DRAFT dated November 11, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to_____________
Commission file number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4359228
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (425) 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
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(Title of Class)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| NO |_|
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, 1997 was $19,878,200.
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 7, 1997 was 11,117,389 shares.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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.
Technology Business
The Company's technology business provides telecommunications products and
services, a proprietary intelligent communications system, as well as computer
software and networking products. Such products and services currently consist
of:
o through the Company's 58% owned subsidiary, IDF International, Inc.
("IDF"), providing site acquisition, zoning, architectural and
engineering consulting services to the wireless communications
industry, and providing construction and engineering services to
municipalities and private industry. Services to the wireless
communications industry are provided by TechStar Communications,
Inc. ("TechStar") and general construction and engineering services
are provided by Hayden/Wegman, Inc. ("Hayden Wegman"), both
wholly-owned subsidiaries of IDF.
o through the Company's wholly-owned Connectsoft Communications
Corporation ("Connectsoft") subsidiary, the development of a
unified, intelligent communications system being marketed under the
name "FreeAgent." FreeAgent is designed to unify communications into
a single message box, allow access to that message box through any
telephone or online computer and apply autonomous software processes
(known as intelligent agentry) to the data flowing in and out of the
message box for the purpose of automating communications and
assisting the user in managing communications. FreeAgent is being
developed to integrate e-mail, voice mail, facsimile, paging,
content from the World Wide Web and potentially any other digital
data from the Internet, enterprise intranets, private branch
exchange ("PBX") telephone systems and the public switched telephone
network ("PSTN"). FreeAgent is capable of applying advanced media
transformation processes (such as text-to-speech conversion),
advanced user interface technologies (such as limited speech
recognition) and specified agentry processes (such as automated
message and information monitoring), so that a person can send or
receive a message between most currently used communications media,
using any wireline or wireless telephone on PBX or PSTN systems or
on any personal computer ("PC") on the Internet or an intranet. For
example, e-mail sent from a PC can be heard as voice mail on a
telephone and voice mail sent by telephone can be received and
listened to on a computer. Similarly, content on Web pages can be
listened to on a telephone, as well as read on a computer.
FreeAgent, which was previewed at the Internet World Summer trade
show in July 1997, is expected to be commercially released in
February 1998. Connectsoft has developed a customized PC-based
component of FreeAgent for the Inkjet Printer Division of
Hewlett-Packard Company ("HP") which was shipped in September 1997.
As part of the continuing development of FreeAgent, Connectsoft
intends to incorporate natural language understanding (the ability
to convert the spoken word to commands) and additional agentry
functions (such as automated notification of urgent messages or
stock price changes and the ability to consummate simple
transactions such as making airline reservations). Such changes are
designed to further facilitate the command and control of the
FreeAgent system by telephone and to further enhance FreeAgent's
functionality and services.
o through the Company's 80.4%-owned subsidiary, Exodus Technologies,
Inc. ("Exodus"), a proprietary application remoting software,
marketed as NTERPRISE(TM), which, when combined with a multi-user
enabling software "kernal" that modifies certain source code
instructions in the Windows(TM) operating system, allows users to
run Windows(TM) application server software programs designed for
the Microsoft(TM) Windows NT(TM) operating system on users' existing
Unix(TM) workstations, X-terminals and other X-windows devices,
Macintosh terminals, Java-enabled network computers and legacy
computers, which would otherwise not be Windows compatible or are
incapable of running newer versions of Windows compatible software.
The Company currently obtains a multi-user software kernal to
support NTERPRISE(TM) from Prologue Software, SA of France
("Prologue") under a software license limited to WindowsNT(TM) in
3.51 version and which
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expires as early as December 31, 1997. In September 1997, Microsoft
Corporation announced that it would incorporate its own multi-user
software in future versions of Windows NT(TM) and that only its
Windows T.share client/server protocol and Citrix Systems, Inc. ICA
application remoting software protocol will be supported in the
initial releases of Windows NT 4.0 and 5.0 "Hydra" multi-user
operating system products. In addition, Microsoft advised the
Company that alternate multi-user and application server software
protocols such as NTERPRISE(TM) would not be presently considered.
Since its July 1996 acquisition of the Exodus technology, the
Company has expended in excess of $6.0 million to develop and market
its NTERPRISE(TM) products. As a result of these material adverse
developments, the Company has significantly reduced its Exodus
operations and is currently considering whether the Exodus protocols
can be redesigned to support client computers that are alternatives
to WindowsNT, such as Unix(TM) workstations, X-terminals and Java
(TM) enabled computers. In the event that the Company is unable to
develop an alternate non-Windows supported solution within the next
three to six months, the Company will probably cease such efforts.
The Company has written off the Exodus goodwill and its investment
in the NTERPRISE(TM) products and system as at July 31, 1997. See
"DESCRIPTION OF BUSINESS Significant Recent Developments" and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
o through the Company's wholly-owned subsidiary, InterGlobe Networks,
Inc. ("InterGlobe"), providing network engineering, design and
consultation services, network security, remote network management
and monitoring as well as Intranet development. In November 1997,
the Company entered into an agreement in principle to sell
InterGlobe to a third party. In the event such sale is consummated,
the Company expects to incur a loss of approximately $1.6 million in
connection with its investment in InterGlobe and has accrued such
loss at July 31, 1997.
Each of the Company's technology businesses, other than the businesses
conducted by TechStar and Hayden-Wegman, is in the early development stage, with
aggregate revenues in the twelve months ended July 31, 1997 of approximately
$2.5 million. TechStar, acquired in December 1996, has been in business since
February 28, 1994, generated revenues of approximately $4.3 million and $3.8
million in the 12 months ended December 31, 1996 and the seven months ended July
31, 1997, respectively, and Hayden-Wegman, which has been in business for over
50 years, generated revenues of approximately $11.7 million and $11.2 million in
the two years ended June 30, 1996 and June 30, 1997, respectively.
The Distribution Business
The Company's distribution business consists of the sale, service and
leasing, as a retail distributor, of light and medium-sized and heavy
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 from 23 retail distribution operations owned by Western, all but
two of which are located in facilities leased by Western from third parties,
that are located in the states of Washington, Oregon, California, Alaska and
Nevada. The Company believes (based on information provided by Case) that it is
the largest independently owned Case dealer in the world. 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. Western earned
net income of approximately $1.0 million on net sales of $148 million in fiscal
year ended July 31, 1997, as compared to net income of approximately $2.0
million on net sales of $107 million in fiscal 1996. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Fiscal 1997 compared to Fiscal 1996."
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Western's strategy is to accelerate the growth of its distribution
business through (i) seeking to acquire additional Case or other equipment
retail distributorships, (ii) increasing sales revenues at existing locations,
and (iii) the sale, lease and service of additional lines of construction
equipment not manufactured by Case. See "THE DISTRIBUTION BUSINESS - Growth
Strategy."
Acquisition Strategy
Prior to January 1996, the Company 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. On January 19, 1996, the Company sold all
of the operating assets of its manufacturing business to Hutchinson Corporation
(the "Hutchinson Transaction"). See "BUSINESS - History and Recent
Acquisitions."
Management of the Company carefully considered the best utilization of the
cash resources that would result from consummation of the Hutchinson
Transaction. It was determined that stockholder value would best be enhanced by
directing the Company's future into the computing and telecommunications
industries through the acquisition of proprietary technologies, unique niche
software products and selective expertise marketable on a national scale. As a
result, between May 1996 and April 1997, the Company acquired ConnectSoft, Inc.,
a Washington corporation ("Old ConnectSoft") and four additional businesses
engaged in such industries, and has expended an aggregate of approximately $14.0
million of its capital resources in acquiring and providing ongoing working
capital for these businesses. See "DESCRIPTION OF BUSINESS - History and Recent
Acquisitions."
Management of the Company believed that, in contrast to a basic
manufacturing and distribution business, ownership of businesses engaged in the
computing and telecommunications industries would have the potential to increase
the market price for the Company's Common Stock to the significantly higher
market values generally enjoyed by businesses involved in those industries.
Management of the Company further believed that the computing and
telecommunications industries are growth industries in which, although
competitive, expanding opportunities for new technologies and products exist.
In considering the acquisition of Old ConnectSoft (including its Exodus
division), InterGlobe, Seattle OnLine and TechStar, management of the Company
considered a number of factors which it deemed to be significant to its
decisions to acquire these businesses, including:
* the belief that Old ConnectSoft and Exodus had developed certain
software products with substantial market potential and possessed
personnel with significant engineering and programming talents;
* the belief that Interglobe would provide the Company access into the
communications and Internet industries;
* the belief that Seattle On-line presented an attractive addition to
the Interglobe business, in that the customers for whom Seattle
On-line was developing Web sites and content for Internet commerce,
were also potential customers of Interglobe's consulting business.
* the belief that TechStar would provide a significant further step
into the communications and telephony industries, insofar as the
wireless communications industry served by TechStar was viewed as
having significant growth potential.
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Prior to the acquisition of Old ConnectSoft, senior management of the
Company had no expertise and little, if any, experience in the computing and
telecommunications industries. In each acquisition subsequent to Old
ConnectSoft, the Company's senior management relied, in large measure, upon the
technical expertise and experience of certain executives of Old ConnectSoft, as
well as other third parties, in the computer and telecommunications industries,
in analyzing each prospective acquisition and its technology. All of these
businesses were acquired, in part, because of the perceived expertise of the key
operating personnel in the niche product and service markets served by such
companies and the potential for growth which the Company believed could be
realized by implementation of the Company's greater financial resources. A
significant factor in the Company's acquisition strategy was to negotiate
long-term employment arrangements with the pre-acquisition management of each
acquired business, and to create incentives for continued support of such
management personnel by granting them performance-based options to acquire
Company Common Stock.
Strategic Goals
The Company's entrance into the computer software and telecommunications
industries has been difficult. See "DESCRIPTION OF BUSINESS - Significant Recent
Developments." Since May 1996, the Company has experienced the adverse effects
of (i) the extensive capital required to be invested in order to develop certain
of the Company's technical businesses, (ii) the fact that software products
developed to support only the Windows(TM) operating system are subject to
changes in policies and strategic objectives of Microsoft, (iii) a lack of
market demand for certain of these technologies, and (iv) the differing
interests of certain key executives whose businesses were acquired. As such, the
Company's initial acquisition program has evolved into a strategy of limiting
the Company's resources and focus to a few select technologies, initially
providing such operating technology businesses with the capital needed to
develop a commercial base for their products or services, and then seeking to
effect a strategic industry alliance coupled with adequate external financing.
In furtherance of these goals, the Company:
* significantly reduced the scope of its financial and development
commitment to Exodus' NTERPRISE(TM) application server software in
the face of Microsoft's recent announcements directing its support
to the Company's competitor in initial future releases of Windows NT
in 4.0 and 5.0 versions;
* in August 1997, acquired control of IDF International, Inc. ("IDF"),
a public company whose common stock is traded in the
over-the-counter market "pink sheets." Prior to such transaction,
IDF's sole business was its ownership of Hayden Wegman. Under the
terms of the acquisition, the Company transferred, through a merger
with an IDF acquisition subsidiary, 100% of the capital stock of
TechStar to IDF in exchange for approximately 6.1 million IDF
shares, representing approximately 58% of the outstanding IDF common
stock. The Company believes that there are significant opportunities
for growth in IDF's TechStar and Hayden Wegman businesses, both
through the addition of new customers and acquisitions of
complementary businesses, and intends to focus its business and
financial resources on this segment of its technology businesses.
* ceased substantially all efforts to produce and market the retail
e-mail software products originally developed and operated by Old
ConnectSoft, and elected to concentrate on the development of the
FreeAgent(TM) software product first conceived and originated by
certain Old ConnectSoft personnel in and subsequent to September
1996. In July 1997, Old ConnectSoft transferred all of the
FreeAgent(TM) technology to Connectsoft. In September 1997,
Connectsoft filed a registration statement with the Securities and
Exchange Commission in connection with a proposed initial public
offering of Connectsoft securities.
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* intends to support the continued growth of its distribution business
conducted by Western through additional acquisitions and the opening
of new locations for both Case construction and agricultural
equipment and other brands of construction and agricultural
equipment.
History and Recent Acquisitions
The Company was initially organized as a New York corporation on June 22,
1988 under the name Alrom Corp., and completed an initial public offering of
securities in August 1990. Effective on May 21, 1991, the Company acquired AUS
and AUP which operated the manufacturing business. Prior to such acquisition,
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.
("AEI"), a company engaged in the business of precision machining metal parts
for the aerospace and defense industries, and certain assets owned and used by
AEI. 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 $27.2 Million of new and used
construction equipment inventory and parts inventory, and $4.5 Million of
vehicles, tools, fixtures and other assets used in connection with seven
separate Case retail construction equipment distribution operations located in
the states of Washington and Oregon which are still owned and operated by
Western.
Effective September 10, 1994, Western purchased from Case two retail
construction equipment distribution outlets located in Sparks, Nevada and
Fremont, California. In December 1994, Western relocated the Fremont outlet to
Hayward, California. Under the terms of the 1994 Case transaction, Western was
obligated to open two additional distribution outlets in Northern California. In
March 1995, Western opened a retail store in Santa Rosa, California.
In August 1995, Western opened a retail store in Salinas, California.
In June 1995, Western completed an initial public offering of 1,495,000
shares of its common stock, which reduced the Company's interest in Western to
56.6%.
In February 1996, Western acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case construction equipment at a facility located in Sacramento,
California (the "Sacramento Operation"). The acquisition was consummated for
approximately $630,000 in cash, $1,590,000 in installment notes payable to Case,
and the assumption of $3,965,000 in inventory floor plan debt with Case and its
affiliates.
In June 1996, Western acquired the operating assets of GCS, Inc. ("GCS"),
a California-based distributor of heavy equipment primarily marketed to
municipal and state government agencies responsible for street and highway
maintenance. The Company operates the GCS business from a location in Fullerton,
California and from the Company's existing facility in Sacramento, California.
The purchase price for the GCS assets was $1,655,000.
In January 1997, Western acquired the operating assets of Sahlberg
Equipment, Inc., a four-store Pacific Northwest distributor of construction
equipment, for $5,289,616. The purchase price consisted of $3,844,152 in
equipment inventory, $796,914 in parts inventory, $625,326 in fixed assets, and
$23,224 in work-in-process. The majority of the purchase price was financed by
the proceeds of two term loans from Case Credit Corporation.
Western operates the Sahlberg business from four locations, 2 in
Washington state, one in Oregon and one in Alaska, with all operations conducted
from facilities leased from third parties.
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In January 1996, the Company and each of its AUG, AUP and AUS
subsidiaries, sold all of the assets of its National O-Ring and Stillman Seal
businesses comprising the manufacturing business of the Company to Hutchinson
for $24,500,000, of which $20,825,000 was paid in cash and the aggregate
$3,675,000 balance was paid by delivery of two 24-month non-interest bearing
promissory notes due January 1998. The Hutchinson notes, which have been
discounted for financial statement presentation by $172,000 at July 31, 1997,
are guaranteed by Total.
Effective as of July 31, 1996, the Company acquired, through a merger with
an acquisition subsidiary of the Company consummated in August 1996 (the
"ConnectSoft Merger"), all of the outstanding capital stock of Old ConnectSoft,
a private company located in Bellevue, Washington, which provided a variety of
computer software products and services. In connection with the ConnectSoft
Merger, Old ConnectSoft shareholders received, on a pro rata basis, an aggregate
of 976,539 shares of the Company's Series B-1 Preferred Stock (the "Preferred
Stock"). Such Preferred Stock does not pay a dividend, is not subject to
redemption, has a liquidation preference of $3.50 per share over Company Common
Stock and votes together with the Company Common Stock as a single class on a
one share for one vote basis. Each share of Preferred Stock is convertible into
shares of Company Common Stock at the holder's option into a minimum of 976,539
shares of Company Common Stock and a maximum of 2,929,617 shares of Company
Common Stock, based upon certain criteria. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Acquisition and Sale
Transactions."
Simultaneous with the completion of the ConnectSoft Merger, the Company
transferred to Exodus the NTERPRISE(TM) application remoting software
development initiated by Old ConnectSoft, in exchange for notes and 80.4% of the
capital stock of Exodus. The balance of the Exodus shares are owned by certain
existing and former employees of Exodus.
At the time of the ConnectSoft Merger, in addition to the application
remoting software development, Old ConnectSoft produced and marketed two retail
software e-mail products. By the end of the second quarter of fiscal 1997, the
Company determined that lack of customer demand for these products no longer
warranted the expenditure of additional capital for ongoing marketing efforts
and ceased producing these products. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Acquisition and Sale
Transactions."
In September 1996, the Company acquired InterGlobe. The InterGlobe
shareholders received the aggregate sum of $400,000, plus an aggregate of
800,000 shares of the Company's Common Stock. The former stockholders of
Interglobe also received four-year employment agreements with Interglobe and the
Company pursuant to which they received seven-year options to purchase an
additional aggregate 800,000 shares of Company Common Stock at an exercise price
of $6.00 per share (the "Interglobe Options"). The Interglobe Options vest and
are exercisable over the four fiscal years ending July 31, 2000, based on
InterGlobe achieving certain pre-tax income and other factors. In addition, the
Interglobe agreement provides that if the Company effects a public offering of
Interglobe or a sale of Interglobe prior to July 31, 2000, the Interglobe
stockholders may elect (but shall not be required) to exchange two-thirds of all
Company securities received by them in the Interglobe Merger for an aggregate of
25% of the common stock of Interglobe owned by the Company prior to such
transaction.
In November 1996, the Company acquired the assets of Seattle OnLine, Inc.
("Seattle OnLine"), a company engaged in providing a regional Internet/Intranet
telecommunication service in the form of high bandwidth Internet connectivity
and hosting for businesses in the Pacific Northwest. The Company purchased the
Seattle OnLine assets for the sum of $147,000 and 16,000 shares of the Company's
Common Stock which were used to settle certain creditor claims. The Company also
issued to the former stockholders of such corporation warrants to purchase an
aggregate of 333,333 shares of the Company's Common Stock.
Effective December 11, 1996, the Company acquired TechStar and issued to
the former TechStar shareholders an aggregate of 507,246 shares of Company
Common Stock, paid $780,000 in cash and delivered three
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year Company notes aggregating $600,000. In a related transaction, in April 1997
the Company also acquired Arcadia Consulting, Inc., a company formed by Solon L.
Kandel for the purpose of providing consulting services to clients in the
wireless telecommunications industry. The Company paid $220,000 and issued to
Mr. Kandel 192,754 shares of Company Common Stock. Subsequent to such
acquisitions, the former stockholders of TechStar publicly sold an aggregate of
331,346 of their 507,246 shares of Company Common Stock and Mr. Kandel publicly
sold all of his 192,754 shares of Company Common Stock.
Significant Recent Developments
Formation and Proposed Financing of Connectsoft
Subsequent to the July 1996 acquisition of Old ConnectSoft, a newly formed
division of Old ConnectSoft (the "FreeAgent Division") conceived and began the
development of the FreeAgent(TM) technology. In April 1997, the FreeAgent
Division commenced the development of a customized PC-based component of
FreeAgent for Hewlett-Packard ("HP") under a software license agreement entered
into in April 1997. The initial Japanese language version of this product was
delivered in September 1997.
The Company formed Connectsoft Communications Corporation ("Connectsoft")
as a wholly-owned subsidiary in June 1997 for the sole purpose of acquiring all
of the assets and properties of Old ConnectSoft relating to the FreeAgent
software development. Effective as of July 31, 1997, Old ConnectSoft transferred
to the Company all of its technology, assets and business relating exclusively
to the development of FreeAgent, including the assignment of the HP software
license agreement, subject to related liabilities (the "FreeAgent Assets"). At
the same time, the Company agreed to forgive certain indebtedness and
obligations of Old ConnectSoft prior to the date of such transfer other than
liabilities, losses, debts, costs or claims arising out of the business
operations of Exodus and its NTERPRISE(TM) application remoting software
products. In addition, effective as of July 31, 1997, the Company transferred to
Connectsoft all of the FreeAgent Assets in exchange for a $1,140,000 Connectsoft
note, representing all but $1.0 million of the $2.14 million of cash advances
made through July 31, 1997 by the Company in connection with the FreeAgent
technology. The $1.0 million balance of such advances was converted into 100% of
the Connectsoft common stock. The Company also agreed to indemnify and hold
harmless Connectsoft from any liabilities or debts related to claims arising out
of the business and operations of Old ConnectSoft prior to July 31, 1997, other
than (i) the $1.14 million note, (ii) matters arising after September 1, 1996
and which are related solely to the FreeAgent Assets, and (iii) activities of
Old ConnectSoft related solely to the development and utilization of the
FreeAgent Assets.
On September 4, 1997, Connectsoft filed a registration statement with the
Securities and Exchange Commission relating to a proposed underwritten public
offering of common stock of Connectsoft. Such registration statement has not yet
become effective, and there can be no assurance that the proposed Connectsoft
public offering will be consummated or, if consummated, that such offering terms
will provide Connectsoft with sufficient capital to develop its FreeAgent
product.
Sale of Seattle On Line and Settlement of Claims of Former Seattle OnLine
Principal Stockholder
For the nine month period from November 1996 through July 31, 1997,
Seattle OnLine generated revenues of $87,000 and incurred a net loss of
$1,575,000. In October 1997, the Company sold certain assets of Seattle OnLine
to Brigadoon.Com, Inc. ("Brigadoon"), an unaffiliated Seattle-based provider of
Internet products and services, in consideration for $25,000 in cash and $50,000
of convertible preferred stock of Brigadoon. In August 1997, in connection with
the settlement of an arbitration proceeding commenced by the former principal
stockholder of Seattle OnLine against the Company in which such stockholder
alleged wrongful termination of his employment and breach of contract, the
Company agreed to pay such stockholder $1.5 million, of which $500,000 was paid
in October 1997 and $1.0 million is due November 17, 1997. In addition, the
Company issued 150,000
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five year warrants exercisable at $6.25 per share. As part of the settlement,
previously issued warrants to purchase 305,000 Company shares were canceled. See
"LEGAL PROCEEDINGS."
Transactions regarding InterGlobe
For the nine months ended September 30, 1996 InterGlobe generated revenues
of $1,111,000 and had net income of $407,000, as compared to net revenues of
$1,041,000 and net losses of $2,224,000 (including $1,600,000 of writeoffs of
investment and goodwill) for the ten months ended July 31, 1997. In November
1997, the Company entered into a letter of intent to sell InterGlobe and the
Company's network operation center ("NOC") business to Brigadoon for $1.5
million in cash and $750,000 of securities of Brigadoon. See "THE TECHNOLOGY
BUSINESS - Internet Engineering Design and Consulting."
On November 4, 1997, Artour Baganov, the former principal stockholder of
InterGlobe, tendered his resignation as a member of the Board of Directors of
the Company and InterGlobe. The Company and InterGlobe subsequently reached an
agreement in principle with Mr. Baganov under which such stockholder agreed to
terminate his employment agreement with InterGlobe, including the cancellation
of up to 692,000 performance options issuable under certain circumstances. In
consideration, the Company and InterGlobe agreed to pay Mr. Baganov an aggregate
of $300,000 in January 1998 in full settlement of obligations under his
employment agreement and released such stockholder from his non-competition
agreement with InterGlobe, subject to the condition that Mr. Baganov neither
solicits nor does business with any third party who was a customer of InterGlobe
during the 120 day period immediately prior to the date of termination of their
employment. Mr. Baganov also agreed to vote his 692,000 shares of Company Common
Stock in favor of management's nominees for election to the Company's Board of
Directors at the next annual stockholders meeting to be held in January 1998. A
definitive written agreement with Mr. Baganov has not, as yet been entered into
and there is no assurance that the Company or InterGlobe will effect such
settlement.
Two other former stockholders of InterGlobe, who collectively own
approximately 102,000 Company shares, had previously resigned as InterGlobe
employees and their employment agreements were cancelled.
Transaction with TechStar
In August 1997, the Company sold TechStar to IDF, pursuant to an agreement
and plan of merger, dated July 31, 1997, among the Company, TechStar, IDF and an
acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon consummation of
the transaction, the Company received 6,171,553 shares of IDF common stock,
representing approximately 58% of the fully diluted outstanding IDF common
stock, as a result of which, for accounting purposes, the Company was deemed to
have acquired IDF. Solon L. Kandel, Sergio Luciani and Simontov Moskona, the
senior executive officers of TechStar, received three year options to purchase
an aggregate of 856,550 shares of IDF common stock (the "IDF Options"),
representing approximately an additional 8% of such fully diluted outstanding
IDF common stock. In connection with the transaction (i) all options granted by
the Company under their employment agreements entitling Messrs. Kandel, Luciani
and Moskona to purchase an aggregate of 780,000 shares of Company Common Stock
(subject to achievement of certain financial performance targets), and all
related 120,000 performance options held by other TechStar employees, were
canceled, (ii) each of Messrs. Luciani and Kandel tendered their resignations as
directors of the Company, and (iii) Messrs. Luciani, Moskona and Kandel utilized
$600,000 of the net proceeds from the sale of their Company shares to invest in
convertible securities of IDF.
Messrs. Kandel, Luciani and Moskona are currently the senior executive
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. Pursuant to such agreements, Messrs. Kandel, Luciani
and Moskona are entitled to receive, in addition to their base salaries and
annual bonuses, IDF Options which vest based upon IDF and its consolidated
subsidiaries, including TechStar and Hayden Wegman, achieving all or certain
pro-rated portions of annual pre-tax income targets in each of fiscal years
ending July 31, 1998, 1999 and 2000. In the event that any or all of such IDF
Options do not vest, the number of shares of IDF
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common stock that would have been issued upon the exercise of such unvested IDF
Options shall be issued to the Company as additional merger consideration. The
terms of such vesting arrangements are similar to those negotiated directly
between the Company and the senior TechStar management in December 1996.
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer
and Chairman of the Board and a Director of the Company, respectively, are also
principal stockholders and members of the board of directors of IDF. Prior to
consummation of the transactions contemplated by the IDF Merger Agreement (i)
Mr. Rubin converted an $800,000 loan previously made to IDF into convertible
preferred stock convertible into an additional 400,000 shares of IDF common
stock, and (ii) through GV Capital, Inc., an affiliate of Mr. Kaplan, IDF sold
$3.0 million of its five year notes convertible into IDF common stock at $1.25
per share, including $600,000 of such notes sold to Messrs. Kandel, Luciani and
Moskona. Mr. Kaplan's affiliate received separate compensation for acting as
placement agent in connection with such private offering of IDF securities.
Adverse Developments Concerning NTERPRISE(TM) Application Server Software
In order for the Company's application server software to be commercially
offered with the Windows(TM) operating system, the Company must directly or
through a third party obtain a license or other authorization from Microsoft.
The Company believes that Citrix Systems, Inc. ("Citrix") and Prologue are the
only corporations with direct access to the Windows source code, and such
corporations possess rights to develop and distribute multi-user software
derived from such source code through direct licenses with Microsoft. The
Company currently obtains the multi-user software kernal to support
NTERPRISE(TM) from Prologue under a software license limited to WindowsNT(TM) in
3.51 version and which expires as early as December 31, 1997. Approximately nine
months ago Microsoft publicly announced that it intended to directly offer
multi-user capability in its future versions of the Windows NT(TM) operating
system. In September 1997, Microsoft announced that it would incorporate its own
multi-user software in future versions of Windows NT(TM) and that only its
Windows T.share client/server protocol and the Citrix ICA application remoting
software protocol will be supported in the initial releases of Windows NT 4.0
and 5.0 "Hydra" multi-user operating system products. In addition, Microsoft
advised the Company that alternate multi-user and application server software
protocols such as NTERPRISE(TM) would not be presently considered.
Since its July 1996 acquisition of the Exodus technology, the Company has
expended in excess of $6.0 million to develop and market its NTERPRISE(TM)
products. As a result of these material adverse developments, the Company has
significantly reduced its Exodus operations and is currently considering whether
the Exodus protocols can be redesigned to support client computers that are
alternatives to WindowsNT, such as Unix(TM) workstations, X-terminals and
Java(TM) enabled computers. In the event that the Company is unable to develop
an alternate non-Windows supported solution within the next three to six months,
the Company will probably cease such efforts and sustain a total loss of its
investment in the NTERPRISETM products and system. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Loss in Connection with ERD Credit Guaranty
In September 30, 1997, ERD Waste Corp. ("ERD") filed for reorganization
under Chapter 11 of the federal bankruptcy laws. In May 1996, the Company had
provided ERD with a $4.4 million standby bank letter of credit in favor of Chase
Bank (formerly, Chemical Bank), a senior secured creditor of ERD. In addition,
in February 1997, the Company advanced $500,000 in cash to ERD. Robert M. Rubin,
the Chairman and Chief Executive Officer of the Company is also a principal
stockholder and Chairman of ERD. On October 29, 1997, Chase Bank drew on the
Company provided letter of credit. As a result, the Company became directly
liable to Northfork Bank, the issuer of the letter of credit, for the $4.4
million amount of such draw; and on October 31, 1997 retired such obligation.
Although the Company is now a creditor in the ERD reorganization, holding
approximately $5.0 million of claims and holds a lien on certain ERD assets, by
reason of the affiliation of Mr. Rubin with both corporations, it is possible
that such lien will not be sustained in the reorganization proceeding; in which
event the Company will be a general unsecured creditor of ERD. Although the
Company does not believe that Chase Bank acted in a
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commercially reasonable manner and is currently considering its legal options,
as a result of the foregoing development, the Company recorded a $5.0 million
net loss in connection with the ERD transaction for the year ended July 31,
1997. Mr. Rubin has personally guaranteed $1.6 million of this amount. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "MANAGEMENT- Compensation Committee Interlocks and Insider
Participation."
THE TECHNOLOGY BUSINESS
Products and Services
Wireless Telecommunication Services
TechStar provides consulting services to clients involved in a variety of
wireless communications (cellular telephone) applications. TechStar offers 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 communications network facilities, management of
wireless network sites, and general management of wireless communications
network projects.
TechStar locates appropriate sites for the construction of a wireless
network broadcasting system, represents the client in negotiations with the
owner-landlord and provides 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.
TechStar typically services wireless communications carriers. These
carriers need to develop or enhance a network of radio links (sites), to allow
for seamless communications coverage in a particular FCC licensed geographical
area. Cellular, paging and dispatch services licenseholders are in the process
of completing their network coverage or enhancing their existing network to
remain competitive with new market entrants. Although these licenses are up to
13 years old, these systems are still incomplete, particularly in suburban and
rural areas. Over the past two years, new carriers acquired various licenses
from the FCC. Some of these licenses were issued for the development of networks
commonly referred to as personal communications systems, or "PCS," and are
currently in the process of being developed. PCS carriers must complete their
systems quickly and through a massive build plan, attempt to compete with
existing carriers. Many initial markets have launched or are close to launching.
Many other licenseholders have not even begun to develop their systems due to
financial constraints, limits on foreign investment, changes in the availability
of financing through capital markets and other forces. These holders are
currently awaiting decisions from the FCC regarding the potential restructuring
of their license fee payments and other modifications. Regardless of the
outcome, competition remains heavy, with some markets, such as Washington D.C.,
hosting as many as five major operating carriers.
Internationally, wireless networks are developing at a rapid pace and
liberalization processes are at various stages of implementation, providing a
significant market opportunity in the near future. Some countries, including in
Eastern Europe, see wireless communications as a much cheaper method of building
a telecommunications infrastructure as opposed to landline communications. As
such, governments in such countries encourage the deployment of wireless
communications systems.
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The Company believes, based on telecommunication industry sources, that
over the next 10 years up to 100,000 sites will have to be developed in the
United States alone. Although TechStar faces fierce competition, the Company
believes that TechStar has positioned itself as one of a few consulting and
engineering service providers capable of offering turnkey services within one
organization. TechStar's primary competition consists of approximately 20
companies, of which approximately half are represented by the telecommunications
divisions of large engineering firms such as Flour-Daniels and Bechtel. Other
competitors include well established independent consulting and engineering
firms such as SBA, Inc., Georon & Company, Entel Communications and Whalen and
Associates.
With over 45 architectural, engineering and other professional employees,
TechStar has rendered or is rendering continuing services for clients such as
AT&T Wireless Communications, Bell Atlantic, Bell South Mobility, Shenandoah
Mobile Company, Trammel Crow/LCC, Nextel Communications and Vanguard Cellular.
TechStar contracts for its site location and other services with AT&T
Wireless Communications under one year agreements, most of which expire December
31, 1997. For the twelve months ended December 31, 1996, revenues from AT&T
Wireless Communications accounted for over 95% of TechStar's revenues, and are
expected to represent approximately 50% of such revenues in calendar 1997. As
the AT&T Wireless initial market buildouts reach completion in early calendar
1998, TechStar's revenue from this customer will decrease significantly. As a
result it is not anticipated that revenues from AT&T Wireless Communications
will be as material in fiscal 1998.
During the fiscal year ended July 31, 1997, in addition to AT&T Wireless,
TechStar obtained contracts to perform site location, architectural and
engineering services for Nextel Communications, Omnipoint Communications and
Bell Atlantic/Nynex Mobile. The Company estimates that revenues from these new
contracts will be approximately $8.0 million over the twelve months ending July
31, 1998. TechStar is currently negotiating contracts with other customers from
which it anticipates 1998 revenues of approximately $1.0 million.
General Engineering Services
Hayden Wegman, headquartered in New York City, with offices in Boston,
Massachusetts, Buffalo, New York and Parsippany, New Jersey, provides general
engineering services to both municipalities and private companies. Established
in 1931, Hayden Wegman has developed a strong reputation and provides (i)
infrastructure design, environmental, construction managment and refurbishment
services on bridges, tunnels, roads, piers, marinas, garages, pumping and
electrical stations and solid waste facilities, office buildings, planned unit
developments and other development projects. Current clients, include state and
local Department of Transportation units and general service administrations,
the United Nations, AT&T, the Museum of Natural History, utility companies and
private developers.
FreeAgent Software
FreeAgent is designed to unify communications into a single message box,
allow access to that message box through any telephone or online computer, and
apply advanced autonomous software processes (known as agentry) to the data
flowing in and out of the message box for the purpose of automating
communications and otherwise assisting the user in managing communications.
FreeAgent is designed to integrate e-mail, voice mail, facsimile, paging,
content from the World Wide Web (the "Web") and potentially any other digital
data from the Internet, enterprise intranets, private branch exchange ("PBX")
telephone systems and the public switched telephone network ("PSTN"). FreeAgent
is capable of applying advanced media transformation processes (such as
text-to-speech conversion), advanced user interface technologies (such as
limited speech recognition), and specified agentry processes (such as automated
message and information monitoring), so that a person can send or receive a
message between most currently used communications media, using any wireline or
wireless telephone on PBX or PSTN systems or any personal computer ("PC") on the
Internet or an intranet. For example, e-mail sent from a PC can be heard as
voice mail on a telephone and voice mail sent by telephone can be received and
listened to on a
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computer. Similarly, content on Web pages can be listened to on a telephone, as
well as read on a computer. FreeAgent, which was previewed at the Internet World
Summer trade show in July 1997, is expected to be commercially released in
February 1998. Connectsoft has developed a customized PC-based component of
FreeAgent for the Inkjet Printer Division of Hewlett-Packard Company ("HP")
which was shipped in September 1997. As part of the continuing development of
FreeAgent, Connectsoft intends to incorporate natural language understanding
(the ability to convert the spoken word to commands) and additional agentry
functions (such as automated notification of urgent messages or stock price
changes and the ability to consummate simple transactions such as making airline
reservations). Such changes are designed to further facilitate the command and
control of the FreeAgent system by telephone and to further enhance FreeAgent's
functionality and services.
FreeAgent is intended to allow users to control their communications
through either a PC connected to the Internet or a telephone, according to their
own preferences independent of how a communication was originally sent. When
accessing FreeAgent from a PC, the user is presented with the user interface of
the Hyper Text Markup Language (HTML) client application. An on-screen interface
for command and control of FreeAgent functionality is accessible from within
this application. All voice, facsimile, page and e-mail messages are displayed
individually on the user's PC. As currently designed, messages in the universal
message box can be viewed and/or listened to (depending upon the type of
message), forwarded to individuals or broadcast to groups. Messages will be
delivered over the Internet. FreeAgent enables access to its universal message
box from any Microsoft Windows or Apple Macintosh computer by supporting
Internet-based massaging programs such as Microsoft Outlook Express(TM),
Netscape Navigator(TM) and NovitaMail(TM).
With FreeAgent's telephone interface, a user will be able to access the
same message box through a telephone. Using telephone keypad commands (and in
future generations of FreeAgent, natural voice commands), a user will be able to
send, forward and broadcast messages to individuals or groups. An individual may
also retrieve e-mail or access up to 98 personal Web page addresses that have
been assigned numbers from 1 to 98, called bookmarks. One of these bookmarks can
be a Web search engine, to allow the user to look for information on additional
Web sites. When a user selects an e-mail message or Web page, FreeAgent's agents
will strip out irrelevant information, such as HTML coding, and translate the
text to speech. The message or Web page is then read to the user in a normal
speech pattern. In doing so, the user has the ability to listen to the e-mail
and implement full, standard voice mail usage functionality (e.g., save, delete,
forward, etc.).
Descriptions of the current capabilities of FreeAgent are illustrated
below:
o A salesperson has 15 minutes before boarding her plane. She dials
her FreeAgent number; listens to the latest news release from the
Web site of the client she is traveling to meet; uses a web search
engine to locate a restaurant appropriate for her dinner meeting and
has FreeAgent dial through to the restaurant so she can make a
reservation. She listens to her e-mail and dictates answers. Next
telephone break, she will check the World Wide Web for news on her
industry and her investments. In her hotel room tonight, she will
log in with her laptop computer, go to her FreeAgent message box and
handle any new communications.
o A successful, non-computer literate entrepreneur tried briefly to
learn to type but abandoned computing to his assistant. With
FreeAgent, instead of having to rely on his secretary to help him
with his e-mail, he listens to it on a telephone and can respond
immediately with the response appearing as a voice attachment to the
sender's e-mail. He can forward certain messages to print out on his
facsimile machine. He is also able to check a series of key web
sites that track his industry day to day and even hour to hour. When
he's out of the office, his secretary uses her computer to send
communications to his message box, so he can handle them overnight.
o A salesman is driving between appointments. Previously he would
obtain new product and pricing information by calling in and
attempting to reach the appropriate person. With FreeAgent, he uses
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his car phone to dial in directly to his company's intranet, from
which all sales information is read to him instantly. He can select
web data to be forwarded to him as fax or e-mail. He used to handle
all his e-mail at night in his hotel room. Now he listens to it and
responds while traveling between appointments, cutting down the time
he spends online at night, and accordingly increasing productivity
and decreasing expenses.
o A company installs FreeAgent for customer support. It no longer has
to maintain separate voice, fax, e-mail and Web-based help systems.
It maintains only the web site. Customers who phone in are able to
hear the information read to them off the web site and even have it
faxed or e-mailed to them. The company saves time and money and
provides more accurate, timely customer support. The company also
has established its personnel systems (health insurance, vacations,
attendance, company news) on its intranet. Most of its employees do
not have computers at home, but still have full access to company
information. Those with computers can use their browsers to access
the same information.
The Company expects to commercially release FreeAgent in February 1998. A
customized PC-based component of FreeAgent has been developed for HP and was
released in September 1997.
The demand for communications services has grown rapidly in recent years,
driven by advancing technologies and an increasingly mobile society. Response to
this demand has resulted in a fragmented, device dependent environment in which
individuals requiring access to multiple communications services such as paging,
voice mail, e-mail, facsimile and online information must use a multitude of
communications devices, work across a number of interface protocols and manage a
large number of service providers, which is generally cumbersome and expensive.
In addition, many individuals do not have access to dedicated information
management systems or to administrative support to process and manage all of the
information available. FreeAgent has been designed to address these problems.
Connectsoft intends to license FreeAgent to telecommunications companies,
large Internet service providers, and multinational distributors of
telecommunications technologies to large enterprises . To meet the needs of
these potential customers, FreeAgent has been designed as an open, scalable and
extensible system that can be readily integrated with existing systems, scaled
to serve tens of thousands of customers, and can be readily modified in the
future to accommodate new subsystems and technologies. This is achieved through
FreeAgent's system architecture, which is comprised of three key subsystems. The
first subsystem, a unified messaging platform, provides for sending and
receiving most forms of digital data from a single user interface (such as a
telephone or PC). The second subsystem, enabled by a proprietary technology
licensed exclusively for telecommunications applications from Data Connection
Limited, provides for real time access by telephone to Internet data, such as
textual e-mail and Web content. Agents in the current version of the FreeAgent
system are capable of performing tasks such as message and information
monitoring, conversion (such as text to speech), message forwarding, and
foldering (the organization of data into easily accessible files). The first two
subsystems will be incorporated into the FreeAgent product expected to be
delivered in February 1998.
The third subsystem, Open Agent Architecture ("OAA"), is being
co-developed with the Artificial Intelligence Center of SRI International, Inc.
(formerly Stanford Research Institute). The OAA system, if successful, would
represent a fundamental breakthrough in the way new software functions are
integrated with existing programs and would permit FreeAgent to easily
incorporate new agentry functions designed by Connectsoft and/or third parties.
Connectsoft believes that technological advances will permit the development of
agents which would be able to search a variety of digital networks for
pre-specified data, execute transactions in accordance with pre-specified
directions (such as automated notification of urgent messages, stock price
changes, or the consummation of simple transactions such as making airline
reservations) and notify the user that these objectives have been accomplished.
Connectsoft believes that the successful development of OAA technology will
enable
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FreeAgent to operate as a virtual executive assistant in processing, managing
and automating a user's communications.
Connectsoft believes that only a few companies are currently marketing a
network-based system with a potential functionality similar to FreeAgent.
FreeAgent is being designed to possess the following features:
o communications unified in a universal message box;
o universal access to the message box through either an online PC or a
telephone on a PBX or PSTN system;
o application of advanced autonomous software processes (agentry) to
the data flowing in and out of the message box;
o open, modular system architecture to facilitate integration with the
existing systems of its potential customers and to permit the use of
readily available third-party hardware and software ("best of breed"
componentry);
o scalability to enable the system to be used by tens to tens of
thousands of users concurrently;
o open systems design to allow for future enhancement of the system
without requiring system redesign, reintegration of existing
hardware or software, or interruption of service;
Connectsoft's primary marketing strategy is to establish strategic and
licensing relationships with telecommunications companies and large Internet
service providers in the United States, Europe and the Pacific Rim that could
offer their customers a range of FreeAgent's basic and optional communications
features as premium monthly fee services. FreeAgent is designed to be capable of
integrating telecommunications services offered by a single provider, or by
multiple providers, subject to arrangements with such third party providers.
Connectsoft also intends to market FreeAgent to multinational telecommunications
technology vendors for distribution to large enterprises. Connectsoft is also
targeting computer and printer manufacturers, which could incorporate a
customized PC-based component of FreeAgent, such as the one developed for HP,
into their own proprietary products. Through these potential marketing channels,
Connectsoft anticipates entering into arrangements pursuant to which it would
install, upgrade and maintain FreeAgent in exchange for license fees and/or a
share of monthly premium and usage fees.
Connectsoft has developed a customized PC-based component of FreeAgent for
HP. Pursuant to a software license agreement entered into in April 1997 and
amended August 1997, Connectsoft delivered a beta version of its software to HP
in May 1997, and expects to deliver a commercial production version of such
software by the end of 1997. This product is being branded as Hewlett-Packard
Internet Direct ("HP Direct") and is expected to be delivered with new HP inkjet
printers, printer driver software and HP's Pavilion line of PCs. It is also
expected that HP Direct will be available to download, as freeware, from HP's
World Wide Web site. With HP Direct, users can configure their PCs to
automatically go on line, download and print priority e-mail, and then go
off-line. Through July 31, 1997, Connectsoft has received from HP $750,000 in
license fees and expects to receive an additional $550,000 based on timely
delivery and acceptance of the commercial production version of the software, as
well as on-going support services. HP has also requested Connectsoft to perform
additional engineering work for a Japanese language version of HP Direct, which
was completed in September 1997, for which Connectsoft expects to receive an
additional $112,000.
Connectsoft's objective is to become a leader in the development of
unified, intelligent communications systems. Connectsoft intends to pursue this
objective by (i) accelerating its marketing and sales activities, in both the
United States and abroad, by targeting and forming strategic relationships with
telecommunications companies,
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large Internet Service Providers, and vendors of telecommunications technologies
to major enterprises, representing channels into millions of potential
end-users, (ii) licensing additional third-party software to enhance its system,
(iii) broadening Connectsoft's engineering efforts to develop additional
capabilities of FreeAgent and (iv) pursuing strategic acquisitions of selected
technologies or businesses to add value to Connectsoft's communications system
in the telecommunications and Internet service or vendor industries.
Application Server Software for Multi-User Applications
The Company has designed and developed proprietary software, marketed as
NTERPRISE(TM), which allows users to run Windows(TM) application server software
programs designed for the Microsoft(TM) Windows NT(TM) operating system
developed by Microsoft on (i) users' existing Unix(TM) workstations, X-terminals
and other X-windows devices, Macintosh terminals and Java-enabled network
computers, which would otherwise not be Windows compatible, and (ii) on older
versions of Windows compatible workstations which are otherwise incapable of
running newer versions of Microsoft compatible software, such as Office 95(TM)
or Lotus Notes(TM). Centralizing applications at the server level by using
NTERPRISE(TM) lowers the cost of a business' operating systems by avoiding the
necessity of installing and maintaining separate applications and operating
system software at each individual workstation, extends the useful life of older
workstations and PCs and provides greater management and control over operating
system and application software. Designed to replicate the look and feel of
Windows applications in substantially all respects, NTERPRISE(TM) supports
substantially all Windows NT(TM) applications and permits direct interface
between the Windows application server software operating system and specific
Windows(TM) applications and non-Windows(TM) enterprise mission critical
applications.
For the year ended July 31, 1997, the Company invested in excess of $6.0
million in the development of NTERPRISE because it believed that the NTERPRISE
product possessed certain significant advantages over other competing
technology, in that:
* NTERPRISE would enable users in a multi-platform environment to utilize
the actual Windows NT(TM) operating system rather than a replacement proprietary
server operating system;
* NTERPRISE provides scalability, having been designed to maintain a high
level of performance even as the number of users connected to the NTERPRISE
system is increased;
* NTERPRISE has multi-window capabilities (a separate window for each
Windows(TM) application) that provide a familiar and easy to use Windows NT(TM)
working environment;
* NTERPRISE runs on several different server platforms, such as Intel's
Pentium Pro(TM). Digital Corporation's Alpha Server and Motorola's and IBM's
Power PC(TM);
* NTERPRISE resides entirely on a central application server and, in most
instances, does not require loading client software or hardware modules in the
users' desktop machines; and
* NTERPRISE can be used to run Windows including applications on a number
of client platforms, including Unix workstations, inexpensive X-Terminals,
Macintosh computers and Java(TM) enabled network computers, or even outdated
desktop platforms such as 286- and 386-based personal computers.
In October 1996, NTERPRISE(TM) was awarded the "Unix/Windows NT Technical
Award" by Windows NT Magazine at the Unix Expo trade show in New York, and, in
November 1996, was named as a finalist for BYTE Magazine's "Best of COMDEX, Best
Connectivity" award at the 1996 annual COMDEX computer show in Las Vegas,
Nevada.
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As a result of Microsoft's recent decision to limit support in the initial
releases of future WindowsNT(TM) 4.0 and 5.0 operating system products to
Microsoft's own T share client/server multi-user protocol and Citrix's ICA
application remoting software protocol, the business prospects of Exodus and its
NTERPRISE(TM) product has been materially and adversely affected. In October
1997, the Company elected to reduce Exodus' staff from a total to 23 employees
to 10 technical personnel and concentrated all current activities toward
engineering changes in its application server product in an effort to adapt
NTERPRISE for use with the Windows "Hydra" operating systems without Microsoft's
support. Any costs associated with these efforts will be expensed in fiscal
1998. In addition, the Company will analyze the feasibility of seeking to
provide customers with protocols or support for client computers which are
alternatives to those supported by Microsoft, such as Unix(TM) workstations,
X-terminals and Java(TM)-enabled computers. There can be no assurance that the
Company will be able to adapt NTERPRISE(TM) for use with "Hydra" or effectively
provide protocols or support to non-Windows computers. In the event that the
Exodus group is unable to achieve positive results within the next three to six
months, it is likely that the Company will cease operations of this business
unit or attempt to sell the technology. The Company has written off all goodwill
and investment in Exodus and the NTERPRISE(TM) product. See "DESCRIPTION OF
BUSINESS Significant Recent Developments" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Fiscal 1997 Compared
to Fiscal 1996."
Internet Engineering, Design and Consulting
Through its acquisition of 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 for businesses and individuals with obsolete or deficient network
structures, and custom built intranet systems.
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 a 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.
InterGlobe also develops custom built Intranet systems designed for
corporate clients, who desire access to a paperless intra-office and external
communications e-mail system. Its current major customer is the Eddie Bauer Inc.
retail chain. 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.
For the ten months ended July 31, 1997, InterGlobe generated revenues of
$1,041,000 and incurred a net loss of $2,224,000 (including the writedown of
goodwill and investment totalling $1,600,000), as compared to net revenues and
net income of $1,111,000 and $407,000, respectively, for the nine months prior
to its sale to the Company. In November 1997, the Company entered into a letter
of intent to sell InterGlobe and the Company's NOC business to Brigadoon.com,
Inc., a Seattle-based company providing Internet products and services,
including Internet access accounts, Internet and World Wide Web content,
proprietary software and a line of multi-protocol computer network
bridge/routers. If consummated, the contemplated transaction will result in the
Company's receipt of $2.25 million, payable $1.5 million in cash and $750,000 by
delivery of shares of convertible preferred stock of the purchaser.
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Regional Internet Service
The Company's Seattle OnLine subsidiary was engaged in the production of
regional Web-sites, Internet marketing and management of corporate
Inter/Intranet sites. Seattle OnLine ceased operations in August 1997 and was
sold to Brigadoon.com, Inc. in October 1997.
Sales and Target Markets
Connectsoft's marketing and sales strategy has several components. Its
primary marketing strategy is to establish strategic and licensing relationships
with telecommunication companies and Internet service providers, as well as
on-line service providers, on-line content providers and direct Internet
marketing companies, who could offer to their customers a range of FreeAgent's
basic and optional communications features as premium monthly fee services.
FreeAgent can be integrated into the switching operations of telecommunication
companies, where so-called intelligent network service switching points, service
control points and intelligent peripherals are found. FreeAgent can also be
integrated into the local area networks of an ISP's access operations, where
access servers, routers and various massaging and content servers are found.
Connectsoft believes that both telecommunication companies and ISPs are
increasingly seeking sources of additional premium revenue, as well as a
competitive advantage through value-added services for attracting and retaining
customers. These marketing efforts are currently focused in the United States,
Europe and the Pacific Rim.
The second component of Connectsoft's marketing and sales strategy
includes targeting computer and printer manufacturers who could incorporate a
customized PC component of FreeAgent, into their own proprietary products under
their brand name. The first step in this strategy was to establish a
relationship with a major computer and printer channel, which Connectsoft
accomplished in April 1997 when it entered into a software license agreement
with HP. Connectsoft believes that additional opportunities are available to
package and market commercially branded versions of FreeAgent in connection with
the development of strategic alliances with partners who are computer and
printer manufacturers, retail advertisers, direct marketers, online content
providers and organizations employing intranets and extranets and which can
benefit from providing its customers, business partners or employees the ability
to automatically download, filter, process and print messages or other data.
Another component of Connectsoft's marketing and sales strategy includes
targeting large enterprises. FreeAgent is designed to integrate the PBXs and
intranets of enterprises to provide the same unified, intelligent communications
services that will be offered to end-users by telecommunication companies and
ISPs.
Connectsoft plans to use its internal direct sales force to support its
relationships with telecommunications companies and Internet service providers,
as well as to take advantage of independent direct sales opportunities with
industry vendors. Connectsoft anticipates fielding a direct sales force of five
by December 1997, one of whom will be focused on international markets.
Connectsoft anticipates that it may, in the future, augment its internal sales
force with the services of independent sales representatives. Connectsoft also
intends to distribute FreeAgent through OEM agreements with hardware
manufacturers, similar to its agreement with HP.
Currently, Connectsoft's principal means of conducting its sales efforts
is through trade show attendance and holding seminars to demonstrate FreeAgent
to potential customers. Connectsoft is also attempting to develop relationships
with other product vendor "partners" capable of encouraging their customers to
purchase FreeAgent in conjunction with their own products on the basis that
overall system or product performance will be enhanced. Connectsoft would assist
these partner-vendors by determining the configuration of FreeAgent that will
deliver optimal service performance along with the partner-vendor's products.
TechStar provides its wireless telecommunications services primarily to
world-wide telecommunications companies and Hayden/Wegman provides its
engineering services primarily to the public sector as well as large
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companies. Business is generated through a combination of personal contacts,
responding to requests for bids and the reputation of both TechStar and
Hayden/Wegman.
In view of the current uncertainty surrounding the viability of the
Company's NTERPRISE application remoting software, active marketing efforts for
this product have been suspended pending the results of the ongoing engineering
and development efforts.
THE DISTRIBUTION BUSINESS
General
Western is engaged in the sale, rental and servicing of light,
medium-sized and heavy construction equipment, parts and related products which
are manufactured principally by Case. The Company believes, based on the number
of locations owned and operated, that Western is the largest independent dealer
of Case construction equipment in the United States. Products sold, rented and
services by Western include backhoes, excavators, crawler dozers, skid steer
loaders, forklifts, compactors, log loaders, trenchers, street sweepers, sewer
vacuums and highway signs.
Western operates out of 23 retail distribution facilities located in the
States of Washington, Oregon, Nevada, California and Alaska. The equipment
distributed by Western is furnished to contractors, government agencies, and
other customers, primarily for use in the construction of residential and
commercial buildings, roads, levees, dams, underground power projects, forestry
projects, municipal construction and other projects.
Growth Strategy
Western's growth strategy focuses on acquiring additional existing
distributorships, opening new locations and increasing sales at its existing
locations.
As opportunities arise, Western intends to make strategic acquisitions of
other authorized Case construction equipment retail dealers located in
established or growing markets, as well as of dealers or distributors of
industrial or construction equipment, and related parts, manufactured by
companies other than Case.
In addition to acquisitions, Western plans to grow by opening new retail
outlets. The strategy in opening additional retail outlets has been to test
market areas by placing sales, parts, and service personnel in the target
market. If the results are favorable, a retail outlet is opened with its own
inventory of equipment. This approach reduces both the business risk and the
cost of market development.
The third aspect of Western's growth strategy is to expand sales at its
existing locations in three ways. First, Western will continue to broaden its
product line by adding equipment and parts produced by manufacturers other than
Case. Western has already added to its inventories products produced by quality
manufacturers such as Dynapac, Champion, Link-Belt, Takeuchi, Tymco, Vactor, and
Kawasaki. Second, Western will seek to increase sales of parts and service--both
of which have considerably higher margins than equipment sales. This growth will
be accomplished through the continued diversification of our parts product lines
and the servicing of equipment produced by manufacturers other than Case. Third,
Western plans to further develop its fleet of rental equipment. As the cost of
purchasing equipment escalates, short and long-term rental will become
increasingly attractive to the Company's customers. Management anticipates that
rental of equipment will make up an increasing shares of its revenues.
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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 one month and twelve months on purchases of specified types of new
Equipment. Principal payments are generally due at the earlier of sale of the
equipment or twelve to fifteen months from the invoice date.
Other Products.
Although the principal products sold, leased and serviced by Western are
manufactured by Case, Western also sells, rents and services equipment and sells
related parts (e.g., tires, trailers and compaction equipment) manufactured by
Hamm and by others. Approximately 25% of Western's net sales for fiscal year
1997 resulted from sales, rental and servicing of products manufactured by
companies other than Case.
Western's distribution business is generally divided into five categories
of activity: (i) New Equipment sales, (ii) used Equipment sales, (iii) Equipment
rentals, (iv) Equipment servicing, and (v) parts sales.
New Equipment Sales 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 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.
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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.
Equipment Rental
Western maintains a separate fleet of Equipment that it generally holds
solely for rental. Such Equipment is customarily held in the rental fleet for 12
to 36 months and then sold as used Equipment with appropriate discounts
reflecting prior rental usage. As rental Equipment is taken out of the rental
fleet, the Company adds new Equipment to its rental fleet as needed. The rental
charges vary based upon the type of Equipment rented.
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
140 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 17,000 customers, with most being small
business owners, none of which accounted for more than 5% of its total sales in
the fiscal year ended July 31, 1997.
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For the fiscal year ended July 31, 1997, 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......................................................... 8%
Parts Sales............................................................ 18%
Service Revenue........................................................ 4%
100%
================================================================================
Western advertises its products in trade publications and appears at trade
shows throughout its territory. It also encourages its salespersons to visit
customer sites and offer Equipment demonstrations when requested.
Western's sales and marketing activities do not result in a significant
backlog of orders. Although Western has commenced acceptance of orders from
customers for future delivery following manufacture by Case, 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 73 Equipment salespersons on July
31, 1997.
On July 31, 1997, 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 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 1997. 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
specialties include JCB Corporation-backhoes, Kobelco Corporation-excavators,
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Dresser Industries-light and medium duty bulldozers, Komatsu Corporation-wheel
loaders and crawler dozers, and Bobcat, Inc.-skid steer loaders.
Western is currently the only Case dealer for construction equipment in
the states of Washington and Nevada and in the Northern California area, and is
one of two Case dealers in the State of Oregon. None of the Case dealers in
Western's territory are owned by Case. However, Case has the right to establish
other dealerships in the future in the same territories in which the Company
operates. In order to maintain and improve its competitive position, revenues
and profit margins, Western plans to increase its sales of products produced by
companies other than Case.
Environmental Standards and Government Regulation
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 prepared by Conestoga, Rovers &
Associates, Inc. (the "Conestoga, Rovers 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 have been made for such clean-up costs on the Company's financial
statements.
In July 1994, prior to Western's acquisition of the Sparks, Nevada
property, Case received an environmental report prepared by RMT, Inc. (the "RMT
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 connection with Western's retail facilities,
and no accruals have been made for such clean-up costs on the Company's
financial statements.
Neither the Conestoga, Rovers report nor the RMT Report revealed
uncertainties with respect to the status of each property reported on which in
the aggregate are reasonably likely to result in material reduction in the
Company's liquidity. Western may be held liable for environmental hazards or
violations on the properties identified in the Conestoga, Rovers Report and RMT
Report to the extent that Western itself creates environmental hazards on those
properties following acquisition from Case, or the reports themselves failed to
identify environmental problems (any of which were required to be corrected by
Case) and, as a result, such problems were not corrected by Case. However, the
Company believes that there is no reasonable likelihood that it will incur any
charges for environmental conditions at either property.
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Insurance
The Company 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.
Employees
At October 31, 1997, the Company's distribution business employed
approximately 414 full-time employees. Of that number, 35 are officers or are
involved in corporate administration, 24 are in branch office administration,
104 are employed in equipment sales and rental, 84 are involved in parts sales
and 167 are employed in equipment servicing.
At October 31, 1997, the Company's technology businesses employed
approximately 219 full-time employees. Of that number, 32 are officers or
involved in administration and clerical activities, 167 are involved in
engineering/construction and software development and customer service and
support, and 20 are involved in sales and marketing.
None of the Company's employees are covered by a collective bargaining
agreement, other than a limited number of employees of the distribution business
employed at the Sacramento, California location. The Company believes that its
relations with its employees are satisfactory.
Future Performance and Risk Factors
The future performance, operating results and financial condition of the
Company's Technology Business and Distribution Business are subject to various
risks and uncertainties, including those described below.
Risk Factors Relating to the Company's Technology Business
Significant Losses from Operations. The technology businesses acquired by
the Company since July 1996, including Old ConnectSoft, Exodus, InterGlobe and
Seattle OnLine, have incurred accumulated net losses since their respective
inceptions in 1992 through 1995 of approximately $31.9 million, including net
losses of approximately $1.3 million in the fiscal year ended December 31, 1993,
$6.5 million in net losses in the fiscal year ended December 31, 1995, $5.4
million in net losses for the seven months ended July 31, 1996 and $17.7 million
in net losses for the fiscal year ended July 31, 1997. It may be anticipated
that such historical losses will continue for the foreseeable future unless the
Company implements a plan to cease or significantly reduce operations of these
businesses or otherwise sells their technologies. In addition, the development
of Connectsoft's FreeAgent(TM) technology has resulted in losses aggregating
approximately $2.8 million in fiscal year ended July 31, 1997. Unless the
Company's proposed public offering of Connectsoft is successfully completed,
such losses may be expected to continue through fiscal 1998. In addition, the
Company's future plans are subject to known and unknown risks and uncertainties
that may cause the Company to continue to incur substantial losses from
operations. Other than IDF and its subsidiaries, there can be no assurance that
any of the Company's technology operations will ever become profitable. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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Significant Investment Losses and Negative Cash Flow. Prior to July 31,
1996, the Company had advanced approximately $3.3 million to Old ConnectSoft.
Since the July 31, 1996 effective date of its acquisition of Old ConnectSoft and
Exodus and through July 31, 1997, the Company has expended approximately $9.0
million in direct advances to cover operating expenses, including personnel
costs, payment of accounts payable and other accrued expenses of its technology
businesses, exclusive of approximately $1.4 million in cash paid to former
stockholders of Old ConnectSoft, InterGlobe, Seattle OnLine, TechStar and
Arcadia in connection with the acquisition of such companies. In addition, the
Company paid $1.5 million to settle an arbitration dispute with the former
stockholder of Seattle OnLine. As a result of recent adverse developments, the
Company has essentially determined that it will no longer seek to finance the
businesses of Old ConnectSoft and Exodus, sold the Seattle OnLine business and
is undertaking to sell the InterGlobe business. As a result, the Company
incurred accumulated losses in fiscal 1997 from the operation of these
businesses and expects to incur additional losses in the first and second
quarters of fiscal 1998 in connection with the cessation of operations of such
businesses. Unless the Company is able to successfully finance the ongoing
operation of Connectsoft, it may also be anticipated that the FreeAgent(TM)
product will continue to represent a significant cash flow drain, at least in
the near term. Even if only partially owned by the Company, there can also be no
assurance that any of the Company's remaining technology businesses will not
continue to represent a significant drain on cash resources, or will ever prove
to be profitable. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources."
Development Stage Products and Lack of Market Acceptance. The Company's
future success in developing and selling its FreeAgent(TM) software solutions
will depend in substantial part upon its successful marketing and market
acceptance of such products. Substantially all of the Company's software
products are in the early stages of development or beta testing, and have not
realized any meaningful market penetration or acceptance. Although the Company's
FreeAgentTM software has been purchased on a test basis by HP, there is no
assurance that additional quantities will be ordered. Accordingly, there can be
no assurance that any of the Company's software products will ever achieve
market acceptance or otherwise be able to be sold in sufficient quantities to
prove profitable to the Company. In addition, there can be no assurance that any
of the other software, communications and networking related products being
developed by the Company will ever receive market acceptance or be able to be
sold in sufficient quantities to provide the Company with a positive cash flow
or profits.
Adverse Development in NTERPRISE(TM) Application Remoting Software
Business. As a result of Microsoft's recent decision to limit support in the
initial releases of future WindowsNT(TM) 4.0 and 5.0 operating system products
to Microsoft's own T share client/server multi-user protocol and Citrix's ICA
application remoting software protocol, the business prospects of Exodus and its
NTERPRISE(TM) product has been materially and adversely affected. The Company
elected to reduce Exodus' staff to approximately 10 technical personnel and
limit current activities toward engineering changes in its application server
product in an effort to adapt NTERPRISE for use with the Windows "Hydra"
operating systems without Microsoft's support. In addition, the Company will
analyze the feasibility of seeking to provide customers with protocols or
support for client computers which are alternatives to those supported by
Microsoft, such as Unix(TM) workstations, X-terminals and Java(TM)-enabled
computers. There can be no assurance that the Company will be able to adapt
NTERPRISE(TM) for use with "Hydra" or effectively provide protocols or support
to non-Windows computers. In the event that the Exodus group is unable to
achieve positive results within the next three to six months, it is likely that
the Company will cease operations of this business unit or attempt to sell the
technology. In fiscal 1997, the Company recorded an $8.2 million loss from its
Exodus business, including the writeoff of $2.2 million of intangibles and
capitalized software costs related to the NTERPRISE(TM) product. See
"DESCRIPTION OF BUSINESS - Significant Recent Developments" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Fiscal 1997 Compared to Fiscal 1996."
Dependence on Few Significant Customers. For its year ended December 31,
1996 and the seven months ended July 31, 1997, in excess of 95% and
approximately 50%, respectively, of the revenues of the Company's TechStar
subsidiary was derived from AT&T Wireless Communications. As AT&T Wireless
completes its initial
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<PAGE>
cellular buildout in early 1998, revenues from this customer are expected to
significantly decrease in fiscal 1998. Although TechStar has replaced this
anticipated lost business with new contracts from other customers, there are
relatively few major customers providing wireless communications facilities in
the territory currently serviced by TechStar. Unless TechStar significantly
expands the area in which it provides its services (including penetration in the
international market), the loss of or reduction in business from a number of the
relatively few significant customers it currently services would have a material
adverse effect on TechStar's business. See "BUSINESS -Wireless
Telecommunications Services." During the three quarters ended July 31, 1997,
following its acquisition on December 11, 1996, TechStar generated revenues of
$3,891,000, or 2.5% of the Company's total revenues for such period.
Competition. The markets in which the Company's business competes are
intensely competitive and are characterized by rapidly changing technology and
evolving industry standards.
Competitive factors in the Windows(TM) application server product market
include completeness of features, product scalability and functionality, product
quality and reliability, marketing and sales resources, distribution channels,
pricing and customer service and support. The Company faces extensive
competition from Citrix, Sun Microsystems, Inc. ("Sun"), Tektronix, Inc.
("Tektronix"), Insignia Solutions, Inc. ("Insignia") and Network Computing
Devices, Inc. ("NCD"), all of whom are significantly larger than the Company and
have substantially greater financial and other resources, including marketing
resources, personnel and more established distribution channels. While the
Company believes that the features available on its NTERPRISE application
remoting software provide users with the maximum flexibility to integrate
Windows NT(TM) applications, there can be no assurance that the Company will be
able to establish and maintain a market position in the face of such substantial
competition. For example, recent strategic decisions by Microsoft have caused
the Company to completely refocus its NTERPRISE(TM) development efforts, and may
result in the termination of all such activities in the near future. See
"DESCRIPTION OF BUSINESS - Significant Recent Developments."
As is the case with its application remoting software, the communications
technology market which Connectsoft's FreeAgent(TM) software seeks to penetrate
is characterized by rapid technological change, changing customer needs,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards could render Connectsoft's products and services obsolete and
unmarketable. Connectsoft's future success will depend upon its ability to
develop and introduce new products and services (including its intelligent
integrated communication system) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of the user. There can be no assurance that
Connectsoft will be successful in developing and marketing new products and
services that respond to technological changes or evolving industry standards,
that Connectsoft will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products and
services, or that its new products and services will adequately meet the
requirements of the marketplace and achieve market acceptance. If Connectsoft is
unable, for technological or other reasons, to develop and introduce new
products in a timely manner in response to changing market conditions or
consumer requirements, Connectsoft's business, operating results and financial
condition will be materially adversely affected.
Dependence on SRI and DCL Licenses. Connectsoft has entered into software
license agreements with SRI and DCL to incorporate their proprietary
technologies into the FreeAgent(TM) system. These license agreements require
Connectsoft to make advance payments, pay minimum royalties and satisfy other
conditions. There can be no assurance that sales of products incorporating such
technologies will be sufficient to recover the amount of such payments or that
sales of products will occur. Failure by Connectsoft to satisfy its obligations
under these agreements may result in modification of the terms or termination of
the relevant agreement, which would have a material adverse effect on the
Company. Connectsoft expects that it will be dependent on SRI and DCL for the
foreseeable future.
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Need for Strategic Alliances. The Company's primary marketing strategy for
FreeAgent is to establish strategic and licensing relationships with
telecommunications companies and Internet Service Providers ("ISPs"). No
assurance can be given that the Company will be successful in entering into any
strategic alliances on acceptable terms, or, if any such strategic alliance is
entered into, that Connectsoft will realize the anticipated benefits from such
strategic alliance.
Dependence on Third Parties to Provide the Full Functionality of
FreeAgent. Connectsoft expects to license FreeAgent to telecommunications
companies, large ISPs and multinational distributors of telecommunications
technologies to large enterprises. In order for end-users to have the full range
of FreeAgent functionality available, Connectsoft's customers must operate
communications networks that are able to offer the full range of FreeAgent's
potential functions and such customers may need to switch from one or more
providers they currently use. For example, if Connectsoft enters into a contract
with a telephone company, in order to receive the full benefits of FreeAgent,
the end user may need to switch from the paging service provider currently used
by such end user to the paging service, if any, offered by such telephone
company (unless the telephone company enters into an arrangement with the end
user's current paging service company to offer such paging services). Even if
the telephone company offers paging services, such services may not be equal in
cost, quality, name recognition or otherwise to the services currently used by
the end user, thus reducing the attractiveness of FreeAgent to the end user. In
the event Connectsoft's customers are unable to offer the full range of
FreeAgent's functions, either because they operate limited communications
networks and/or they are unable to enter into satisfactory arrangements with
third parties that provide the necessary additional communications services, the
full potential and usefulness of FreeAgent may not be realized. In addition,
consumer acceptance may be limited by the need to switch from one or more
service providers with whom they are satisfied to the comparable services, if
any, offered by Connectsoft's customer for FreeAgent. As a result, the Company
may not generate revenues from the FreeAgent product sufficient to achieve or
sustain profitable operations.
Lack of Established Distribution Channels. Connectsoft must establish and
maintain relationships with new distribution channels that will deliver access
to its unified, intelligent communications system. There is intense competition
in establishing such relationships. There can be no assurance that Connectsoft
will succeed in establishing such relationships, or that if established, the
Company will be able to maintain these relationships. The failure of Connectsoft
to successfully establish and then maintain these relationships could have a
material adverse effect on Connectsoft's business, operating results and
financial condition.
Limited Resources. Building a unified, intelligent communications system
based on software technology is a complex process that requires significant
engineering and financial resources. To implement the FreeAgent system,
Connectsoft must develop certain technology and license other technologies from
third parties, establish distribution channels and find strategic partners.
Connectsoft has recently terminated its President and chief marketing officer
and has a limited technical and sales staff. Although Connectsoft is actively
seeking to hire the services of one or more experienced telecommunications and
software executives, there can be no assurance that Connectsoft will be able to
establish and maintain adequate executive, marketing and sales capabilities.
Furthermore, because Connectsoft has not generated any revenues since inception,
and is not assured of deriving significant additional revenues in fiscal 1998,
if at all, and because the Company must conserve its remaining sources of cash,
there is no assurance given such limited resources that the Company and
Connectsoft will be able to develop or implement the FreeAgent system. Unless
Connectsoft completes its contemplated initial public offering by the end of
March 1998, the Company may elect to significantly limit future investment in
Connectsoft, in which event the FreeAgent business may be materially and
adversely affected.
Dependence on the Internet. The Company believes that Connectsoft's future
success is in part dependent upon continued growth in the use of the Internet.
Rapid growth in the use of and interest in the Internet is a recent phenomenon.
The Internet may not prove to be a viable means of conducting commerce or
communications for a number of reasons, including, but not limited to,
potentially unreliable network infrastructure, the failure to establish
satisfactory security protections for Internet communications, or the failure to
timely develop performance
27
<PAGE>
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
levels of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by any such growth.
Failure of the Internet as a mode of conducting commerce and communications
could have a material adverse effect on Connectsoft's business, operating
results and financial conditions.
Dependence on Emerging Markets; Uncertainty of Market Acceptance.
Connectsoft's future financial performance will depend on the growth in demand
for a unified, intelligent communications system, by mobile business
professionals and other consumers. This market is new and emerging, is rapidly
evolving, is characterized by an increasing number of market entrants and will
be subject to frequent and continuing changes in customer preferences and
technology. As is typical in new and evolving markets, demand and market
acceptance for Connectsoft's technologies are subject to a high level of
uncertainty. In addition, because the markets for Connectsoft's technologies are
new and evolving, it is difficult to assess or predict with any assurance the
size or growth rate, if any, of these markets. There can be no assurance that
the markets for Connectsoft's technologies will develop, or that they will not
develop more slowly than expected or attract new competitors. If the Company's
technologies do not achieve market acceptance, Connectsoft's business, operating
results and financial condition could be materially adversely affected.
Consequences of Rapid Technological Change. The software and
telecommunications industries are characterized by rapid technological change,
frequent introduction of new products, services and systems, changes in customer
demands and evolving industry standards. The introduction of products and
services embodying new technology or adapting products and services to the
computing market and the emergence of new industry standards often render
existing products and services obsolete or unmarketable. The success of the
Company's technology and telecommunications business success will depend upon
its ability to enhance its existing products and services and to develop,
introduce or otherwise acquire on a timely basis new products and services that
keep pace with technological developments and emerging industry standards in
order to meet the changing needs of the Company's customers. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction or sale of
these products or that the Company's new enhancements (if any) will adequately
meet the requirements of the marketplace and achieve market acceptance. In
addition, there can be no assurance that technological changes or evolving
industry standards will not render the Company's products, services and
technologies obsolete.
Limited Protection of Intellectual Property and Proprietary Rights; Risk
of Litigation. The Company holds copyrights on its products, manuals,
advertising and other materials and maintains trademark rights in the
NTERPRISE(TM) and FreeAgent name and logo. The Company regards its software as
proprietary and relies primarily on a combination of trademark, copyright and
trade secret laws, employee and third-party nondisclosure agreements, and other
methods to protect its proprietary rights. Unauthorized copying is common within
the software industry, and if a significant amount of unauthorized copying of
the Company's products were to occur, the Company's business, operating results
and financial condition could be adversely affected. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products. Further, the Company may
enter into transactions in countries where intellectual property laws are not
well developed or are poorly enforced. Legal protections of the Company's rights
may be ineffective in such countries. Any claims or litigation, with or without
merit, could be costly and could result in a diversion of management's
attention, which could have a material adverse effect on the Company's business,
operating results and financial condition. Adverse determinations in such claims
or litigation could also have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's success in its Exodus application server software and
FreeAgent(TM) product is heavily dependent upon proprietary technology. While
Exodus has filed one United States patent application, to date, it has no
registered patents, and none of the other operating subsidiaries in the
Company's technology business holds
28
<PAGE>
patents. 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 management and technical
personnel, strategic relationships, name recognition, the timeliness and quality
of support services and the ability to rapidly develop, enhance and market
software products may be more significant than formal contractual rights and
patent and copyright registrations in maintaining its competitive position.
The Company believes that its products and services do not infringe the
rights of third parties. However, while the Company has not received notice of
any infringement claims, third parties may assert such claims against the
Company. If made such claims could require the Company to enter into licensing
agreements or royalty arrangements for the technology in question, or result in
litigation, any of which could materially and adversely affect the Company's
business. In addition, certain of the Company's rights are dependent upon
licenses granted to third parties and sublicensed to the Company. There can be
no assurance that such third parties will maintain these licenses or, if
maintained, that the Company will continue to hold sublicenses thereunder. In
the absence of such sublicenses, the Company would need to directly license the
rights sublicensed to it by such third parties. There can be no assurance that
the Company could acquire any such license on terms acceptable to the Company or
at all. Any failure to acquire such licenses could materially and adversely
affect the Company's business and prospects. See "BUSINESS."
New Product Development and Timely Introduction of New and Enhanced
Products. The markets for the products and services provided by the Company's
technology businesses 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
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.
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 and retain additional key personnel, or failure to
retain existing key personnel, could have a material adverse effect on the
Company's technology business, operating results or financial condition.
29
<PAGE>
Risk Factors Relating to the Company's Distribution Business
Competition. The Company's Distribution Business operates in highly
competitive environments, certain of which are characterized by firms having
resources and manpower significantly greater than those of Western, and in all
of which Western faces a great deal of competition on the basis of price. Such
intense price competition has the effect of holding down Western's profit
margins on product sales. The retail construction equipment industry, including
the states of Washington, Oregon, California and Nevada in which Western
operates, is highly fragmented with many brands of equipment and distributors of
such brands active in the market. Moreover, Western's dealership arrangements
with Case do not provide Western with exclusive dealerships in any territory.
Although management believes that it is unlikely that Case will create
additional independent dealers in the states of Oregon, Washington, California,
Alaska or Nevada, or will reinstitute its own proprietary dealerships in that
territory, there is no assurance that Case will not elect to do so in the
future. See "BUSINESS_The Distribution Business_Competition."
Government Regulation and Environmental Standards. Western operations are
subject to numerous rules and regulations at the federal, state and local levels
which are designed to protect the environment and to regulate the discharge of
materials into the environment. Based upon current laws and regulations, Western
believes that its policies, practices and procedures are properly designed to
prevent unreasonable risk of environmental damage and the resultant financial
liability to Western. No assurance can be given that future changes in such
laws, regulations, or interpretations thereof, changes in the nature of
Western's operations, or the effects of former occupants' past activities at the
various sites at which Western operates, will not have an adverse impact on the
Company's operations.
Western is subject to federal environmental standards because, in
connection with its operations, it handles and disposes of hazardous materials
and discharges sewer water in its equipment servicing operations. Western
internal staff is trained to keep appropriate records with respect to its
handling of hazardous waste, to establish appropriate on-site storage locations
for hazardous waste, and to select regulated carriers to transport and dispose
of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems. There is always the risk that such
materials might be mishandled, or that there might occur equipment or technology
failures, which could result in significant claims for personal injury, property
damage and clean-up or remediation. Any such claims could have a material
adverse effect on the Company.
Risk of Termination of Case Dealership. Under the terms of the standard
Case Corporation ("Case") construction equipment sales and services agreement
with its dealers, including Western, Case reserves the right to terminate
Western as an authorized Case dealer at any one or more of the nineteen retail
locations, for any reason, upon 90 days notice. In the Agreement of Purchase and
Sale by and between Case and Western, dated December 4, 1992 (the "Case Purchase
Agreement"), Case acknowledged that its corporate business policy is not to
exercise such discretionary right of termination arbitrarily, and agreed that if
Western's operations at a particular location acquired from Case are profitable
and are terminated by Case for any reason other than "for cause" (defined as any
grounds which Case shall determine in the exercise of its reasonable business
judgment) it would not reinstate its own retail operations at such location
through December 1997. Should its Case dealerships at any one or more locations
be terminated by Case, the Company's business could be materially and adversely
affected. In the event of such termination, the Company's interest in the
Distribution Business segment would be significantly affected. Western would
suffer significant adverse effects to its liquidity position and cash reserves,
as all of Western's indebtedness to Case under its various secured financing
agreements would become immediately due and payable upon termination of one or
more of such dealerships. All of Western's indebtedness to its institutional
lenders could also be accelerated at that time. On September 30, 1997, the
principal amount of all indebtedness which could be so accelerated equaled
approximately $27.1 million, See "Existence of Liens on Substantially all
Western Assets; Potential Unavailability of Additional Financing" below.
Furthermore, in the event that Western accelerates growth of its Distribution
Business, dependence upon Case as its principal supplier, at least in the near
term, will increase.
30
<PAGE>
Importance of Case Corporation to the Company's Operations. During the
year ended July 31, 1997 the Company's Western subsidiary accounted for $148.1
million, or 95.9% of the Company's total net sales from continuing operations
for fiscal 1997. Approximately 75% of Western's revenues result from sales,
leasing and servicing of equipment and parts manufactured by Case. As a result,
the ability of Case to continue to manufacture products that Western can
successfully market and distribute, largely based on the quality and pricing of
such products, is of material importance to the Company. In the event that Case
should cease to manufacture equipment for the construction equipment industry,
fail to produce sufficient products to stock the Company's inventories
adequately, fail to maintain beneficial product price levels on its products or
to maintain its international reputation for quality in such industry, the
Company could be materially and adversely affected.
Effects of Downturn in General Economic Conditions, Cyclicality and
Seasonality. Demand for all of Western's construction equipment distributed
through its retail operations, is significantly affected by general domestic
economic conditions. All of such products and services are either capital goods
themselves, principally sold for inclusion in capital equipment or used for the
provision of construction services by others. Sales of capital goods tend to
fluctuate widely along with trends in overall economic activity in the national
economy. A general inflationary spiral or a continuing increase in prevailing
interest rates could adversely affect new construction, and consequently result
in a significant reduction in demand for the construction equipment sold by
Western. The construction equipment business has also historically been
cyclical, and is subject to periodic reductions in the levels of construction
(especially housing starts) and levels of total industry capacity and equipment
inventory, irrespective of the effects of inflation or increasing interest
rates. In addition, housing construction in the northwest slows down beginning
in November and continuing through to January. Accordingly, Western's operations
may be materially and adversely affected by any general downward economic
pressures, adverse cyclical trends, or seasonal factors.
Dependence on Key Personnel. The Company's success in its Distribution
Business depends to a significant degree upon the continuing contributions of
its senior management and other key employees. The Company believes that its
future success will also depend in large part on its ability to attract and
retain highly-skilled sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, integrating and retaining such personnel. Failure to
attract or retain existing and additional key personnel could have a material
adverse effect on the Company's Distribution Business, operating results or
financial condition.
Risk Factors Relating to the Company in General
Risk of Nasdaq Delisting. On October 13, 1997, the Company was notified by
The Nasdaq Stock Market, Inc. ("Nasdaq"), to the effect that the issuance of the
Series B-1 convertible Preferred Stock to the Old ConnectSoft stockholders in
August 1996 and the private placement of Series B-2 convertible Preferred Stock
in the 1997 private placement violated Nasdaq's marketplace Rule 4460(i)(c)(ii)
and Rule 4460(i)(d)(1) which, in effect, require shareholder approval for any
transactions involving the present or potential issuance of voting securities
representing more than 20% of the voting capital stock outstanding immediately
before such transaction. The Company believes that neither transaction violated
such Nasdaq rules and, based upon an informal meeting with the Nasdaq staff,
believes that Nasdaq will not commence delisting proceedings conditioned upon
the Company's implementation of certain agreed upon corporate governance
procedures for its board of directors and obtaining stockholder ratification of
the issuances of such preferred stock at it 1997 annual stockholders meeting
scheduled in January 1998. However, there is no assurance that Nasdaq will not
commence delisting proceedings or that the Company's continued listing on Nasdaq
will not be terminated for other reasons. In such event, the Company's Common
Stock would trade on the OTC Electronic Bulletin Board or on another national
securities exchange, if application to such exchange is made and accepted. There
can be no assurance if the Company is delisted from trading on Nasdaq that its
Common Stock will subsequently be accepted for trading on a national securities
exchange. In the event of such delisting and the requirement that the Company's
Common Stock trade only on the OTC Electronic Bulletin Board, the trading market
for such Common Stock and investors liquidity may be materially and adversely
affected.
31
<PAGE>
Control by Principal Stockholder and Management. As of October 31, 1997,
Robert M. Rubin beneficially owned 14.2% of the Company's outstanding voting
capital stock, assuming the exercise of all outstanding options held by him.
Accordingly, he will have a significant influence on all matters on which
stockholders are entitled to vote, including the election of the Company's
directors. In addition, as of October 31, 1997, the Company's directors and
executive officers as a whole beneficially owned 2,694,964 shares or 24.3% of
the Company's outstanding voting capital stock, assuming the exercise of all
outstanding stock options held by them. Insofar as the holders of voting
securities do not have cumulative voting rights under the Company's Certificate
of Incorporation, the current executive officers and directors of the Company,
acting together, are currently in a position to materially influence the outcome
of issues to be voted on by the Company's stockholders.
Volatility of Market Prices for Company's Common Stock. The market prices
for the Company's publicly traded Common Stock has been historically volatile
and there is limited liquidity in such market. Future announcements concerning
the Company's Technology Business or Distribution Business, or its competitors,
including operating results, government regulations, or foreign and other
competition, could have a significant impact on the market price of the Common
Stock in the future.
Substantial Dilution from Issuance of Significant Additional Shares. In
connection with its acquisition program, between July 1996 and July 31, 1997,
the Company has issued an aggregate of 1,895,000 shares of Common Stock. In
addition, the Company: (i) will be required to issue a minimum of 976,539
additional shares of Company Common Stock and a maximum of 2,929,617 additional
shares of Common Stock, to former stockholders of Old ConnectSoft upon
conversion of 976,539 shares of Company Series B-1 Preferred Stock issued in the
Old ConnectSoft acquisition, with the conversion rate to Common Stock to be
based upon achievement of certain earnings and other criteria relating to Old
ConnectSoft and Exodus, (ii) may be required to issue up to 150,000 additional
shares of Common Stock based upon exercise of the warrants issued in connection
with the settlement of a dispute with the former stockholder of Seattle OnLine;
and (iii) may be required to issue up to 200,000 additional shares of Common
Stock based upon exercise of additional options granted to employees of the
Company. Immediately prior to the July 31, 1996 effective date of the Old
ConnectSoft acquisition, an aggregate of 5,695,749 shares of Company Common
Stock were outstanding, and an aggregate of 8,105,589 shares were outstanding on
a fully-diluted basis, after giving effect to the exercise of all warrants and
options then outstanding. In contrast, as a result of the Company's acquisition
program and the issuance of additional options and convertible securities since
July 31, 1996, as at October 31, 1997, an aggregate of 11,117,389 shares of
Company Common Stock were outstanding, and an aggregate of 18,358,539 shares
would be outstanding on a fully-diluted basis, after giving effect to (i) the
maximum permitted conversion of shares of Series B-1 Preferred Stock issued in
connection with the Old ConnectSoft acquisition into 2,938,617 shares, and (ii)
the exercise of all outstanding options and warrants, including performance
options issued under its acquisition program.
32
<PAGE>
ITEM 2. Properties
The following table sets forth information as to each of the properties
which the Company owns or leases:
The Distribution Business:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1745 N.E. Columbia Blvd. Carlton O. Fisher, 12/31/00 $67,500(1) Approx. 4 No
Portland, Oregon 97211 Nancy A. Harrison & plus CPI Acres; Building
(Retail sales, service, storage Jane G. Whitbread adjustments 17,622 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/98 $27,480(1) Approx. 1 Acre; No
Salem, Oregon 97303 Living Trust Buildings 14,860
(Retail sales, service, storage sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 No
Springfield, Oregon 97477 Company Acres; Building
(Retail sales, service, storage 17,024 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
West 7916 Sunset Hwy. Case Corporation 9/30/98 $58,404(1) Approx. 5 No
Spokane, Washington 99204 Acres; Building
(Retail sales, service, storage 19,200 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
3217 Hewitt Avenue Dick Calkins Month to $40,320(1) Approx. 2.5 No
Everett, Washington 98201 Month Acres; Building
(Retail sales, service, storage 12,483 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
1901 Frontier Loop The Landon Group Month to $40,500(1) Approx. 7 No
Pasco, Washington 99301 Month Acres; Building
(Retail sales, service, storage 14,200 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
13184 Wheeler Road, N.E. Maiers Industrial Park 4/30/02 $38,400(1) Approx. 10 No
Building 4 Acres; Building
Moses Lake, Washington 13,680 sq. ft.
98837
(Retail sales, service, storage
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
63291 Nels Anderson Road B&K Management 10/31/98 $31,800(1) Approx. 3,600 No
Bend, Oregon 97701 Corp. sq. ft.
(Retail sales, service, storage
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
4601 N.E. 77th Avenue Parkway Limited 9/30/99 $101,280 6,100 sq. ft. No
Suite 200 Partnership
Vancouver, Washington
98662
(Executive Offices)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Net lease with payment of insurance, property taxes and maintenance costs by
Company.
33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
2702 W. Valley Hwy No. Avalon Island LLC 11/30/15 $204,000(1) Approx. 8 No
Auburn, Washington 98001 Acres; Building
(Retail sales, service, storage 33,000 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
500 Prospect Lane Frederick Peterson 9/15/02 $26,496(1) Approx. 1.9 No
Moxee, Washington 98936 acres; Building
(Retail sales, service, storage 6,200 sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
2112 Wildwood Way James Ghia 5/31/98 $18,720 Approx. 1 Acre; No
Elko, Nevada 89431 Building 3,000
(Retail sales, service, storage sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
1455 Glendale Ave. Owned N/A N/A Approx. 5 acres; N/A
Sparks, Nevada 89431 Building 22,475
(Retail sales, service, storage sq. ft.
and repair facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
25886 Clawiter Road Fred Kewel II, 11/30/99 $110,088(1) Approx. 2.8 No
Hayward, California 94545 Agency acres; Building
(Retail sales, service, storage 21,580 sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
3540 D Regional Parkway Soiland 2/28/98 $36,036(1) plus 5,140 sq. ft. No
Santa Rosa, California CPI adjust-
95403 ments
(Retail sales, service, storage
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
1751 Bell Avenue McLain-Rubin Realty 3/1/16 $204,000(2) Approx. 8 No
Sacramento, California Company LLC(2) Acres; Buildings
95838 35,941 sq. ft.
(Retail sales, service, storage
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
1041 S. Pershing Avenue Raymond Investment 3/14/01 $36,000(1) Approx. 2 No
Stockton, California 95206 Corp. Acres; Buildings
(Retail sales, service, storage 5,000 sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
1126 E. Truslow Avenue D. June Brecht, Glen Month to $22,524(1) Building 4,800 No
Fullerton, California 92631 Brecht and Marshal Month sq. ft.
(Retail sales, service, storage Brecht
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/98 $28,800(1) Approx. 8 acres; No
Salinas, CA 93301 Building 4,000
(Retail sales, service, storage sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(2) C. Dean McLain and Robert M. Rubin are (i) the Executive Vice
President and Director of the Company and Chief Executive Officer of Western,
and (ii) the President, Chief Executive Officer and Chairman of the Company,
respectively. Messrs. Rubin and McLain are the equity owners of McLain-Rubin
Realty Company, LLC. The terms of its lease with McLain-Rubin Realty Company LLC
is "triple net", under which Western pays, in addition to rent, all insurance,
property taxes, maintenance costs and structural and other repairs.
34
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
13691 Whitaker Way D&J Enterprises 5/1/98 $77,700 Approx. 2 acres; No
Portland, OR 97230 Building 11,780
(Retail sales, service, storage sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
2535 Ellis Street Hart Enterprises 2/15/02 $33,600 Approx. 2 acres; No
Redding, OR 96001 Building 6,200
(Retail sales, service, storage sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
1702 Ship Avenue D&J Enterprises 1/18/99 $94,200(1) Approx. 4 acres; No
Anchorage, AK 99501 Building 11,800
(Retail sales, service, storage sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
913 S. Central McLain-Rubin Realty 5/21/17 $205,200(1) Approx. 4.4 No
Kent WA 98032 Company II, LLC(2) plus CPI acres; Building
(Retail sales, service, storage adjustments 21,400 sq. ft.
and repair facility)
- ----------------------------------------------------------------------------------------------------------------------------------
85454 Highway 11 Eagle Enterprises 9/1/98 $21,600 Approx. 0.5 No
Milton-Freewater, OR 97862 acres; Building
(Retail sales, service, storage 1,000 sq. ft.
and repair facility)
==================================================================================================================================
</TABLE>
Western's operating facilities are separated into six "hub" outlets and
twelve "sub-stores." The hub stores are the main distribution centers located in
Auburn and Spokane, Washington, Portland, Oregon, Sparks, Nevada, Hayward,
California and Sacramento, California. The sub-stores are the smaller retail
facilities in Everett, Pasco, Moses Lake, Kent and Yakima, Washington; Portland,
Salem, Springfield, Milton-Freewater and Bend, Oregon; Santa Rosa, Stockton,
Fullerton, Redding and Salinas, California; Elko, Nevada; and Anchorage, Alaska.
The Technology Business:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
11130 NE 33rd Place Koll Management 11/22/01 $350,000(1) 17,200 sq. ft. No
Bellevue, Washington 98004
(Principal executive offices,
ConnectSoft and eXodus
offices and software
production facility)
- ----------------------------------------------------------------------------------------------------------------------------------
1520 Fourth Avenue, Metropolitan Federal 7/31/98 $48,000(1) 4,031 sq. ft. No
Suite 200 Savings and Loan
Seattle, Washington 98101 Association
(Interglobe Networks offices
and operating facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
6th and Virginia 6th and Virginia 9/30/00 $25,000(1) 1,000 sq. ft. No
Seattle, Washington 98121 Properties
(Network operations center)
- ----------------------------------------------------------------------------------------------------------------------------------
4340 East West Highway Booze Allen and 12/31/98 $41,292 3,441 sq. ft. No
Bethesda, MD 20814 Hamilton 12/31/97 $48,000 4,000 sq. ft.
(TechStar offices and
operating facility)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expiration Annual Size/ Purchase
Location and Use Lessor Date Rental Square Feet Options
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
330 West 42nd Street Newmark & Co. 11/30/99 $198,000 10,500 sq. ft. No
New York, NY 10017
(Hayden Wegman and IDF
offices and operations)
- ----------------------------------------------------------------------------------------------------------------------------------
214 Lincoln Street DeNormandie 8/30/01 $116,250 9,300 sq. ft. No
Boston MA 02134 Associates
(Hayden Wegman office)
- ----------------------------------------------------------------------------------------------------------------------------------
455 Commerce Dr. C&S Associates 3/31/01 $62,304 4,300 No
Amherst, New York 14228
(Hayden Wegman office)
- ----------------------------------------------------------------------------------------------------------------------------------
1055 Parsippany Boulevard Boulevard Plaza 12/31/97 $21,087 1,200 No
Parsippany, NJ 07054 Associates
(Hayden Wegman office)
- ----------------------------------------------------------------------------------------------------------------------------------
1417 Fourth Avenue Collier Management 2/9/00 $54,000(1) 8,000 sq. ft. No
Seattle, Washington 98101
(Prior Seattle OnLine offices
and operating facilities)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the leased and owned facilities used by the Company are believed to
be adequate in all material respects for the needs of the Company's current and
anticipated business operations.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, there are no pending material legal proceedings
in which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate may have a material adverse effect on the results of operations or
financial position of the Company.
On September 1997, an action was commenced by Prudential Securities
Incorporated ("Prudential") in the United States District Court for the Western
District of Washington seeking an investment banking fee of approximately
$550,000 in connection with the Company's acquisition of Old ConnectSoft. The
Company believes that, although Prudential had originally been engaged by Old
ConnectSoft as an investment banker, Prudential did not directly or indirectly
introduce the Company to Old ConnectSoft and had abandoned efforts to finance,
or otherwise provide investment banking services to, Old ConnectSoft well prior
to the Company's involvement with Connectsoft. Accordingly, the Company does not
believe that Prudential is entitled to any fee, and if litigation is commenced,
will vigorously defend any such action and assert against Prudential what it
believes are meritorious counterclaims on behalf of Old ConnectSoft.
In September 1997, the Company agreed to pay the former principal
stockholder of Seattle OnLine $1.5 million pursuant to the settlement of an
arbitration proceeding brought by such stockholder in Seattle, Washington.
$500,000 of such amount was paid in October 1997 and the $1.0 million balance is
due November 17, 1997. Under the terms of the settlement, the Company also
issued warrants to purchase 150,000 shares of Company Common Stock at $6.25 per
share to such person and his legal counsel. As part of the settlement, warrants
to purchase 305,000 Company shares issued at the time of the acquisition of
Seattle OnLine were canceled.
36
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for trading the Company's securities is the NASDAQ
National Market System. The following is a table that lists the high and low
selling prices for shares of the Company's Common Stock and for the Company's
Public Warrants on the NASDAQ National Market System during the periods
identified:
Common Stock Public Warrants
------------ ---------------
High Low High Low
---- --- ---- ---
Fiscal year 1995
First Quarter ............. $ 6.58 $ 3.50 $ 1.3125 $0.90625
Second Quarter ............ 5.42 4.00 1.1718 0.875
Third Quarter ............. 5.00 3.75 1.0938 0.78125
Fourth Quarter ............ 5.92 4.25 1.50 0.78125
Fiscal year 1996
First Quarter ............. 6.58 5.08 1.125 0.75
Second Quarter ............ 11.88 6.08 1.00 0.75
Third Quarter ............. 13.25 3.37 1.56 0.875
Fourth Quarter ............ 10.25 4.19 6.75 1.625
Fiscal year 1997
First Quarter ............. 10.875 5.25 5.25 2.875
Second Quarter ............ 11.375 7.563 4.875 3.875
Third Quarter ............. 8.1875 3.44 4.50 3.75
Fourth Quarter ............ 6.0000 4.3875 4.00 3.25
Fiscal 1998
First Quarter ............. 7.8125 1.9375 5.25 2.25
================================================================================
On October 31, 1997 the last sale price of the Common Stock was $2.09375;
and on the last day prior to October 31, 1997 on which the Public Warrants
traded (October 31, 1997), the last sale price of the Public Warrants was $2.625
as reported on the NASDAQ National Market System. The Company estimates that it
had over 1,000 beneficial holders of its Common Stock and 6 record holders of
its Public Warrants on October 31, 1997.
Dividend Policy
In the foreseeable future, the Company intends to retain earnings to
assist in financing the expansion of its business. In the future, the payment of
dividends by the Company on its Common Stock will also depend on its financial
condition, results of operations and such other factors as the Board of
Directors of the Company may consider relevant. The Company does not currently
intend to pay dividends on its Common Stock.
During the period that any of the shares of Series B-2 Preferred Stock is
not converted, such shares will accrue dividends at an annual rate of 7%, which
are added to the face amount of such Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 1993,
1994, 1995, 1996 and 1997 have been derived from the audited financial
statements of the Company.
37
<PAGE>
Income Statement Data (000's):
<TABLE>
<CAPTION>
Year ended July 31,
-------------------
1997(4) 1996(3) 1995 1994 1993(1)
------- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $ 154,545 $ 106,555 $86,173 $67,370 $30,386
(Loss) income from continuing operations . (27,257) (9,610) 1,164 1,024 417
Net (loss) income ........................ (27,257) (1,835)(2) 2,268 2,287 1,575
Per share:
(Loss) income from continuing operations $ (2.75) $ (1.66) $ 0.20 $ 0.18 $ 0.06
Net (loss) income ...................... $ (2.75) (0.32) 0.40 0.43 0.34
</TABLE>
Balance Sheet Data:
July 31,
--------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets................. $144,723 $119,055 $76,829 $62,529 $58,320
Total liabilities............ 110,742 87,015 56,575 44,591 44,787
Working capital.............. 20,919 17,218 10,022 11,739 6,624
Shareholders' equity......... 24,101 22,581 20,254 17,938 13,533
- ----------
(1) Represents nine months of results of Western Power & Equipment Corp.
("Western") following its acquisition in November 1992.
(2) Includes income from discontinued operations and the gain on the sale of
the manufacturing business of $7.8 million, net of tax.
(3) Includes results of operations of Old ConnectSoft for the day ended July
31, 1996.
(4) Includes the results of InterGlobe for the 10 months following its
acquisition in September 1996, Seattle OnLine for the nine months
following its acquisition in November 1996 and TechStar for the seven
months following its acquisition in December 1996.
38
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This management discussion and analysis of financial conditions and
results of operations contains certain "forward-looking statements" as defined
in the private securities litigation reform act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements that involve certain risks and uncertainties, detailed from time to
time in the Company's various commission filings and in "Item 1. Description of
Business - Future Performance and Risk Factors." No assurance can be given that
any such matters will be realized.
General Overview
Management of the Company carefully considered, both prior and immediately
subsequent to consummation of the January 1996 sale of the Company's
manufacturing divisions to Hutchinson Corporation ("Hutchinson"), the best
utilization of the cash resources that would result therefrom. It was determined
that stockholder value would best be enhanced by directing the Company's future
into the computing and telecommunications industries, by acquiring proprietary
technologies, unique niche software products and selective expertise that could
be marketed on a national scale.
Effective as of July 31, 1996, the Company acquired, through merger of an
acquisition subsidiary of the Company in August 1996 (the "ConnectSoft Merger"),
all of the outstanding capital stock of Old ConnectSoft, a private company
located in Bellevue, Washington.
Prior to the July 1996 acquisition by the Company and through January
1997, Old ConnectSoft focused on providing EMail and internet software products.
In September 1996, Old ConnectSoft conceived and began to develop its
FreeAgent(TM) software designed to integrate e-mail, voice mail, facsimile, page
massaging, content on the World Wide Web (the "Web") and potentially any other
network-based digital data found on the Internet, corporate intranets, private
branch exchange ("PBX") telephone systems and the public switched telephone
network ("PSTN"). With this network-based application, FreeAgent is currently
capable of applying advanced media transformation processes and user interface
technologies for speech recognition, text-to-speech and natural language
understanding so that a person can send or receive a message between any two
media, using any two communication devices, whether a telephone on PBX or PSTN
systems, a personal computer on Internet or intranet systems or almost any other
communication device connected to these systems. In July 1997, Old ConnectSoft
transferred to Connectsoft, a newly formed wholly-owned subsidiary of the
Company, all of the FreeAgent(TM) technology and assets. In consideration of
such transfer, the Company agreed to indemnify its ConnectSoft subsidiary from
all liabilities and obligations, other than those related to FreeAgentTM, which
arise out of the business or operations of Old ConnectSoft.
Exodus, previously a division of Old ConnectSoft, became a separate 80.4%
owned subsidiary of the Company immediately following the ConnectSoft Merger.
Exodus has developed a proprietary application remoting software, marketed as
NTERPRISE(TM), which, when combined with a multi-user software "kernal" which
modifies certain source code instructions in the Windows(TM) operating system,
allows users to run Windows(TM) application server software programs designed
for the Microsoft(TM) Windows NT(TM) operating system (i) on users' existing
Unix(TM) workstations, X-terminals and other X-windows devices, Macintosh
terminals and Java-enabled network computers, which would otherwise not be
Windows compatible, and (ii) on older versions of Windows compatible
workstations such as 286- and 386-based personal computers, which are otherwise
incapable of running newer versions of Windows compatible software. In September
1997, Microsoft Corporation announced that it would incorporate its own
multi-user software in future versions of Windows NT(TM) and that only its
Windows T.share client/server protocol and Citrix Systems, Inc. ICA application
remoting software protocol will be supported in the initial releases of Windows
NT 4.0 and 5.0 "Hydra" multi-user operating system products. In addition,
Microsoft advised the Company that alternate multi-user and application server
software protocols such as NTERPRISE(TM) would not be
39
<PAGE>
presently considered. Since its July 1996 acquisition the Exodus technology, the
Company has expended in excess of $6.0 million to develop and market its
NTERPRISE(TM) products. As a result of these material adverse developments, the
Company has significantly reduced its Exodus operations and is currently
considering whether the Exodus protocols can be redesigned to support client
computers that are alternatives to WindowsNT, such as Unix(TM) workstations,
X-terminals and Java(TM) enabled computers. In the event that the Company is
unable to develop an alternate non-Windows supported solution within the next
three to six months, the Company will probably cease such efforts and sustain a
total loss of its investment in the NTERPRISE(TM) products and system. See "RISK
FACTORS" and "BUSINESS -Significant Recent Developments - Transactions with
Prologue."
In fiscal year ended July 31, 1997, the Company incurred a net loss of
$8.2 million including impairment loss of $2.2 million from its Exodus
subsidiary and a net loss of $3.1 million from the operations of Old
ConnectSoft. In addition, the operations of FreeAgent(TM) conducted by
Connectsoft incurred an additional $2.8 million of net losses in fiscal 1997.
Effective September 20, 1996, the Company acquired InterGlobe Networks,
Inc. InterGlobe provides engineering, design and consulting services for users
and providers of telecommunications facilities on the Internet and other media.
In fiscal 1997, InterGlobe incurred a net loss of $2,224,000 (including
$1,600,000 of goodwill and investment writeoffs) on total revenues of
$1,041,000.
Effective November 8, 1996, the Company acquired the assets of Seattle
OnLine, Inc. which provides a local Internet service in the Pacific Northwest.
In fiscal 1997, Seattle OnLine incurred a net loss of $1.6 million on total
revenues of $87,000.
The aggregate net losses of approximately $17.6 million incurred by the
Company's Old ConnectSoft, Exodus, Connectsoft, InterGlobe and Seattle OnLine
subsidiaries (all of which are based in the Seattle, Washington area) do not
include approximately $6.5 million of selling, general and administrative
expenses and net interest expense incurred in fiscal 1997 in connection with the
operations of the Company's corporate offices in Bellevue, Washington and Long
Island, New York.
Effective December 11, 1996, the Company acquired TechStar pursuant to a
merger transaction. TechStar is engaged in providing site acquisition, zoning,
architectural and engineering services, as well as consulting services to the
wireless telecommunications industry. In August 1997, the Company sold TechStar
to IDF in exchange for approximately 58% of the IDF outstanding common stock.
From December 1996 (the date of acquisition by the Company) through July 31,
1997, TechStar earned $1.1 million before taxes on $3.9 million of total
revenues.
40
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
% of % of
1997 Revenues 1996 Revenues
---- -------- ---- --------
FISCAL YEAR ENDED JULY 31,
(in Thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net Sales ........................................ $ 154,545 100.0% $ 106,555 100.0%
Cost of goods sold ............................... $ 134,759 87.2% $ 93,906 88.1%
Selling, general and administrative expenses ..... $ 25,400 16.4% $ 9,535 8.9%
Research and development expenses ................ $ 4,953 3.2% $ 10,295 9.7%
Other operating expenses ......................... $ 12,510 8.1% -- --
Interest expense, net ............................ $ 3,025 2.0% $ 1,137 1.1%
(Loss) from continuing operations before income
taxes and minority interest .................... $ (26,102) (16.9%) $ (8,318) (7.8)%
(Benefit) provision for income taxes ............. $ (1,669) (1.1)% $ 890 0.8%
Minority interest in earnings of consolidated
subsidiary ..................................... $ 421 0.3% $ 402 0.4%
Discontinued operations and gain on sale of wholly
owned subsidiaries (less applicable income taxes
of $5,042) ..................................... -- -- $ 7,775 7.3%
Net (loss) ....................................... $ (24,854) (16.1)% $ (1,835) (1.7)%
Dividend on preferred stock ...................... $ 2,403 1.6% -- --
Net (loss) available for common shareholders ..... $ (27,257) (17.7)% $ (1,835) (1.7)%
</TABLE>
Results of Operations
Fiscal Year 1997 As Compared to Fiscal Year 1996.
Western's revenues for the fiscal year ended July 31, 1997 increased by
$41.6 million, or approximately 39% over the fiscal year ended July 31, 1996.
The increase was due primarily to the contribution of the stores acquired or
opened in the last year, accounting for $21.4 million (51%) of the increase in
sales. Western's same store revenues increased $10.2 million or 25% for the
fiscal year ended July 31, 1997, as compared to the fiscal year ended July 31,
1996. For the fiscal year ended July 31, 1997, Western's sales in all
departments were up at least 25% compared to the same period in the prior year.
Old ConnectSoft, Connectsoft, Interglobe, Exodus, Seattle OnLine and TechStar
(the "Technology Group") reported total revenue of $6.4 million for the fiscal
year ended July 31, 1997.
Selling, general and administrative ("SG&A") expenses were $25 million
(16.2% of sales) for the fiscal year ended July 31, 1997, compared to $9.5
million (8.9% of sales) for the comparative prior year period. The substantial
increase in SG&A expenses of $15.5 million for the year ended July 31, 1997 were
attributable to an increase at Western of $3.4 million and an increase of $6.8
million of corporate SG&A, and included Technology Group SG&A expenses of $13.6
million which had no comparable expense in 1996.
During the fiscal year ended July 31, 1997, the Technology Group continued
development activities related to its NTERPRISE(TM) software product and to a
lesser extent its e-mail software products for retail and OEM markets, as well
as the ConnectSoft FreeAgent(TM) product involving intelligent integrated
communications for telecommunication companies, Internet access providers and
corporate intranets. Research and development expense
41
<PAGE>
of $10,295,000 in fiscal 1996 consisted primarily of purchased research and
development of $10 million related to the acquisition of Old ConnectSoft and
Exodus. Research and development expense of $4,953,000 in fiscal 1997 represents
costs incurred by the Technology Group in the design and development of products
prior to those products achieving technological feasibility.
Other operating expenses in fiscal 1997 are comprised of:
ERD bad debt $ 4,985,000
Seattle OnLine settlement 1,800,000
Write down of goodwill
of other assets 5,725,000
-----------
$12,510,000
===========
During the year ended July 31, 1997, only minimal revenues were generated
by Old ConnectSoft's EMAIL CONNECTION(TM) product, and subsequent to such date
revenues have declined further. These revenue decreases were attributable to
more intense competition and lower sales prices in the market place and the
inclusion of similar products in bundled software packages distributed by the
larger companies in the industry. In addition, EMAIL CONNECTION(TM) is based on
an older 16 bit technology, while most competitive products are built upon the
new and enhanced 32 bit technology. As a result, due to insignificant sales and
the economic infeasability of upgrading the EMAIL CONNECTION(TM) product to the
32 bit technology, the Company determined that this technology had no material
remaining value. Therefore, the $430,000 balance of the value of this technology
was written off in fiscal 1997.
In addition due to the lack of sales as mentioned above, and the high cost
of market entry, management has determined that there is no material remaining
value to the non-compete agreement with the former Chief Executive Officer of
Old ConnectSoft. The $500,000 balance of the value of this asset was written off
in fiscal 1997.
The remaining intangible assets acquired as a result of the purchase of
Old ConnectSoft and Exodus relate to the NTERPRISE(TM) product. As a result of
recent adverse developments concerning the Old ConnectSoft and Exodus software
products, management has determined that an aggregate of loss of $2.2 million
would be incurred for fiscal 1997 as a results of the impairment of the value of
those assets as of July 31, 1997.
Interest expense for the fiscal year ended July 31, 1997 was $3.025
million compared to $1.137 million for the fiscal year ended July 31, 1996, due
to increased inventory carried by Western to support higher equipment sales
level, including a significant investment in equipment dedicated to the rental
fleet, and required funding of the operations of certain of the technology
companies.
The effective tax rate for fiscal 1997 was approximately 6.4%, which is
lower than the 37% effective tax rate for the prior year comparative period.
This decrease is a result of the recognition of a valuation allowance against
the net operating loss carryforward and deferred tax assets.
In fiscal year ended July 31, 1997, the Company incurred a net loss of
$8.2 million from its Exodus subsidiary and a net loss of $3.1 million from the
operations of Old ConnectSoft. In addition, the FreeAgent(TM) development and
marketing activities conducted by Connectsoft incurred an additional $2.8
million of net losses in fiscal 1997. InterGlobe incurred a net loss of $2.224
million (including $1.6 million of writeoffs of goodwill and investment) on
total revenues of $1,040,590 and Seattle OnLine incurred a net loss of $1.575
million on total revenues of $87,000.
42
<PAGE>
The aggregate net losses of approximately $17.2 million incurred by the
Company's Old ConnectSoft, Exodus, Connectsoft, InterGlobe and Seattle OnLine
subsidiaries (all of which are based in the Seattle, Washington area) do not
include approximately $6.5 million of selling, general and administrative
expenses and net interest expense incurred in fiscal 1997 in connection with the
operations of the Company's corporate offices in Bellevue, Washington and Long
Island.
Although Western's sales increased, the increase in Western's operating
and interest expenses and warranty problems with Case backhoe Equipment which
Western elected to absorb, resulted in net income of approximately $1.0 million
in fiscal 1997, as compared with $2.0 million in the prior year.
As a result of the foregoing, in fiscal year ended July 31, 1997, the
Company reported a consolidated net loss of $27.3 million on total net
consolidated sales of approximately $154.5 million.
Fiscal Year 1996, As Compared With Fiscal Year 1995
<TABLE>
<CAPTION>
% of % of
1996 Revenues 1995 Revenues
---- -------- ---- --------
YEARS ENDED JULY 31,
(In Thousands)
<S> <C> <C> <C> <C>
Net sales ........................................... $ 106,555 100% $86,173 100%
Cost of goods sold .................................. $ 93,906 88.1% $76,145 88.4%
Selling, general and administrative expenses ........ $ 9,535 8.9% $ 6,228 7.2%
Research and development expenses ................... $ 10,295 9.7% -- 0%
Interest expense, net ............................... $ 1,137 1.1% $ 1,421 1.6%
Income (loss) from continuing operations before taxes
and minority interest ............................. $ (8,318) (7.8)% $ 1,993 2.3%
Provision for income taxes .......................... $ 890 0.8% $ 711 0.8%
Income from discontinued business operations ........ $ 7,775 7.3% $ 1,104 1.3%
Net (loss) income ................................... $ (1,835) (1.7)% $ 2,268 2.6%
</TABLE>
Continuing operations for fiscal 1996 and 1995 consist of twelve months of the
Company's Distribution Group activities comprising Western and one day of Old
ConnectSoft operations.
Revenues for fiscal 1996 increased by approximately $20,382,000, or 23.7%
over fiscal 1995. All such revenues are attributable to the Western subsidiary,
which reported net sales for fiscal 1996 of $106,555,000, as compared to
$86,173,000 for fiscal 1995. Same store revenues increased 13.8% over the prior
year results reflecting a continuation of generally good economic conditions,
increased market acceptance of Western's products, increased housing starts, as
well as revenues realized from the addition of numerous new parts and equipment
lines to Western's product offerings.
Cost of goods sold as a percentage of Western's sales was 88.1% during
fiscal 1996 which is consistent with the prior year results. Western's
management has placed a high priority on improving overall gross margins by
working to increase higher margin service and parts revenues and by obtaining
higher prices for new equipment.
Selling, general and administrative expenses totaled $9,535,000 or 8.9% of
sales for fiscal 1996 compared to $6,228,000 or 7.2% of sales for fiscal 1995.
The increase in selling, general and administrative expenses as a percent of
sales resulted mainly from administrative costs associated with Western's
acquisition and integration of the Sacramento Case operations and GCS
operations. Stock option compensation expense of $1,671,000 relates to options
granted to certain key employees under the Company's 1996 Stock Option Plan.
Research and development expense for fiscal 1996 amounted to $10,295,000
or 9.7% of consolidated revenue. Included in this amount is $10,033,000
representing an allocation of the cost of acquiring Old ConnectSoft to in
process
43
<PAGE>
technology which was charged to operations. An additional $2,484,000 of research
and development costs were capitalized due to technological feasibility of the
products. In August 1996, the assets and liabilities relating to the
NTERPRISE(TM) application remoting software product development and business
were sold to Exodus, an 80%-owned subsidiary of the Company. The remaining 20%
equity interest in Exodus is owned by key employees of such subsidiary.
The $284,000 decrease in net interest expense for fiscal 1996 is primarily
attributable to an increasing balance of inventory purchased under Western's
various floor plan lines of credit to stock the new outlets, an increase of
inventory dedicated to rental from approximately $5,000,000 in fiscal 1995 to
more than $12,000,000 in fiscal 1996, as well as changes in floor plan terms by
Case. Effective January 1, 1996, Case changed factory to dealer terms in a
program they have named "Focus 2000". While interest free floor plan terms for
Case's most expensive units wheel loaders and excavators remains at six to eight
months, the terms on Case's smaller units were shortened from nine months to
four months interest free. For the first time, Case is also granting a 4% cash
discount if the dealer pays for the machine outright rather than utilizing the
interest-free floor planning. Western was able to take advantage of the cash
discounts for some of its purchases in fiscal 1996, which had an immediate
effect on interest expense. The interest free floor planning period was not
utilized, however. Nevertheless, management believes that the positive impact of
the discounted cost as these units are sold will more than offset the increased
interest expense. These increases in expense are offset by increased interest
income from investments in cash and marketable debt securities which amounted to
$754,000 during fiscal 1996, an increase of $583,000 over fiscal 1995, resulting
from a significant increase in investable funds from the proceeds of the sale of
the manufacturing businesses in January 1996.
The provision for income taxes from continuing operations for fiscal 1996
of $890,000 increased $179,000 from fiscal 1995. The increase in the amount and
as a percentage of pre tax income from continuing operations resulted primarily
from expensing of purchased software development costs.
The Company recognized a gain of $12,502,000 ($7,460,000, net of
applicable taxes) in connection with the sale of its manufacturing business to
Hutchinson which was consummated in January 1996. Income from continuing
operations of the Manufacturing Business for the period of August 1, 1995 to
January 19, 1996, the date of sale, amounted to $315,000 as compared to
$1,104,000 for the full year for fiscal 1995.
Liquidity And Capital Resources
General
In fiscal 1996, as a result of the Hutchinson transaction the Company
significantly increased its liquidity and capital resources. During the year
ended July 31, 1997, cash and cash equivalents decreased by $4.8 million, with
operating losses from the Technology Business principally offset by the receipt
of $9.2 million of net proceeds from the 1997 Private Placement. The Company had
negative cash flow from operations of approximately $15.2 million during fiscal
1997 reflecting such operating losses from its Technology Business.
The Company has used, and intends to use in the future, the proceeds of
the Hutchinson Transaction, to acquire and fund the working capital needs of
additional businesses. The Company has been granted a $10,000,000 secured demand
line of credit from its commercial bank. This line is uncommitted and secured by
the Company's portfolio of cash and marketable securities held by the bank. On
July 31, 1997 approximately $6,849,000 was outstanding under such line of
credit, the principal of which bears interest at the bank's 90 day LIBOR rate
(currently 5.875%) plus 1.125%. Substantially all of the advances under the line
of credit were used by the Company to finance the working capital and software
development requirements of its Old ConnectSoft, Exodus, InterGlobe, Seattle
OnLine and Connectsoft subsidiaries.
In May 1996 approximately 427,000 options granted under the Company's
employee stock option plans were exercised and $1,776,000 of net proceeds were
received by the Company. The Company used these funds to reduce its short
44
<PAGE>
term bank borrowings. On May 21, 1997, to foster exercise of the Public
Warrants, the expiration date of the Public Warrants was extended from June 30,
1997 to July 31, 1998.
The Company's cash, cash equivalents and marketable securities of
$22,302,000 as of July 31, 1997 and available credit facilities are considered
sufficient to support current or higher levels of operations for at least the
next twelve months.
The Company seeks to provide a high current return on its investments of
cash and cash equivalents while preserving both liquidity and capital. The
established policy guidelines for its investment portfolio include investments
that include United States Treasury securities, United States government agency
obligations, deposit-type obligations of United States banking institutions,
repurchase agreements, United States denominated A1 grade commercial paper,
United States money market funds and interests in mutual funds that invest in
the above listed instruments. Concentration of the portfolio is limited to not
more than 20% of the investment portfolio in the securities of any one bank,
corporation or non-government issuer.
The investments chosen reflect this policy by investing substantially all
cash and cash equivalents in money market funds, United States Treasury
Securities and United States denominated A1 grade commercial paper.
On October 31, 1997, the Company repaid the entire balance then due to
Northfork Bank of $14,409,810. Such balance consisted of $9,998,810 under the
advised line of credit and $4,411,000 under the standby letter of credit.
Simultaneously, the Company entered into a new banking arrangement with
Northfork Bank which provides for a credit facility of up to $2,000,000. This
facility is secured by deposit of cash and marketable securities held at the
bank of approximately $6,320,000 and carries an annual interest rate of LIBOR to
1 1/8% (currently 6.9%). As of November 10, 1997 there were no amounts
outstanding under this credit line and all amounts subsequently drawn will be
due and payable on October 1, 1998.
In addition, the Company is currently in negotiations with other financing
institutions to expand the credit available to the Company. There can be no
assurance that these negotiations will result in additional availability for the
Company.
1997 Private Placement
Primarily as a result of payments made in connection with its acquisition
program commenced in May 1996 and to support the capital requirements of Old
ConnectSoft and Exodus, the Company has recently sought to recoup its liquid
capital resources. Accordingly, on January 10, 1997, the Company consummated a
private placement of 400,000 shares of Series B-2 Preferred Stock (the "Private
Placement Preferred Shares") to 11 unaffiliated purchasers. The Company realized
net proceeds of approximately $9,200,000 from the sale of the Private Placement
Preferred Shares.
The Private Placement Preferred Shares were initially convertible by the
holders into an aggregate of 1,165,501 1997 Private Placement Shares, subject to
adjustment, at various times during the three-year period ending January 8, 2000
at prices equal to the lesser of (i) the Closing Date Average Price of $8.58 per
share, (ii) 105% of the Anniversary Average Price (which Anniversary Average
Price shall be the Average Price (defined below) on the date immediately
preceding the first anniversary of the Closing Date), but only if the
Anniversary Average Price is less than the Closing Date Average Price, or (iii)
82.5% of the Conversion Date Average Price. For purposes of determining the
Private Placement Preferred Shares conversion rate, the Average Price equals the
average daily closing bid price of the Company's Common Stock as reported on
Nasdaq or other national securities exchange for the ten (10) trading days
immediately preceding the date of sale of such Private Placement Preferred
Shares, the anniversary of such sale, or the conversion date, as the case may
be.
In addition to the Private Placement Preferred Shares, the investors in
the 1997 Private Placement purchased Private Placement Warrants to purchase an
aggregate of 350,000 shares of Common Stock at an exercise price of $8.58 per
share, the Closing Date Average Price. The Private Placement Warrants expire
January 8, 2002 to the extent unexercised.
In the event of an initial public offering of common stock of the
Company's Exodus subsidiary, investors in the 1997 Private Placement have the
right to purchase, for $.01 per warrant, five-year warrants to purchase up to
350,000 shares of Exodus common stock (the "Exodus Common Stock") at an exercise
price equal to the initial price per share that Exodus Common Stock is offered
to the public (the "Exodus Warrants"). The Exodus Warrants contain terms which
are substantially identical to the Private Placement Warrants. The shares of
Exodus Common Stock issuable upon exercise of the Exodus Warrants shall be
subject to customary "piggyback" registration rights and one demand registration
right following completion of a proposed initial public offering of Exodus
securities, but shall be subject to restrictions on sale pursuant to customary
"lock-up" agreements (but in no event for more than 180 days) with the
representative of the underwriters of the Exodus initial public offering.
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Pursuant to the terms of the 1997 Private Placement, the Company filed a
registration statement with the Securities and Exchange Commission (the
"Commission") with respect to the distribution of the Shares of Company Common
Stock issuable upon exercise of the Private Placement Warrants, as well as the
1997 Private Placement Shares to be issued upon conversion of the Private
Placement Preferred Shares. Such registration statement was declared effective
by the Commission on May 7, 1997. Subsequent to such date, there was a
significant decline in the per share trading price of Company Common Stock, and
all 400,000 of the Private Placement Shares were converted into an aggregate of
2,631,125 shares of Common Stock.
Western
Western's primary source of internal liquidity has been its profitable
operations since its inception in November 1992. As more fully described below,
Western's primary sources of external liquidity were contributions to Western by
the Company, and equipment inventory floor plan financing arrangements provided
to Western by Case Credit Corporation, the other manufacturers of products sold
by Western, Seattle-First National Bank ("SeaFirst Bank"), Associates Commercial
Corporation ("Associates") and Orix Commercial Credit ("Orix"). In addition, in
fiscal 1995, WPE, the immediate parent of Western, completed an initial public
offering of 1,495,000 shares of common stock at $6.50 per share, generating net
proceeds of $7,801,000. The net proceeds of the offering were utilized to repay
amounts due to the Company and to Case, the acquisition and opening of
additional outlets, as well as to reduce floor plan debt.
Under its inventory floor plan finance arrangements, the manufacturers of
products sold by Western provide Western with interest free credit terms on new
equipment purchases for periods ranging from one to 12 months, after which
interest commences to accrue monthly at rates ranging from two to three percent
over the prime rate of interest. Principal payments are typically made under
these agreements at scheduled intervals and/or as the equipment is rented, with
the balance due at the earlier of a specified date or sale of the equipment. At
July 31, 1997, Western was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $34,634,000.
In order to take advantage of a 3% cash discount offered by Case under its
new Focus 2000 program, to provide financing beyond the term of applicable
manufacturer provided floor plan financing arrangements, Western has entered
into separate secured floor planning lines of credit with SeaFirst Bank.
The SeaFirst line of credit was entered into in June 1994, renewed in
September 1997 and provides a $22,000,000 line of credit which can be used to
finance new and used equipment or equipment to be held for rental purposes. On
July 31, 1997, approximately $20,857,000 was outstanding under such line of
credit, the principal of which bears interest at 0.50% below the bank's prime
rate and is subject to annual review and renewal on September 1, 1998.
In June 1997, Western obtained a $75 million inventory flooring and
operating line on credit through Deutsche Financial Services ("DFS"). The DFS
credit facility is a three year floating rate facility based on prime with rates
between 0.50% under a bank prime rate to 1.00% over such prime rate depending
upon the amount of total borrowng under the facility. Amounts are advanced
against Western's assets, including accounts receivable, parts, new equipment,
rental fleet, and used equipment. Western expects to use this borrowing facility
to lower flooring related intererst expense by using advances under such line to
finance inventory purchases in lieu of financing provided by suppliers, to take
advantage of cash purchase discounts from its suppliers to provide operating
capital for further growth, and to refinance some of its acquisition related
debt at a lower interest rate. Although Western had not drawn against this
credit facility as of July 31, 1997, as at September 30, 1997, approximately
$16.6 million was outstanding under such facility.
On October 19, 1995, Western entered into a purchase and sale agreement
with an unrelated party for the Auburn, Washington facility subject to the
execution of a lease. Under the terms of this agreement, which closed on
December 1, 1995, Western sold the property and is leasing it back from the
purchaser. In accordance with Statement of Financial Accounting Standards No. 13
(SFAS 13), the building portion of the lease is being accounted for as a capital
lease while the land portion of the lease qualifies for treatment as an
operating lease. See Note 7 to the accompanying consolidated financial
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statements for more information. The proceeds from the Auburn facility sale
leaseback transaction were sufficient to retire the related note payable to
Case.
Effective February 29, 1996, Western acquired substantially all of the
operating assets used by Case Corporation ("Case") in connection with its
business of servicing and distributing Case construction equipment at a facility
located in Sacramento, California (the "Sacramento Operation"). The acquisition
was consummated for approximately $630,000 in cash, $1,590,000 in installment
notes payable to Case and the assumption of $3,965,000 in inventory floor plan
debt with Case and its affiliates. The acquisition is being accounted for as a
purchase.
The real property and improvements used in connection with the Sacramento
Operation, and upon which the Sacramento Operation is located, were sold by Case
for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, a
director of the Company and the President and Chief Executive Officer of
Western, and Robert M. Rubin, the Chairman and Chief Executive Officer of the
Company and a director of Western. Simultaneous with its acquisition of the
Sacramento Operation real property and improvements, MRR leased such real
property and improvements to Western under the terms of a 20 year Commercial
Lease Agreement dated as of March 1, 1996. In accordance with SFAS 13, the
building portion of the lease is being accounted for as a capital lease while
the land portion of the lease qualifies for treatment as an operating lease.
On October 10, 1995, using proceeds from its initial public offering,
Western retired the $2,175,000 real estate note given to Case for the purchase
of the Sparks, Nevada real estate in September 1994. In March 1996 Western
consummated an agreement with an institutional lender for a conventional
mortgage on the property in the amount of $1,330,000 secured by the Sparks,
Nevada real estate. The agreement calls for the principal and interest payments
over a seven year term using a fifteen year amortization period. The note cannot
be prepaid during the first two years of its term.
On June 11, 1996, Western acquired the operating assets of GCS, Inc.
("GCS"), a California-based, closely held distributor of heavy equipment
primarily marketed to municipal and state government agencies responsible for
street and highway maintenance. Western will operate the GCS business from an
existing location in Fullerton, California and from Western's existing facility
in Sacramento, California. The Purchase price for the GCS assets was $1,655,000.
This transaction is being accounted for as a purchase.
During fiscal 1997, cash and cash equivalents of Western decreased by
$846,000 primarily due to the purchase of Sahlberg Equipment, Inc. and increased
inventory levels. Western had positive cash flow from operating activities
during the year of $2,546,000 reflecting net income for the year after adding
back depreciation and amortization. Purchases of fixed assets during the year
were related mainly to the opening of new distribution outlets and the Sahlberg
acquisition.
The Technology Business
In fiscal 1997, the Company funded substantially all of the working
capital requirements of Old ConnectSoft, Exodus, Connectsoft, Seattle OnLine and
InterGlobe through a secured line a credit, initially provided by Citibank NA
and later replaced by Northfork Bank. Advances under such line of credit was
secured by cash and marketable securities of the Company. On October 31, 1997
the Company repaid the entire $14.4 million balance then due to Northfork Bank,
including $4.4 million advanced by Northfork under the letter of credit in favor
of Chase Bank for the benefit of ERD Waste Corp.
On October 31, 1997, the Company entered into a new banking arrangement
with Northfork Bank which provides for a credit facility of up to $2.0 million
secured by cash deposits and marketable securities and bearing interest at the
Libor Rate plus 1-1/8% (currently 6.9%). As of November 10, 1997, no amounts
were outstanding under this credit line. The credit line and all amounts
subsequently drawn thereunder are due and payable on October 1, 1998.
Acquisition and Sale Transactions
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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, N O-Ring Corporation and Stillman Seal
Corporation (the "Hutchinson Subsidiaries"), which are subsidiaries of
Hutchinson Corporation ("Hutchinson"). Under the terms of the Hutchinson
Transaction, the Hutchinson Subsidiaries assumed all of the liabilities and
obligations of the Company and each of its AUG, AUP and AUS subsidiaries arising
out of the ordinary course of the former manufacturing business operated by AUP
and AUS other than, in general, liabilities for breaches of law, liabilities for
unpaid taxes on the sale of assets to Hutchinson, or any liabilities which may
result from discontinued operations not purchased by the Hutchinson
Subsidiaries. In the event that the Hutchinson Subsidiaries or Hutchinson (see
below) fail to discharge the assumed liabilities, at this time the Company could
be liable for the assumed trade payables (the remaining amounts of which are not
believed to be material), the assumed environmental liabilities (which, if any,
are not believed to be material), the assumed liabilities for product liability
or other tort claims (which, if any, are not believed to be material), the
assumed liabilities for performance under contracts and bids outstanding at the
time of closing (which, if any, are not believed to be material) and the assumed
liabilities for taxes resulting from operation of the former manufacturing
business (which, if any, are not believed to be material).
A subsidiary of Total America, Inc., a New York Stock Exchange listed
company ("Total"), Hutchinson produces a variety of rubber related products for
three market sectors: automotive, consumer and industrial. Hutchinson has
guaranteed the obligations of the Hutchinson Subsidiaries to assume and
discharge the transferred liabilities.
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 $172,000 at July 31, 1997, are guaranteed by Total.
Management of the Company carefully considered, both prior and immediately
subsequent to consummation of the Hutchinson transaction, the best utilization
of the cash resources that would result therefrom. The Board of Directors
determined that stockholder value could best be enhanced by directing the
Company's future in the computing and telecommunications industries through the
acquisition of proprietary technologies, unique niche software products and
selective expertise that could be marketed on a national scale.
As a result of such strategy, the Company embarked upon an acquisition
program and, between May 1996 and April 1997 and acquired five companies. The
terms of such acquisitions are summarized below.
Old ConnectSoft and Exodus
Effective as of July 31, 1996, the Company acquired, through merger of an
acquisition subsidiary of the Company in August 1996 (the "ConnectSoft Merger"),
all of the outstanding capital stock of Old ConnectSoft, a private company
located in Bellevue, Washington, which provided retail e-mail software products
and was then developing the NTERPRISE(TM) application remoting software. The
acquisition of Old ConnectSoft was not closed until August 8, 1996. However,
utilizing the purchase method of accounting, the operating results of Old
ConnectSoft have been included in the consolidated operating results commencing
July 31, 1996 because the Company assumed effective control of Old ConnectSoft
under the terms of a written agreement as of that date. July 31, 1996 was also
the date of the Old ConnectSoft shareholders' meeting at which the merger was
approved. In connection with the ConnectSoft Merger, Old ConnectSoft
shareholders received, on a pro rata basis, an aggregate 976,539 shares of the
Company's Series B-1 Preferred Stock (the "Series B-1 Preferred Stock"). Such
Series B-1 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 Series B-1 Preferred Stock is
convertible into shares of Company Common Stock at the holder's option into a
minimum of 976,539 shares of Company Common Stock and a maximum of 2,929,617
shares of Company Common Stock, based upon certain criteria.
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The Series B-1 Preferred Stock may be converted into shares of Company
Common Stock as follows:
(a) each share of Series B-1 Preferred Stock may be converted, at any
time, into one share of Company Common Stock (a minimum of 976,539 shares
of such Common Stock if all such shares of Series B-1 Preferred Stock are
so converted);
(b) 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"):
(i) shall equal or exceed $3,000,000, each share of Series B-1 Preferred
Stock may be converted into two shares of Company Common Stock (a maximum
of 1,953,078 shares of such Common Stock if all such shares of Series B-1
Preferred Stock are so converted); or (ii) shall equal or exceed
$5,000,000, each share of Series B-1 Preferred Stock may be converted into
three shares of Company Common Stock (a maximum of 2,929,617 shares of
such Common Stock if all such shares of Series B-1 Preferred Stock are so
converted).
The "Subject Entities" were defined to include Old ConnectSoft and Exodus
and their consolidated subsidiaries (if any), or any other subsidiary of the
Company formed to conduct business operations engaged in by Old ConnectSoft as
at the July 31, 1996 effective time of the ConnectSoft Merger. The definition of
Subject Entities also included any subsidiary of the Company to whom assets or
operating revenues of Old ConnectSoft are transferred.
At the time of the Old ConnectSoft Merger, all personnel and other assets
relating to the ENTERPRISE(TM) application remoting software, and all
liabilities associated with such business were transferred by Old ConnectSoft to
Exodus. The 19.6% minority equity interest in Exodus not owned by the Company is
held by current and former management and employees of Exodus, some of whom were
pre-Old ConnectSoft Merger shareholders of Old ConnectSoft. Such persons waived
their right to receive shares of Series B-1 Preferred Stock in the ConnectSoft
Merger in consideration of their receipt of shares of common stock of Exodus.
The Old ConnectSoft merger agreement also provides that each share of
Series B-1 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 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.
In the event that the contemplated initial public offering of Connectsoft
is consummated, the former Old ConnectSoft stockholders will be entitled to
receive the full 3-for-1 conversion ratio, representing a maximum of 2,929,617
shares of Company Common Stock upon conversion of all 979,539 shares of Series
B-1 Preferred Stock. Presently, the conversion ratio is 1-for-1.
Prior to consummation of the Old ConnectSoft Merger, the Company provided
interim working capital financing for Old ConnectSoft which aggregated
approximately $3.4 million and assumed all of Old ConnectSoft's operating
expenses and liabilities. The Company also agreed to increase its aggregate
funding commitments to Old ConnectSoft and its related companies to a minimum of
$5.0 million.
In consideration for their introducing the Company to Old ConnectSoft and
its stockholders, as of July 31, 1996, the Company issued an aggregate of 50,000
shares of its Common Stock to Hampshire Securities Corporation and 100,000
shares of Common Stock to Meadowbrook, Ltd., neither of which entity is
affiliated with the Company.
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InterGlobe
In September 1996, the Company acquired, through merger of 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) 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 InterGlobe 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. Mr. Baganov subsequently resigned as a
director of the Company and InterGlobe on November 4, 1997.
Seattle OnLine
On November 8, 1996, the Company formed Seattle OnLine as a wholly-owned
subsidiary to acquire acquired the assets of Seattle OnLine, Inc., a privately
owned Washington corporation 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 selling
corporation in settlement of its debts. Craig Dieffenbach, the President and
principal stockholder of the selling corporation 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 minority stockholder of the selling
corporation also entered into non-competition and non-disclosure agreements for
the benefit of the selling corporation and Seattle OnLine. 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. From its inception in
1996 through November 8, 1996, Seattle OnLine generated revenues of $81,000,
incurred a net loss of $400,000 and had total assets of $106,000 at November 8,
1996.
Of such warrants, the minority stockholder of the selling corporation
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.
In August 1997, Mr. Dieffenbach commenced an arbitration proceeding in
Seattle, Washington against the Company and Seattle OnLine alleging wrongful
discharge and breach by the Company of the Seattle OnLine merger agreement. In
August 1997, the Company agreed to settle the dispute by the payment of $1.5
million, of which $500,000
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has been paid and $1.0 million is due on or before November 17, 1997. The
Company also agreed to issue to Mr. and Mrs. Dieffenbach and their legal counsel
150,000 Company warrants exercisable at $6.25 per share. The value of these
warrants resulted in an additional charge of $300,000. As part of such
settlement, Mr. Dieffenbach's employment agreement and 305,000 Company warrants
were canceled. See "LEGAL PROCEEDINGS."
TechStar and Arcadia
Effective December 11, 1996, the Company acquired TechStar, formerly known
as Broadcast Tower Sites, Inc., pursuant to a merger transaction (the "TechStar
Merger"). TechStar is engaged in providing site acquisition, zoning,
architectural and engineering services, as well as consulting services, to the
wireless telecommunications industry.
Pursuant to the terms of the TechStar Merger, the former TechStar
shareholders received an aggregate of 507,246 shares of Company Common Stock,
$780,000 was paid in cash and the Company delivered three year notes aggregating
$600,000, bearing interest at the Citibank, N.A. prime rate, and payable in
installments of $100,000, $200,000 and $300,000 on each of November 30, 1997,
1998 and 1999 (the "TechStar Notes").
In a related transaction, in December 1996 the Company also entered into
an agreement to acquire 100% of the capital stock of Arcadia, a company recently
formed for the purpose of providing consulting services to clients in the
wireless telecommunications industry, and paid $220,000 as a deposit on
execution of the Arcadia agreement. The Company completed the Arcadia
acquisition in April 1997, at which time it issued an aggregate of 192,754
shares of Company Common Stock. Following the Arcadia acquisition, Arcadia was
merged with and into the Company. Arcadia has had no operations, and has no
material assets other than its employment relationship with Solon Kandel, its
President and stockholder. Mr. Kandel became a director of the Company in April
1997 and subsequently resigned his directorship in August 1997 upon consummation
of the IDF Merger.
Each of Messrs. Sergio Luciani and Simontov Moskona, the former
stockholders of TechStar and Solon L. Kandel received four-year employment
agreements with TechStar and the Company pursuant to which such persons shall
receive, in addition to their base salaries and annual bonuses based upon
performance of TechStar, options exercisable over a five year period entitling
the holders to purchase an additional aggregate 780,000 shares of Company Common
Stock (the "TechStar Options"). The TechStar Options shall vest and be
exercisable (i) 195,000 options on November 30, 1997 in the event that TechStar
achieves at least $2,000,000 of Pre-Tax Income (as defined) in the 12 months
ending November 30, 1997, (ii) 195,000 options on November 30, 1998 in the event
that TechStar achieves at least $2,500,000 of Pre-Tax Income (as defined) in the
12 months ending November 30, 1998, (iii) 195,000 options on November 30, 1999
in the event that TechStar achieves at least $3,000,000 of Pre-Tax Income in the
12 months ending November 30, 1999, and (iv) 195,000 options on November 30,
2000 in the event that TechStar achieves at least $3,500,000 of Pre-Tax Income
in the 12 months ending November 30, 2000. Alternatively, all 780,000 TechStar
Options shall vest if, during the period commencing upon closing the Merger and
terminating on November 30, 2000, the accumulated Pre-Tax Income of TechStar has
equalled or exceeded $11,000,000. 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 TechStar, prior to November 30, 2000, all of the TechStar Options
shall immediately vest upon such occurrence. In addition, the TechStar
acquisition agreement provides that if the Company effects a public offering of
TechStar or a sale of TechStar prior to November 30, 2000, Messrs. Luciani,
Moskona and Kandel may elect (but shall not be required) to exchange all Company
securities received by them in the TechStar acquisition (the "Exchange Option")
for an aggregate of 25% of the common stock of TechStar then owned by the
Company prior to such transaction.
In addition to the 780,000 TechStar Options issued to the former TechStar
and Arcadia stockholders, the Company also agreed to issue an additional 120,000
TechStar Options, on identical terms as those offered to Messrs. Luciani,
Moskona and Kandel, to certain other key employees of TechStar designated by the
former TechStar and Arcadia stockholders.
Sergio Luciani, a former stockholder and currently Executive Vice
President and Chief Financial Officer of TechStar was appointed as a member of
the Board of Directors of the Company. Mr. Luciani resigned his Company
directorship upon consummation of the transaction with IDF in September 1997.
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In August 1997, the Company sold TechStar to IDF in consideration for
approximately 6.1 million shares of IDF, representing approximately 58% of its
outstanding common stock, before dilution resulting from completion of a $3.0
million private placement of IDF notes convertible into IDF common stock at
$1.25 per share. As part of such transaction, the employment agreements and the
780,000 performance options of each of Messrs. Luciani, Moskona and Kandel were
canceled, as were the 120,000 performance options granted to other TechStar
employees. In addition, IDF agreed to make the $300,000 payment due in May 1999
under the TechStar Notes. Messrs. Luciani and Kandel agreed to resign as members
of the Company Board of Directors and became senior executive officers of IDF.
See "BUSINESS - Significant Recent Developments - IDF Transaction."
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ITEM 8. FINANCIAL STATEMENTS
Page
Number
------
Financial Statements:
Report of Independent
Public Accountants F - 1
Consolidated Balance Sheets as of
July 31, 1997 and 1996 F - 2
Consolidated Statements of Operations for the years
ended July 31, 1997, 1996 and 1995 F - 4
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 1997, 1996 and 1995 F - 5
Consolidated Statements of Cash Flows for the years ended
July 31, 1997, 1996 and 1995 F - 6
Notes to Consolidated Financial Statements F - 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Officers, Directors and Key Employees
The following table sets forth information with respect to directors,
nominees for directors, executive officers and key employees of the Company as
of November 10, 1997. There are no pending legal proceedings to which any
director, nominee for director or executive officer of the Company is a party
adverse to the Company.
Name Age Position
- ---- --- --------
Robert M. Rubin... 57 Chairman of the Board of Directors, President and Chief
Executive Officer
Lawrence E. Kaplan 54 Director
C. Dean McLain.... 42 Director and Executive Vice President of the Company;
President and Chief Executive Officer of Western
David M. Barnes 54 Vice President of Finance, Chief Financial Officer and
Director
Howard Katz....... 55 Executive Vice President and Director
================================================================================
Robert M. Rubin. Mr. Rubin has served as the Chairman of the Board of
Directors of the Company since May, 1991, and was its Chief Executive Officer
from May 1991 to January 1, 1994. Between October, 1990 and January 1, 1994, Mr.
Rubin served as the Chairman of the Board and Chief Executive Officer of AUG and
its subsidiaries; from January 1, 1994 to January 19, 1996, he served only as
Chairman of the Board of AUG and its subsidiaries. From January 19, 1996, Mr.
Rubin has served as Chairman of the Board and President and Chief Executive
Officer of the Company. Mr. Rubin was the founder, President, Chief Executive
Officer and a Director of Superior Care, Inc. ("SCI") from its inception in 1976
until May 1986. Mr. Rubin continued as a director of SCI (now known as Olsten
Corporation ("Olsten")) until the latter part of 1987. Olsten, a New York Stock
Exchange listed company, is engaged in providing home care and institutional
staffing services and health care management services. Mr. Rubin is Chairman of
the Board, Chief Executive Officer and a stockholder of ERD Waste Technology,
Inc., a diversified waste management public company specializing in the
management and disposal of municipal solid waste, industrial and commercial
non-hazardous waste and hazardous waste. In September 1997, ERD filed for
protection under the provisions of Chapter 11 of the federal bankruptcy act. Mr.
Rubin is a former director and Vice Chairman, and currently a minority
stockholder, of American Complex Care, Incorporated, a public company formerly
engaged in providing on-site health care services, including intra-dermal
infusion therapies. In April 1995, American Complex Care, Incorporated's
operating subsidiaries made assignments of their assets for the benefit of
creditors without resort to bankruptcy proceedings. Mr. Rubin is also a minority
stockholder of Universal Self Care, Inc., a public company engaged in the sale
of products used by diabetics. Mr. Rubin is also the Chairman of the Board of
both Western and IDF. The Company owns approximately 56.6% of the outstanding
common stock of Western and approximately 58% of the outstanding common stock of
IDF. Mr. Rubin owns approximately 13% of the fully-diluted IDF common stock. Mr.
Rubin is also a director and a minority stockholder of Response USA, Inc., a
public company engaged in the sale and distribution of personal emergency
response systems; Diplomat Corporation, a public company engaged in the
manufacture and distribution of baby products; and Medi-Merg, Inc., a Canadian
managment company for hospital emergency rooms and out-patient facilities.
54
<PAGE>
Lawrence E. Kaplan. Mr. Kaplan has served as a director of the Company
since February, 1993. Since January, 1987, Mr. Kaplan has been an officer,
director and principal stockholder of Gro-Vest Management Consultants, Inc., an
investment banking firm located on Long Island, New York. Mr. Kaplan is also a
registered representative, officer, director and principal stockholder of G-V
Capital, a brokerage firm. He is also a director of Andover Equities, Inc. and
PARK Group, both blank check companies which are looking for merger
opportunities. He is also an officer and director of Saratoga Standardbreds
Inc., a blank check company which is looking for a merger opportunity.
C. Dean McLain. Mr. McLain has served as an Executive Vice President of
the Company since March 1, 1993, as a director of the Company since March 7,
1994 and President of Western since June 1, 1993. From 1989 to 1993, Mr. McLain
served as Manager of Privatization of Case Corporation. From 1985 to 1989, Mr.
McLain served as General Manager of Lake State Equipment, a distributor of John
Deere construction equipment. Mr. McLain holds a B.S. degree in Business and
Economics, and a Master's of Business Administration, from West Texas State
University.
David M. Barnes. Mr. Barnes has been Chief Financial Officer of the
Company since May 15, 1996, and Vice President Finance and director since
November 8, 1996. Mr. Barnes has been a director of Consolidated Stainless,
Inc., a manufacturer and distributor of stainless steel products, since June 21,
1994. From April 1990 until July 1990, Mr. Barnes also served as an officer and
director of Intelcom Data Systems, Inc., which engages in the design and
development of software for the foreign currency exchange and banking
industries. From October 1987 until May 1989, Mr. Barnes was Vice President of
Finance at U.S. Home Care Corp., a home health care provider. From April 1983
until September 1987, Mr. Barnes was Vice President of Finance and
Administration of Lifetime Corporation. From 1975 to 1983, Mr. Barnes was
Executive Vice President of Beefsteak Charlies, Inc. Mr. Barnes served as a
Director of Universal Self Care, Inc., a distributor and retailer of products
and services principally for diabetics, from May 1991 to June 1995 and he is a
director, President and a minority stockholder of American Complex Care,
Incorporated, a public company formerly engaged in providing on-site health care
services, including intradermal infusion therapies. In April 1995, American
Complex Care, Incorporated's operating subsidiaries made assignments of their
assets for the benefit of creditors without resort to bankruptcy proceedings.
Howard Katz. Mr. Katz has been Executive Vice President of the Company
since April 15, 1996. From December 1995 through April 15, 1996, Mr. Katz was a
consultant for, and from January 1994 through December 1995 he held various
executive positions, including Chief Financial Officer from December 1994
through December 1995, with National Fiber Network (a fiber optics
telecommunications company). From January 1991 through December 1993, Mr. Katz
was the President of Katlaw Construction Corp., a company that provides general
contractor services to foreign embassies and foreign missions located in the
United States. Prior to joining Katlaw Construction Corp., Mr. Katz was employed
as a management consultant by Coopers and Lybrand, LLP and as a divisional
controller for several large public companies.
55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the amount of all compensation paid by the
Company for services rendered during each of the three fiscal years of the
Company ended July 31, 1997, 1996 and 1995 to each of the Company's most highly
compensated executive officers and key employees whose total compensation
exceeded $100,000, and to all executive officers and key employees of the
Company as a group.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------- Payouts
Annual Compensation Other Restricted -------
------------------- Annual Stock Options/ LTIP All Other
Name and Principal Year Salary Bonus Compensation Awards SARs(#) Payouts Compensation
- ------------------ ---- ------ ----- ------------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. Rubin 1997 $325,000 $ -0- $0 $0 $0 $0
Chairman, 1996 300,000 50,000 $0 $0 450,000 $0 $0
President, and 1995 168,750 69,600 $0 $0 80,000(3) $0 $0
Chief Executive
Officer
Howard Katz 1997 $131,968 -- $0 $0 200,000 $0 $0
Executive Vice- 1996 -- -- $0 $0 150,000 $0 $0
President and 1995 -- -- $0 $0 -- $0 $0
Director
David M. Barnes 1997 $129,807 -- $0 $0 100,000 $0 $0
Chief Financial 1996 -- -- $0 $0 100,000 $0 $0
Officer and 1995 -- -- $0 $0 -- $0 $0
Director
C. Dean McLain(2) 1997 $268,587 $18,658 $0 $0 $0 $
Executive Vice 1996 250,000 84,868 $0 $0 150,000 $0 $0
President and 1995 170,709 75,000 $0 $0 195,000(3) $0 $29,250(4)
Director;
President of
Western
===========================================================================================================
</TABLE>
- -----------
(1) On June 15, 1995, Western entered into a separate employment agreement
with Robert Rubin. Mr. Rubin's 1995 salary includes $18,750 paid through
Western (See "Employment, Incentive Compensation and Termination
Agreements").
(2) Mr. McLain joined the Company in March 1993. Effective as of August 1,
1995, Mr. McLain's employment agreement with the Company was terminated
and he entered into an amended employment agreement with Western Power
Equipment Corp. (See "Employment, Incentive Compensation and Termination
Agreements").
(3) On May 5, 1995 the Board of Directors canceled the named person's
outstanding stock options to acquire an equal number of shares and issued
new stock options at the then current market price of $3.125.
(4) Pursuant to the terms of Mr. McLain's Employment Agreement, dated February
12, 1993, during the Fiscal Year 1993 Mr. McLain received $38,095 from the
Company as reimbursement for certain expenses that he incurred in
connection with his move to Washington State, and the sale of his former
residence, in order to permit his assuming his employment duties on behalf
of the Company. In addition, under the terms of his Employment Agreement
on March 1, 1993, July 31, 1994, and August 1, 1995 Mr. McLain was
permitted to and did purchase from the Company 8,000, 6,000, and 6,000
shares of the Company's common stock, respectively, at a price of $.01 per
share. On March 1, 1993, August 1, 1994, and on August 1, 1995, the
closing prices for a share of the Company's common stock as reported by
NASDAQ was $5 3/4, $4 1/16 and $4 7/8, respectively. The value of the
20,000 shares of common stock held by Mr. McLain as of July 31, 1995 was
$97,500.
56
<PAGE>
STOCK OPTION PLANS
Option Grants in Fiscal Year 1997
The following table identifies individual grants of stock options made
during the last completed fiscal year to the executive officers named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
Individual Grants Realizable Value at
----------------- Assumed Annual Rates of
Stock Price Appreciation
for Option Term
------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options
Options Granted to Exercise of
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10%($)
- ---- ------- ------------ ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
5/21/99-
Robert Rubin.......... 156,550 21.5% $5.125 8/4/01 $ 842,435 $ 882,500
Howard Katz........... 200,000 27.5% 4.375-5.125 8/4/01 1,010,625 1,058,750
David M. Barnes....... 100,000 13.8% 4.375-5.125 8/4/01 498,750 522,500
C. Dean McLain........ 0 0 N/A N/A N/A N/A
========================================================================================================
</TABLE>
The following table provides information concerning the exercise of stock
options during the last completed fiscal year by each executive officer named in
the Summary Compensation Table, and the fiscal year-end value of unexercised
options held by each such person.
Aggregated Options Exercised
in Last Fiscal Year and Fiscal
Year-End Option Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Unexercised Value of Unexercised
Shares Acquired on Value Realized Options at Fiscal In-The-Money Options at
Name Exercise (#) ($) Year-End (#) Fiscal Year-End ($)
- ---- ------------------ -------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
Robert Rubin -0- -0- 560,000 $1,322,509
(exercisable) (exercisable)
Howard Katz -0- -0- 200,000 $613,393
(exercisable) (exercisable)
David Barnes -0- -0- 91,666 $203,384
(exercisable) (exercisable)
C. Dean McLain 112,000 718,500 233,000 $871,875
(exercisable) (exercisable)
</TABLE>
Employment, Incentive Compensation and Termination Agreements
In November 1994, Robert M. Rubin entered into a three-year employment and
bonus compensation agreement with the Company, retroactive to August 1, 1994.
Under the terms of that agreement, Mr. Rubin serves as Chairman of the Board of
the Company and its subsidiaries through and including July 31, 1997. Mr. Rubin
receives an annual base salary of $150,000 per annum. Such base salary shall be
increased by $10,000 for the fiscal year ending July 31, 1996 and by $15,000 for
the fiscal year ending July 31, 1997. In addition, Mr. Rubin was entitled to a
guaranteed bonus of $50,000 plus an additional annual incentive bonus payment
equal to (i) $5,000 for each $.01 increase in net earnings per share above $.55
per share for the fiscal year ending July 31, 1995, (ii) $5,000 for each $.01
increase in net earnings per share above $.60 per share for the fiscal year
ending July 31,
57
<PAGE>
1996 and (iii) $5,000 for each $.01 increase in net earnings per share above
$.65 per share for the fiscal year ending July 31, 1997.
Upon completion of Western's initial public offering, Mr. Rubin's
employment agreement with the Company was amended to (i) eliminate his
guaranteed annual bonus, and (ii) limit his annual incentive bonus to $50,000
per annum for each of fiscal years ended July 31, 1996 and 1997, and made it
payable only in the event that the consolidated net income of the Company,
excluding the net income of Western, shall exceed $1,500,000 in each of such
fiscal years.
Following the amendment of his employment agreement with the Company,
Western entered into a separate employment agreement with Mr. Rubin, effective
June 14, 1995 and expiring July 31, 1998. Pursuant to such agreement, Mr. Rubin
serves as Chairman of the Board of Western and shall receive an annual base
salary of $150,000, payable at the rate of $12,500 per month from the effective
date of such agreement. In addition to his base annual salary, Mr. Rubin shall
be entitled to receive an annual bonus equal to $50,000 per annum, payable only
in the event that the "consolidated pre-tax income" of Western (as defined)
shall be in excess of $3,000,000 for the fiscal year ending July 31, 1996,
$3,500,000 for the fiscal year ending July 31, 1997, and $4,000,000 for the
fiscal year ending July 31, 1998, respectively. Under the terms of his
employment agreement with Western, Mr. Rubin is only obligated to devote a
portion of his business and professional time to Western (estimated at
approximately 20%). The term "consolidated pre-tax income" is defined as
consolidated net income of the Company and any subsidiaries of Western
subsequently created or acquired, before income taxes and gains or losses from
disposition or purchases of assets or other extraordinary items.
The Company has entered into an amended and restated employment agreement
with Mr. Rubin, dated as of June 3, 1996, to extend the term of Mr. Rubin's
employment through July 31, 2001 (the "Restated Agreement"). The Restated
Agreement provides for a base salary payable to Mr. Rubin of $175,000 for the
fiscal year ending July 31, 1997, $200,000 for the fiscal year ending July 31,
1998, $225,000 for the fiscal year ending July 31, 1999, and a base salary for
the fiscal years ending July 31, 2000 and July 31, 2001 as determined by the
Compensation Committee of the Company's Board of Directors and ratified by a
majority of the entire Board of Directors of the Company (other than the
employee). The base salary in each of the fiscal years ending July 31, 2000 and
2001 will not be less than the annual base salary in effect in the immediately
preceding fiscal year, plus an amount equal to the increase in the annual cost
of living as published by the Bureau of Labor Statistics of the United States
Department of Labor for wage earners in the New York metropolitan area measured
over the course of the immediately preceding fiscal year. The Restated Agreement
also provides for incentive bonuses to be paid to Mr. Rubin of (i) $75,000 on
November 1, 1997, if the net income of the Company, including all of its
consolidated subsidiaries other than Western Power & Equipment Corp., as
determined by the Company's independent auditors using generally accepted
accounting principles, consistently applied (the "Corporations' Net Income"), is
greater than or equal to $2,000,000 for the fiscal year ended July 31, 1997;
(ii) $100,000 on November 1, 1998 if the Corporations' Net Income is greater
than or equal to $2,500,000 for the fiscal year ended July 31, 1998; and (iii)
$125,000 on November 1, 1999 if the Corporations' Net Income is greater than or
equal to $3,000,000 for the fiscal year ended July 31, 1999. Incentive
compensation for each of the fiscal years ending July 31, 2000 and July 31, 2001
shall be as determined by the Compensation Committee of the Company's Board of
Directors and ratified by a majority of the entire Board of Directors of the
Company (other than the employee).
On January 19, 1996, as a result of the Hutchinson Transaction, John
Shahid, former President and Chief Executive Officer of the Company, and the
Company entered into a Termination Agreement whereby Mr. Shahid resigned as an
officer and director of the Company and each of its subsidiaries in
consideration for the payment of an aggregate of $815,833, representing salary
payments under his Employment Agreement though December 31, 1998, as well as a
bonus payment for fiscal year 1996 in the amount of $90,000. The Termination
Agreement also provides that the Company shall retain Mr. Shahid as a consultant
for a period of three years, commencing April 1, 1996, for which consulting
services he will be paid an aggregate of $200,000 in equal quarterly
installments.
58
<PAGE>
Prior to the Western 1995 initial public offering, C. Dean McLain served
as President and Chief Executive Office of Western and Executive Vice President
of the Company pursuant to the terms of an employment agreement with the Company
effective March 1, 1993, which was to terminate on July 31, 1998. Pursuant to
his employment agreement, in fiscal year 1995 Mr. McLain received a base salary
of $148,837 and the maximum $75,000 bonus provided for in such fiscal year. Such
agreement entitled Mr. McLain to scheduled increases in his base salary up to
$172,300 per year during the fiscal year ending July 31, 1998. The terms of such
employment agreement also provided for the issuance to Mr. McLain of an
aggregate of 20,000 shares of the Company's Common Stock at $.01 per share. In
addition, Mr. McLain received options to acquire an aggregate of 45,000 shares
of the Company's Common Stock at fair market value ($4.75 per share) on the date
of grant under the Company's 1991 Stock Option Plan, and additional options
under the Company's 1991 Stock Option Plan to purchase 150,000 shares of Company
Common Stock at fair market value ($5.50 per share) on the date of grant. These
options have since been repriced to $3.125 per share.
Effective as of August 1, 1995, Mr. McLain's employment agreement with the
Company was terminated and he entered into an amended employment agreement with
Western, expiring July 31, 2005. Pursuant to such agreement, Mr. McLain serves
as President and Chief Executive Officer of Western and will receive an annual
base salary, payable monthly, of $250,000 through the end of fiscal 1996,
$265,000 per annum in fiscal 1997, $280,000 per annum in fiscal 1998, $290,000
per annum in fiscal 1999, and $300,000 per annum in fiscal 2000. For each of the
fiscal years ending 2001, 2002, 2003, 2004 and 2005, inclusive, Mr. McLain's
base salary shall be determined by the Compensation Committee of Western and
ratified by the full Board of Directors of Western. In each of the five fiscal
years from 2001 through 2005, such base salary shall not be less than the annual
base salary in effect in the immediately preceding fiscal year plus a cost of
living adjustment. In addition, Mr. McLain will be entitled to receive bonus
payments in each of the five fiscal years ending 1996 through 2000, inclusive,
equal to 5% of such fiscal year consolidated pre-tax income of Western in excess
of $1,750,000 in each such fiscal year (the "Incentive Bonus"); provided, that
the maximum amount of the Incentive Bonus payable by Western to Mr. McLain shall
not exceed $150,000 in any such fiscal year, without regard to the amount by
which the Company's consolidated pre-tax income shall exceed $1,750,000 in each
of such fiscal years. For each of the fiscal years ending 2001 through 2005, Mr.
McLain's incentive bonus shall be determined by the Compensation Committee of
Western's Board of Directors and ratified by Western's full Board of Directors.
The maximum annual incentive bonus which Mr. McLain shall be entitled to receive
under his Employment Agreement shall not be less than $150,000. As used in Mr.
McLain's Employment Agreement, the term "consolidated pre-tax income" is defined
as consolidated net income of Western and any subsidiaries of Western
subsequently created or acquired, before the Incentive Bonus, income taxes and
gains or losses from disposition or purchases of assets or other extraordinary
items.
Under the terms of his amended employment agreement, the 150,000 stock
options, exercisable at $6.50 per share, awarded to Mr. McLain under Western's
1995 Stock Option Plan in March 1995, were canceled and on August 1, 1995 Mr.
McLain was granted options to purchase 300,000 shares of Western common stock at
$6.00 per share, the closing sale price of the Company's common stock on August
1, 1995. As the number of shares underlying Western's 1995 Stock Option Plan was
at that time insufficient for the full granting of such options, the options to
purchase 300,000 shares were granted on August 19, 1995 subject to stockholder
approval of the amendment of the 1995 Stock Option Plan (the "Plan"), which was
approved by the stockholders of Western on December 6, 1995. Such amendment to
the Plan added 550,000 shares of Common Stock to be available for option grants
under the Plan. The granting of all stock to Mr. McLain pursuant to his amended
employment agreement was ratified at Western's 1995 Annual Meeting. The Western
options granted to Mr. McLain were repriced to $4.50 per share in December 1995.
In the event that Western does not meet the accumulated consolidated
pre-tax income levels described above, Mr. McLain shall still be entitled to
options to purchase the 125,000 Western shares should the accumulated
consolidated pre-tax income of Western for the five fiscal years ending 1996
through 2000 equal or exceed $16,000,000. In the event such additional incentive
stock options become available to him, Mr. McLain may
59
<PAGE>
exercise such options beginning August 1, 1996 and ending July 31, 2005 at $4.50
per share. Mr. McLain's employment agreement also provides for fringe benefits
as are customary for senior executive officers in the industry in which the
Company operates, including medical coverage, excess life insurance benefits and
use of an automobile supplied by the Company.
The Company hired Howard Katz as Executive Vice President effective April
15, 1996. Mr. Katz currently receives a base salary of $162,000 per annum,
payable bi-weekly. Mr. Katz does not have an employment agreement with the
Company.
The Company hired David M. Barnes as its Chief Financial Officer effective
May 15, 1996. Mr. Barnes receives a base salary of $150,000 per annum, payable
bi-weekly. Mr. Barnes does not have an employment agreement with the Company.
In December 1995, the Company amended each of its then outstanding
employee stock option plans in anticipation of the consummation of the
Hutchinson transaction. Under the old terms of the plans, all options granted to
employees would have terminated within ninety days of such employees'
termination of employment with the Company or any of its subsidiaries. As a
majority of the Company's employees, other than those of Western, were to be
terminated upon the consummation of the Hutchinson transaction, the Company felt
that it was in its best interests to amend the Plans in order to extend the
expiration dates of these options and to allow for such options to immediately
vest in full upon the consummation of the Hutchinson transaction. All of the
options granted under the Plans became exercisable until January 19, 1998. At
such time, the options held by individuals no longer employed by the Company or
its subsidiaries shall immediately terminate. Options which continue to be held
by Company employees shall revert back to their old vesting terms and original
expiration dates. One effect of these amendments is to change the federal income
tax treatment of incentive options held by non-employees of the Company. Upon
exercise, these options shall be treated as non-qualified stock options for
federal income tax purposes. As a result of such option exercise period
extension, the Company incurred additional compensation expense for the fiscal
year ended July 31, 1996 in the amount of $332,293. Such amount is equal to the
product of the number of options whose exercise periods were extended and the
aggregate difference between the exercise price of each extended option and the
market price for a share of Company Common Stock on January 19, 1996 (the
closing date of the Hutchinson Transaction, the day that the option extension
became effective).
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 1997, the Compensation Committee of
the Company's Board of Directors (the "Compensation Committee") met once in May
1997. During this time the Company's Board of Directors decided all compensation
matters relating to the Company's executive officers. Mr. Rubin's annual
compensation identified in the Summary Compensation Table was provided for under
his employment agreements entered into in July 1991 and August 1994, and his
amended and restated employment agreement dated as of June 3, 1996, which were
approved by the Company's Board of Directors. In June 1995, following completion
of Western's initial public offering, Mr. Rubin's 1994 employment agreement with
the Company was amended to (i) eliminate his guaranteed annual bonus, and (ii)
limit his annual incentive bonus to $50,000 per annum for each of fiscal years
ended July 31, 1996 and 1997, and payable only in the event that the
consolidated net income of the Company, excluding the net income of Western,
shall exceed $1,500,000 in each of such fiscal years. For information concerning
Mr. Rubin's June 1996 amended and restated employment agreement, see
"Employment, Incentive Compensation and Termination Agreements", above. Mr.
Rubin also entered into a separate employment agreement with Western. See,
"Employment, Incentive Compensation and Termination Agreements," above. Mr.
McLain's annual compensation was provided for under his employment agreement
dated February 12, 1993, which was approved by vote of the Company's Board of
Directors. Effective as of August 1, 1995, Mr. McLain's employment agreement
with the Company was terminated and he entered into an amended employment
agreement with Western. See "Employment, Incentive Compensation and Termination
Agreements", above.
60
<PAGE>
During the 1997 fiscal year, other than Messrs. Rubin and McLain, who were
then officers of the Company and members of the Board of Directors, no officers
or employees of the Company or any subsidiary participated in the Board's
compensation decisions. Of the Compensation Committee members, only Mr. Rubin
was at any time an officer or employee of the Company or any of its
subsidiaries. While Mr. Rubin serves on the Compensation Committees of the
Boards of Directors of other publicly held corporations, no executive officers
or directors of such companies serve on the Company's Compensation Committee,
other than Lawrence Kaplan. The Company's Audit, Compensation and Stock Option
Committees are comprised of Messrs. Rubin and Kaplan.
No director of the Company receives any directors fees for attendance at
Board meetings, although they do receive reimbursement for actual expenses of
such attendance.
In October 1991, Mr. Rubin agreed to waive rights inherent in his
ownership of the Company's Series A Preferred Stock to designate a majority of
the members of the Company's Board of Directors and to use his best efforts to
cause the Company to amend its Certificate of Incorporation so as to eliminate
all rights of Mr. Rubin or any other holder of the Series A Preferred Stock to
designate a majority of the members of the Board of Directors. In partial
consideration for his agreement to waive and modify such rights and privileges,
the Company issued to Mr. Rubin for $200,000 ($2.63 per share) an aggregate of
76,000 additional shares of Company Common Stock. Mr. Rubin paid for such shares
by delivering to the Company his full recourse 10% promissory note, which note
is secured by collateral other than the shares acquired (certain marketable
securities in corporations other than the Company) which has a fair market value
in excess of $200,000. This note was payable over five years, commencing March
31, 1992, together with accrued interest, in twenty equal quarterly principal
installments of $10,000 each. In March 1993, the Company agreed to amend Mr.
Rubin's note to be payable in a single payment 36 months from the date of
issuance at 8% interest per annum. In connection with such amendment, Mr. Rubin
agreed to apply no less than 50% of any bonus received by him against the
outstanding principal of the installment note. On November 7, 1996, the Board of
Directors of the Company agreed to extend the maturity date of such note to
March 31, 1999.
On January 26, 1994, the Company entered into a month-to-month public
relations consulting agreement with Gro-Vest Management Consultants, Inc.
("Gro-Vest Consultants"), a company one of whose principal stockholders,
directors and officers is Lawrence Kaplan. Commencing on March 1, 1994, the
Company became obligated to pay $3,000 per month to Gro-Vest Consultants for its
services under such agreement, subject to termination of the agreement on 30
days' notice provided by either party thereto. An aggregate of $26,000 was paid
to Gro-Vest Consultants in the 1997 fiscal year.
At the closing of the Hutchinson Transaction, the Company, Robert Rubin
and Hutchinson (as guarantor) entered into a five-year Non-Competition Agreement
in favor of Hutchinson and its affiliates, pursuant to which Mr. Rubin and the
Company agreed not to compete with the businesses acquired in the Hutchinson
transaction. Under the terms of the Non-Competition Agreement, Mr. Rubin will
receive payments aggregating $200,000 over a seven year period. In addition, at
the Closing Hutchinson engaged Mr. Rubin as a consultant to provide advisory
services relating to the acquired manufacturing business over a seven year
period, for which services Mr. Rubin will receive payments aggregating
$1,000,000. Such payments are pledged as collateral by Mr. Rubin for his $1.2
million loan.No payments have or will be made to Mr. Rubin under his
non-competition or consulting agreements with Hutchinson, unless and until the
Hutchinson transaction and such payments are ratified by the Company's
stockholders at the next special or annual meeting of stockholders. Such
payments are pledged as collateral by Mr. Rubin for his $1.2 million loan.
On February 9, 1996, the Company loaned an aggregate of $450,000 to
Diplomat Corporation ("Diplomat") in connection with Diplomat's acquisition of
BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a
director. Before the BioBottoms transaction, Mr. Rubin held approximately 22% of
Diplomat's outstanding capital stock. Such loan (i) bears interest at the prime
rate of CoreStates Bank, N.A. plus 2% and is payable monthly, (ii) is
subordinated to a $2,000,0000 revolving credit loan agreement between Diplomat
and Congress Financial Corporation, (iii) is payable in full on or before May 4,
1996 and (iv) is secured by a second priority lien in all of the assets of
Diplomat and its wholly-owned subsidiary, BioBottoms, Inc. The loan was repaid
61
<PAGE>
in full in May 1996. In addition to repayment of principal and its receipt of
accrued interest, the Company received a facilities fee of $50,000.
Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between
the Company and ERD Waste Corp.("ERD"), the Company agreed to provide certain
financial accommodations to ERD by making available a $4.4 million standby
letter of credit (the "Letter of Credit") originally issued by Citibank NA and
later assumed by Northfork Bank in favor of Chase Bank (formerly Chemical Bank)
on behalf of ERD. Chase Bank is the principal lender to ERD and its
subsidiaries, and upon issuance of the Letter of Credit, Chase Bank made
available $4.4 million of additional funding to ERD under ERD's existing lending
facility. The funding was used to refinance certain outstanding indebtedness of
Environmental Services of America, Inc. ("ENSA"), a wholly-owned subsidiary of
ERD. Robert M. Rubin, the Chairman and Chief Executive Officer and a principal
stockholder of the Company is also the Chairman, Chief Executive Officer, a
director and a principal stockholder of ERD, owning approximately 25.1% of the
outstanding ERD Common Stock.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in certain machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses payable to Citibank and others in connection with making the Letter
of Credit available, as well as the amount of all interest paid by the Company
on drawings under the Letter of Credit prior to their repayment by ERD and (ii)
to issue to the Company an aggregate of 25,000 shares of ERD common stock for
each consecutive period of 90 days or any portion thereof, commencing August 1,
1996 that the Letter of Credit remains outstanding. ERD Common Stock was then
traded on the NASDAQ National Market and, at the time of closing of the
transaction with ERD, its the closing price of ERD Common Stock, as traded on
Nasdaq was $9.25 per share.
In August 1996, a subsidiary of ERD which operates a waste facility in
Nassau County, New York was cited by the New York State Department of
Environmental Conservation ("DEC") for violating certain DEC regulations. Such
waste facility currently accounts for approximately 13% of ERD's consolidated
revenues. As a result of the uncertainties surrounding ERD's waste facility
operations, the per share price of ERD Common Stock closed at $2.875 per share
on November 8, 1996. ERD and the DEC have reached agreement to settle such
violations, which resulted in the closing of the Long Beach, New York facility.
As a result, the business of ERD was materially and adversely affected.
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Letter of Credit
provided by the Company is called for payment, ERD will issue to the Company its
convertible note bearing interest at 12% per annum, payable monthly, and payable
as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's
receipt of the initial proceeds from any public or private placement of debt or
equity securities of ERD, or (iii) completion of any bank refinancing by ERD, to
the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4.4 million note is issued and converted into ERD Common Stock. In addition to
the collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
In February 1997, the Company advanced an additional $500,000 to ERD,
payable on demand.
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M.
Rubin agreed to indemnify the Company for all losses, if any, incurred by the
Company as a result of issuance of the Letter of Credit for the benefit of ERD.
In consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial
62
<PAGE>
ownership in the outstanding Company Common Stock as of May 30, 1996) of all
losses that the Company may incur in connection with its having provided the
Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by AUGI from
the sale of ERD capital stock described above. In addition, Mr. Rubin personally
guaranteed the $500,000 additional advance from the Company to ERD.
On September 30, 1997, ERD filed for reorganization under Chapter 11 of
the federal bankruptcy laws, and on October 29, 1997, Chase Bank drew on the
Company provided letter of credit. As a result, the Company became liable to
Northfork Bank, the issuer of the letter of credit, for the $4.4 million amount
of such draw; which obligation the Company paid in full on October 31, 1997. As
a result, the Company is now a creditor in the ERD reorganization, holding
approximately $5.0 million of claims and holds a lien on certain ERD assets.
However, by reason of the affiliation of Mr. Rubin with both corporations, it is
possible that such lien will not be sustained in the reorganization proceeding;
in which event the Company will be a general unsecured creditor of ERD. Although
the Company does not believe that Chase Bank acted in a commercially reasonable
manner and is currently considering its legal options, as a result of the
foregoing development, the Company recorded a $5.0 million net loss in
connection with the ERD transaction for the year ended July 31, 1997. In the
event that the Company does not recoup any portion of such loss in connection
with the ERD bankruptcy proceeding or otherwise, Mr. Rubin has personally agreed
to indemnify the Company for the first $1.6 million of such loss.
As of November 10, 1997, the directors and executive officers listed below
hold outstanding non-qualified options to acquire shares of Company Common Stock
granted under the Company's 1996 Stock Option Plan, adopted on April 25, 1996
and amended as of July 30, 1996, as follows: options were granted on April 25,
1996 to Robert M. Rubin (450,000 options), C. Dean McLain (150,000 options) and
Howard Katz (150,000 options) at an exercise price of $3.78125 per share;
options were granted on May 15, 1996 to David M. Barnes (100,000 options) at an
exercise price of $5.25 per share; options were granted to Robert M. Rubin
(30,000 options), Howard Katz (100,000 options) and David M. Barnes (50,000
options) at an exercise price of $5.125 on October 4, 1996; and options were
granted to Howard Katz (100,000 options) and David M. Barnes (50,000 options) at
an exercise price of $4.375 on May 21, 1997. The exercise prices of all such
options equals the average of the closing bid and asked prices for a share of
Company Common Stock as reported on The Nasdaq National Market on the date of
option grant.
On July 30, 1996, the Board of Directors of the Company amended the terms
of the 1996 Stock Option Plan to make all options granted under the 1996 Stock
Option Plan exercisable without shareholder approval. On the date the 1996 Stock
Option Plan was amended, the market price of the Company's Common Stock was
$6.0125 per share, as a result of which the Company incurred a compensation
charge equal to $1,670,667, representing the aggregate value of such unexercised
in-the-money options issued under such option plan (including unexercisable
options) to the named persons.
All options granted to each of Messrs. Rubin and McLain in April 1996, and
100,000 options granted to Mr. Katz at $5.125 per share in October 1996, were
immediately exercisable. The options granted to Mr. Barnes in May 1996 and the
remaining 150,000 options granted to Mr. Katz vested immediately as to 33 1/3 %
and as to 33 1/3 % at the end of each of various fiscal periods ending 1997 and
1998, subject to their continued employment with the Company. The options to
acquire 156,550 shares granted to Mr. Rubin and 50,000 shares granted to Mr.
Barnes in October 1996 vest 50% on the first anniversary of the option grant and
50% on the second anniversary of the option grant.
In June 1996, the Company agreed to loan to Mr. Rubin up to $1,200,000, at
an interest rate equal to one percent above the fluctuating Prime Rate offered
by Citibank, N.A. All borrowings under the loan are repayable on a demand basis,
when and if requested by the Company, but in no event later than July 31, 1998.
Mr. Rubin's indebtedness is secured by his pledge of 150,000 shares of Company
Common Stock and his collateral
63
<PAGE>
assignment of all payments due to him under the terms of his seven-year
Consulting Agreement and Non-Competition Agreement with Hutchinson, which
currently aggregate $1,200,000.
Robert M. Rubin is currently a director of IDF and owns 874,659 shares of
IDF common stock, representing approximately 13.0% of the currently outstanding
IDF common stock after giving effect to the IDF Merger, including Mr. Rubin's
conversion of an $800,000 loan previously made to IDF into convertible preferred
stock convertible into an additional 400,000 shares of IDF common stock. As a
result of the completion of the IDF Merger, Mr. Rubin serves as Chairman of the
Board of Directors of IDF and received a three year employment agreement from
IDF at an annual salary of $75,000. Lawrence Kaplan, a director of the Company,
is also a member of the Board of Directors of IDF and directly and through
affiliates owns an aggregate of 497,859 shares of IDF common stock. In addition,
GV Capital, Inc., an affiliate of Mr. Kaplan, has acted as placement agent in
connection with the IDF private placement and received additional compensation
for such services, in the form of commission of 7.5%, a 2.5% non-accountable
expense allowance and 180,000 shares of IDF common stock for nominal
consideration.
Board Compensation Committee Report on Executive Compensation
The Board of Directors of the Company has decided that the best way to
attract and retain highly capable employees on a basis that will encourage them
to perform at increasing levels of effectiveness and to use their best efforts
to promote the growth and profitability of the Company and its subsidiaries, is
to enter into employment agreements with its senior executive officers. During
the fiscal year ended July 31, 1995, Messrs. Rubin, Shahid and McLain were all
under contract with the Company. This had enabled the Board to concentrate on
the negotiation of particular employment contracts rather than on the
formulation of more general compensation policies for all management and other
personnel. Upon the effective date of the initial public offering of Western,
Mr. McLain's Employment Agreement was terminated. Mr. Shahid's Employment
Agreement was terminated upon consummation of the Hutchinson Transaction. See,
"Employment, Incentive Compensation and Termination Agreements" above. The
Company believes that its compensation levels as to all of its employees were
comparable to industry standards. Currently, Mr. Rubin is the Company's only
senior executive officer of the Company employed under a contract approved by
the full Board of Directors. See "Employment, Incentive Compensation and
Termination Agreements," above.
In setting levels of compensation under such employment contracts and in
approving management's compensation of all other Company employees, the Board of
Directors evaluates the Company's overall profitability, the contribution of
particular individuals to Company performance and industry compensation
standards. A significant percentage of the compensation paid to each of Messrs.
Shahid, McLain and Rubin in the past under their respective employment
agreements and payable to Mr. Baganov under his agreement was and is tied to the
Company's achievement of prescribed levels of pre-tax income of the Company as a
whole or of the subsidiary for which such executive is responsible. See,
"Employment, Incentive Compensation and Termination Agreements," above. The
members of the Company's Board of Directors are Messrs. Robert M. Rubin, C. Dean
McLain, Lawrence E. Kaplan, Howard Katz and David M. Barnes.
ROBERT M. RUBIN LAWRENCE E. KAPLAN C. DEAN MCLAIN
HOWARD KATZ DAVID M. BARNES
64
<PAGE>
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial owners
of more than 10 percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended July 31, 1997.
65
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 10, 1997
with respect to the beneficial ownership of the Common Stock of the Company by
each beneficial owner of more than 5% of the total number of outstanding shares
of the Common Stock of the Company, each director and all executive officers and
directors of the Company as a group. Unless otherwise indicated, the owners have
sole voting and investment power with respect to their respective shares.
<TABLE>
<CAPTION>
No. of Percent of
Name and Address Office Shares Outstanding
- ---------------- ------ ------ -----------
<S> <C> <C> <C>
Robert M. Rubin Director, President, 1,575,798(1)(2) 14.2%
11130 NE 33rd Place Chief Executive Officer
Bellevue, WA 98004
Director -0- -0-
Lawrence E. Kaplan
330 Vanderbilt Motor Pkwy
Hauppauge, NY 11788
Director, Executive 257,500(2)(3) 2.3%
C. Dean McLain Vice-President and
4601 N.E. 77th Avenue President of Western
Suite 200
Vancouver, WA 98662
Artour Baganov 698,182(4) 6.3%
1520 Fourth Avenue,
Suite 200
Seattle, WA 98101
Associated Capital L.P.(5) 570,000 5.1%
477 Madison Avenue - 14th floor
New York, NY 10022
David M. Barnes Vice President of 91,666(6) 0.9%
11130 NE 33rd Place Finance and Director
Bellevue, WA 98004
Executive Vice 200,000(6) 1.8%
Howard Katz President and Director
11130 NE 33rd Place
Bellevue, WA 98004
All directors and executive officers as a group 2,694,964(1)(2) 24.3%
(5 persons) (3)(4)(6)
=============================================================================================
</TABLE>
- ----------
* Less than one percent (1%)
(1) Includes non-qualified options to purchase 80,000 shares granted to Mr.
Rubin at an exercise price of $3.125 per share adn 126,550 shares at an
exercise price of $5.125 per share issued under the Company's 1991 Stock
Option Plan which are fully exercisable.
66
<PAGE>
(2) Includes non-qualified options granted under the 1996 Stock Option Plan
(options to acquire 323,450 shares to Mr. Rubin; options to acquire
150,000 shares to Mr. McLain). Such options were granted on April 25, 1996
at an exercise price of $3.78125 per share, the fair market value of the
Common Stock on the date of option grant. The 1996 Stock Option Plan was
amended in July 1996 to make options granted under the plan exercisable
without stockholder approval. Messrs. Rubin and McLain's continuing
employment by the Company is governed by the terms of their employment
agreements. Does not include 30,000 options granted to Mr. Rubin on
October 4, 1996 under the 1996 Stock Option Plan, which options are not
yet exercisable.
(3) Includes (i) options to purchase 36,000 shares of the Company's Common
Stock at $3.125 per share granted under the Company's 1991 Stock Option
Plan, (ii) options to purchase 45,000 shares of the Company's Common Stock
at $4.875 per share under the 1991 Stock Option Plan, (iii) options to
purchase 12,500 shares of the Company's Common Stock at $3.875 per share
under the 1991 Stock Option Plan and (iv) options to purchase 150,000
shares of the Company's Common Stock at $3.78125 per share granted under
the 1996 Stock Option Plan.
(4) Mr. Baganov is currertly the President of InterGlobe and was formerly a
member of the Board of Directors of the Company and InterGlobe. On
November 4, 1997, Mr. Baganov resigned as a director of the Company and
its subsidiaries. The forgoing shares owned by Mr. Baganov does not
include a maximum of 698,182 shares of Company Common Stock at $5.50 per
share which are exercisable by Mr. Baganov only under certain conditions
specified in connection with his employment agreement with Interglobe. In
the event InterGlobe and Mr. Baganov settle the terms of such employment
agreement, such options will be cancelled.
(5) The General partner of Associated Capital, L.P., a Delaware limited
partnership ("Associated"), is A Cap, Inc., a New York corporation ("A
Cap"). Under Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended, A Cap may be deemed to be a direct beneficial owner of
the shares of Company Common Stock owned by Associated by virtue of its
interest in, and control over, Associated. Jay H. Zises, as President of A
Cap, has the sole power to vote and to direct the voting of, and to
dispose and to direct the disposition of, the shares of the Company's
Common Stock deemed to be beneficially owned by A Cap. Under Rule 13d-3,
Mr. Zises may be deemed to be an indirect beneficial owner of the Company
Common Stock owned by Associated.
(6) Includes options to purchase 100,000 shares granted to Mr. Katz at an
exercise price of $5.125 per share and options to purchase 50,000 shares
granted to Mr. Katz at an exercise price of $3.78125 under the 1996 Plan
which are immediately exercisable. Does not include options granted under
the 1996 Stock Option Plan to Messrs. Barnes (33,334 shares at an exercise
price of $3.78125 per share and 25,000 at an exercise price of $5.125 per
share) and Katz (50,000 shares) at exercise price of $3.78125,
respectively, which are not yet exercisable. The options issuable to each
of Messrs. Barnes and Katz which are not yet exercisable are only
exercisable under certain conditions related to their continued employment
with the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11, Executive Compensation - Compensation Committee Interlocks
and Insider Participation" and "Employment, Incentive and Termination
Agreement", and "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations," above.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Report of Independent Accountants..............................F-2
Consolidated Balance Sheets as of
July 31, 1997 and 1996........................................F-3
Consolidated Statements of Operations
for the years ended July 31, 1997,
1996, and 1995................................................F-4
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1997,
1996 and 1995.................................................F-5
Consolidated Statements of Cash Flows
for the years ended July 31, 1997,
1996 and 1995.................................................F-7
Notes to Consolidated Financial
Statements....................................................F-9
2. Schedule II -- Valuation and Qualifying Accounts...............S-1
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 24, 1996, with
respect to the acquisition of ConnectSoft.
(c) Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Registrant. (8)
3.2 By-laws of Registrant. (9)
4.1 Specimen Certificate of Common Stock. (10)
4.2 1991 Employee Stock Option Plan. (8)
4.3 1996 Stock Option Plan, as amended
10.1 Agreement of Purchase and Sale, dated December 4, 1992, by and
between Case and Western Power (Schedules omitted) (1)
10.2 Employment Agreement, by and between Western Power and C. Dean
McLain. (14)
10.3 Financing Agreement with Associates Commercial Corporation and
Western Power. (3)
68
<PAGE>
Exhibit
Number Description
------ -----------
10.4 Asset Purchase Agreement, dated as of September 22, 1994, by
and between Case and Western Power (schedules omitted). (4)
10.5 Management Agreement between Western Power and American United
Global, Inc. (6)
10.6 Revised Financing Agreement with Seattle-First National Bank
and Western Power. (14)
10.7 Auburn Facility Real Estate Purchase and Sale Agreement, dated
October 19, 1995, by and between Western Power and Ford Kiene.
(14)
10.8 Western Power Lease Agreement--Sacramento, California. (7)
10.9 Sacramento Acquisition Agreement with Western Power
a. Asset Purchase Agreement (7)
b. Used Equipment Note (7)
c. Parts Note (7)
d. Accounts Receivable Note (7)
e. Goodwill Note (7)
f. Real Estate Note from MRR to Case (7)
g. Deed to Secure Debt of MRR to Case (7)
h. Security Agreement (7)
i. C. Dean McLain's Personal Guaranty (7)
10.10 GCS Acquisition Agreement with Western Power (14)
69
<PAGE>
Exhibit
Number Description
------ -----------
10.11 Amended and Restated Employment Agreement with Robert M. Rubin
(11)
10.12 Asset Purchase Agreement, dated as of November 22, 1995, by
and among Hutchinson Corporation, American United Global, Inc.
("AUGI"), AUG California, Inc. ("AUG- Ca"), American United
Products, Inc. ("AUP"), and American United Seal, Inc. ("AUS")
(Schedules and Exhibits omitted). (12)
10.13 Non-Competition Agreement, dated January 19, 1996, among
Hutchinson Seal Corporation, AUGI, AUG-Ca, AUP and AUS. (12)
10.14 Non-Competition Agreement, dated January 19, 1996, between
Hutchinson Seal Corporation and Robert M. Rubin. (12)
10.15 Agreement of Hutchinson Corporation to guaranty payments under
Non-Competition and Consulting Agreements. (12)
10.16 Consulting Agreement, dated January 19, 1996, between
Hutchinson Seal Corporation and Robert M. Rubin (12)
10.17 $2,625,000 Purchase Note from N O-Ring Corporation to AUGI.
(12)
10.18 $1,050,000 Purchase Note from Stillman Seal Corporation to
AUGI. (12)
10.19 Guaranty of Hutchinson Corporation of the Purchase Notes,
aggregating $3,675,000 of N O-Ring Corporation and Stillman
Seal Corporation. (12)
10.20 January 19, 1996, amendment to certain provisions of Asset
Purchase Agreement. (12)
10.21 Agreement and Plan of Merger, dated June 28, 1996, by and
among AUGI, ConnectSoft, Inc., and certain shareholders of
ConnectSoft, Inc. (without exhibits) (13)
70
<PAGE>
Exhibit
Number Description
------ -----------
10.24 Agreement of Plan and Merger, by and among American United
Global, Inc. ("AUGI"), BTS Acquisition Corp., Broadcast Tower
Sites, Inc., Simantov Moskona and Sergio Luciani , dated
December 11, 1996 (Incorporated by reference from the
Company's Form 8-K filed December 24,1996).
10.25 Agreement and Plan of Merger, dated July 31, 1997, between
American United Global, Inc. IDF International, Inc. and
TechStar Communications, Inc. (without exhibits)
10.26 Asset Purchase Agreement, dated January 17, 1997, among
Sahlberg Equipment, Inc., John Sahlberg and Robert Sahlberg, R
& J Partners and Western Power & Equipment Corp. (Incorporated
by reference from Western Power and Equipment Corp.'s Form 8-K
filed February 3, 1997 (File No. 0-26230)).
10.27 Loan Agreement dated, June 5, 1997, between Deutsche Financial
Services, Inc. and Western Power and Equipment Corp.
(Incorporated by reference from Western Power and Equipment
Corp.'s Form 10-Q filed June 11, 1997 (File No. 0-26230)).
10.28 Commercial Lease, dated June 1, 1997 between McLain-Rubin
Realty Company II, LLC and Western Power and Equipment Corp.
for Kent, Washington facility (Incorporated by reference from
Western Power and Equipment Corp.'s Form 10-K filed October
29, 1997 (File No. 0-26230)).
22 Subsidiaries of the Company.
27. Financial Data Schedule.
- ----------
(1) Filed as an Exhibit to the Current Report on Form 8-K of American United
Global, Inc. ("AUGI"), as filed on December 19, 1992 and incorporated
herein by reference thereto.
(2) Filed as an Exhibit to the AUGI Annual Report on Form 10-K, as filed on
October 29, 1993 and incorporated herein by reference thereto.
(3) Filed as an Exhibit to Amendment No.1 to AUGI's Registration Statement on
Form S-1, filed on February 1, 1994 and incorporated herein by reference
thereto. (Registration No. 33-72556)
(4) Filed as an Exhibit to the Current Report on Form 8-K of AUGI, as filed on
September 23, 1994 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to Amendment No. 1 to the Western Power & Equipment
Corp. ("Western Power") Registration Statement on Form S-1, filed on May
16, 1995 and incorporated herein by reference thereto. (Registration No.
33-89762).
(6) Filed as an Exhibit to the Western Power Registration Statement on Form
S-1, filed on February 24, 1995 (Registration No. 33-89762).
(7) Filed as an Exhibit to the Current Report on Form 8-K of Western Power as
filed on March 6, 1996 and incorporated herein by reference thereto.
(8) Included with the filing of AUGI's Registration Statement on Form S-1 on
October 18, 1991, as amended by Amendment No. 1, dated December 18, 1991,
Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated January 24,
1992 and Amendment No. 4, dated January 28, 1992.
(9) Filed as an Exhibit to the definitive Proxy Materials of Alrom Corp., a
New York corporation, as filed on December 10, 1991.
(10) Filed as on Exhibit to AUGI's Registration Statement on Form S-18
(Registration No. 330330 81-NY)_ and incorporated herein by reference
thereto.
(11) Filed as on Exhibit to AUGI's Preliminary Proxy Materials filed 1996
Annual Meeting on June 27, 1996.
(12) Filed as on Exhibit to AUGI's Current Report on Form 8-K, dated February
2, 1996.
(13) Filed as an Exhibit to AUGI's Current Report on Form 8-K, dated July 24,
1996.
(14) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal year
ended July 31, 1996.
71
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13, 1997
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
/S/ Robert M. Rubin Chairman of the Board, November 13, 1997
- --------------------- Chief Executive Officer
Robert M. Rubin and Director
/S/ C. Dean McLain
- --------------------- Executive Vice President November 13, 1997
C. Dean McLain and Director
- --------------------- Director
Lawrence E. Kaplan
/S/ David M. Barnes
- --------------------- Vice President-Finance November 13, 1997
David M. Barnes and Chief Financial
and Chief Accounting Officer
/S/ Howard Katz
- --------------------- Executive Vice President November 13, 1997
Howard Katz and Director
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13, 1997
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 , 1997
- ----------------------- Chief Executive Officer
Robert M. Rubin and Director
/S/ C. Dean McLain Executive Vice President November , 1997
- --------------------- and Director
C. Dean McLain
Director November , 1997
- ----------------------
Lawrence E. Kaplan
/S/ David M. Barnes Vice President-Finance November , 1997
- ----------------------- and Chief Financial
David M. Barnes and Chief Accounting Officer
/S/ Howard Katz Executive Vice President November , 1997
- ------------------- and Director
Howard Katz
<PAGE>
AMERICAN UNITED GLOBAL, INC.
FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F - 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
American United Global, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of American
United Global, Inc. and its subsidiaries at July 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Seattle, Washington
November 10, 1997
F-2
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 12,284,000 $ 17,086,000
Investment in marketable debt securities .................. 10,018,000 --
Trade accounts receivable, less allowance
for doubtful accounts of $807,000 and
$652,000, respectively ................................. 12,473,000 6,628,000
Notes receivable from shareholder (Note 15) ............... 1,238,000 838,000
Inventories (Note 4) ...................................... 83,370,000 65,697,000
Prepaid expenses and other receivables .................... 357,000 476,000
Deferred tax asset (Note 8) ............................... 936,000 1,528,000
Notes receivable (Note 10) ................................ 3,503,000 --
------------- -------------
Total current assets .................................. 124,179,000 92,253,000
Property and equipment, net (Note 5) ...................... 9,530,000 8,878,000
Notes receivable (Note 10) ................................ -- 3,198,000
Investment in marketable debt securities .................. -- 6,268,000
Intangibles and other assets, net of accumulated
amortization of $1,460,000 and
$202,000, respectively (Note 13) ........................ 8,582,000 6,628,000
Deferred tax asset (Note 8) ............................... 2,432,000 1,830,000
------------- -------------
$ 144,723,000 $ 119,055,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 7) ........... $ 55,490,000 $ 54,364,000
Short-term borrowings (Note 7) ............................ 11,751,000 4,660,000
Current portion of capital lease obligations (Note 11) .... 412,000 1,119,000
Accounts payable .......................................... 20,150,000 4,252,000
Accrued liabilities ....................................... 12,583,000 5,387,000
Income taxes payable (Note 8) ............................. 1,924,000 5,253,000
Deferred revenue .......................................... 950,000 --
------------- -------------
Total current liabilities ............................. 103,260,000 75,035,000
Long-term borrowings (Note 7) ................................ 3,456,000 2,968,000
Capital lease obligations, net of current portion (Note 11) .. 4,026,000 2,083,000
Purchased business obligations (Notes 3 and 6) ............... -- 6,929,000
------------- -------------
Total liabilities ..................................... 110,742,000 87,015,000
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
Minority interest ............................................ 9,880,000 9,459,000
------------- -------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 9 and 12):
Preferred stock, 12.5% cumulative, $1.00 per share
liquidation value, $.01 par value; 1,200,000
shares authorized; none issued and outstanding .......... -- --
Series B-1 convertible preferred stock, convertible
to common, $3.50 per share liquidation value, $.01
par value; 1,000,000 shares authorized; 976,539 and 0
shares issued and outstanding, respectively ............. 10,000 --
Series B-2 7% convertible preferred stock; convertible
into common, $25 per share liquidation value, 500,000
shares authorized, 120,000 and 0 shares issued and
outstanding, respectively ............................... 1,000 --
Common stock, $.01 par value; 20,000,000 shares authorized;
10,441,583 and 6,266,382 shares issued and outstanding,
respectively ............................................ 104,000 63,000
Additional contributed capital ............................ 48,782,000 20,654,000
Deferred compensation ..................................... (196,000) (793,000)
Retained (deficit) earnings ............................... (24,600,000) 2,657,000
------------- -------------
Total shareholders' equity ............................ 24,101,000 22,581,000
------------- -------------
$ 144,723,000 $ 119,055,000
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Net sales ......................................................... $ 154,545,000 $ 106,555,000 $86,173,000
Cost of good sold ................................................. 134,759,000 93,906,000 76,145,000
------------- ------------- -----------
Gross profit ............................................... 19,786,000 12,649,000 10,028,000
Selling, general and administrative expenses ...................... 25,400,000 9,535,000 6,228,000
Other operating expenses (Notes 13 and 18) ........................ 12,510,000 -- --
Research and development expenses (Note 3) ........................ 4,953,000 10,295,000 --
------------- ------------- -----------
Operating (loss) income .................................... (23,077,000) (7,181,000) 3,800,000
Interest expense, net ............................................. 3,025,000 1,137,000 1,421,000
Loss on Western Power & Equipment initial public offering (Note 9) -- -- 386,000
------------- ------------- -----------
(Loss) income from continuing operations before income taxes
and minority interest .................................... (26,102,000) (8,318,000) 1,993,000
(Benefit) provision for income taxes (Note 8) ..................... (1,669,000) 890,000 711,000
Minority interest in earnings of consolidated subsidiaries ........ 421,000 402,000 118,000
------------- ------------- -----------
(Loss) income from continuing operations ................... (24,854,000) (9,610,000) 1,164,000
------------- ------------- -----------
Discontinued operations, net of taxes (Note 10):
Income from operations, net of tax ............................. -- 315,000 1,104,000
Gain (loss) on disposal (net of tax of $5,042,000) ............. -- 7,460,000 --
------------- ------------- -----------
-- 7,775,000 1,104,000
------------- ------------- -----------
Net (loss) income ................................................. (24,854,000) (1,835,000) 2,268,000
Dividends on preferred stock ...................................... (2,403,000) -- --
------------- ------------- -----------
Net (loss) income available for common shareholders ............... $ (27,257,000) $ (1,835,000) $ 2,268,000
============= ============= ===========
(Loss) earnings per common and common equivalent share:
(Loss) income from continuing operations ....................... $ (2.75) $ (1.66) $ .20
Discontinued operations ........................................ -- 1.34 .20
------------- ------------- -----------
Net (loss) income per share ....................................... $ (2.75) $ (.32) $ .40
============= ============= ===========
Weighted average number of shares ................................. 9,919,626 5,810,526 5,729,852
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-----------------------------------------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 ............................. -- $ 5,639,000 $ 56,000
Net income
Issuance of common shares as compensation ............ 16,000 1,000
Net collection on note receivable from shareholder ...
------------ ----------- ---------- ------------
Balance at July 31, 1995 ............................. -- -- 5,655,000 57,000
Net loss .............................................
Issuance of common shares as compensation ............ 12,000
Stock issued under stock option plans and warrants ... 600,000 6,000
Tax benefit related to stock option plans and warrants
Deferred compensation (Note 3) .......................
Stock option compensation ............................
Net collection on note receivable from shareholder ...
------------ ----------- ---------- ------------
Balance at July 31, 1996 ............................. 6,267,000 63,000
Net loss .............................................
Dividend on preferred stock ..........................
Issuance of common shares ............................ 1,886,000 19,000
Issuance of preferred stock .......................... 1,377,000 14,000
Conversion of preferred stock to common .............. (280,000) (3,000) 2,046,000 20,000
Tax benefit related to stock option plans and warrants
Amortization of deferred compensation (Note 3) .......
Exercise of stock options ............................ 243,000 2,000
Stock options issued to non-employees ................
Warrants issued in connection with acquisition .......
------------ ----------- ---------- ------------
Balance at July 31, 1997 ............................. $ 1,097,000 $ 11,000 10,442,000 $ 104,000
============ =========== ============ ============
<CAPTION>
ADDITIONAL RETAINED TOTAL
CONTRIBUTED EARNINGS SHAREHOLDERS'
CAPITAL OTHER (DEFICIT) EQUITY
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 ............................. $ 15,858,000 $ (200,000) $ 2,224,000 $ 17,938,000
Net income ........................................... -- -- 2,268,000 2,268,000
Issuance of common shares as compensation ............ 31,000 32,000
Net collection on note receivable from shareholder ... 16,000 16,000
------------ ----------- ------------ ------------
Balance at July 31, 1995 ............................. 15,889,000 (184,000) 4,492,000 20,254,000
Net loss ............................................. (1,835,000) (1,835,000)
Issuance of common shares as compensation ............ 15,000 15,000
Stock issued under stock option plans and warrants ... 1,770,000 1,776,000
Tax benefit related to stock option plans and warrants 510,000 510,000
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Deferred compensation (Note 3) ....................... (500,000) (500,000)
Stock option compensation ............................ 2,470,000 (293,000) 2,177,000
Net collection on note receivable from shareholder ... 184,000 184,000
------------ ----------- ------------ ------------
Balance at July 31, 1996 ............................. 20,654,000 (793,000) 2,657,000 22,581,000
Net loss ............................................. (24,854,000) (24,854,000)
Dividend on preferred stock .......................... 2,286,000 (2,403,000) (117,000)
Issuance of common stock ............................. 8,525,000 8,544,000
Issuance of preferred stock .......................... 15,401,000 15,425,000
Conversion of preferred stock to common .............. (17,000) --
Tax benefit related to stock option plans and warrants 356,000 356,000
Amortization of deferred compensation (Note 3) ....... 597,000 597,000
Exercise of stock options ............................ 854,000 856,000
Stock options issued to non-employees ................ 571,000 571,000
Warrants issued in connection with acquisition ....... 142,000 142,000
------------ ----------- ------------ ------------
Balance at July 31, 1997 ............................. $ 48,782,000 $ (196,000) $(24,600,000) $ 24,101,000
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................... $(24,854,000) $ (1,835,000) $ 2,268,000
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Shares issued in lieu of compensation ............................. -- -- 32,000
Depreciation and amortization ..................................... 2,646,000 891,000 1,068,000
Long-term asset impairment ........................................ 5,725,000 -- --
Gain on sale of equity securities ................................. -- (34,000) --
Loss on settlement ................................................ 1,800,000 -- --
Loss on standby letter of credit .................................. 4,985,000 -- --
Amortization of deferred compensation ............................. 597,000 -- --
(Gain)on disposal of business ..................................... -- (7,460,000) --
Loss on Western Power & Equipment initial public offering ......... -- -- 386,000
Loss on sale of fixed assets ...................................... -- -- 4,000
Deferred tax provision ............................................ (11,000) (781,000) (267,000)
Income applicable to minority interest ............................ 421,000 402,000 118,000
Purchased research and development ................................ -- 10,033,000 --
Stock option compensation ......................................... 271,000 1,671,000 --
Imputed interest .................................................. 305,000 161,000 --
Change in assets and liabilities, net of effects of acquisition and
dispositions:
Trade accounts receivable ....................................... (7,255,000) (275,000) (2,420,000)
Inventories ..................................................... (17,673,000) (12,840,000) (5,181,000)
Other assets .................................................... -- (686,000) --
Prepaid expenses and other receivable ........................... (1,646,000) 571,000 (1,196,000)
Inventory floor financing ....................................... 1,126,000 12,411,000 --
Accounts payable ................................................ 14,181,000 143,000 261,000
Accrued liabilities ............................................. 6,588,000 2,026,000 273,000
Income taxes payable ............................................ (3,329,000) (165,000) 324,000
Change in deferred revenue ...................................... 950,000 -- --
Other ........................................................... -- (496,000) 828,000
------------ ------------ -----------
Net cash provided by (used in) operating activities ............. (15,173,000) 3,737,000 (3,502,000)
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sale of fixed assets .................................. -- 2,075,000 6,000
Proceeds from sale of business, net ................................. -- 19,099,000 --
Purchase of property and equipment .................................. (1,222,000) (695,000) (332,000)
Purchase of equity securities ....................................... -- (1,051,000) --
Proceeds from sale of equity securities ............................. -- 1,085,000 --
Purchase of debt securities ......................................... (3,750,000) (6,268,000) --
Advances to ConnectSoft, Inc. prior to acquisition .................. -- (3,289,000) --
Acquisition of businesses, net of cash acquired ..................... (1,497,000) (2,342,000) (557,000)
------------ ------------ -----------
Net cash provided by (used in) investing activities ............. (6,469,000) 8,614,000 (883,000)
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Cash flows from financing activities
Net borrowings (payments) under revolving credit agreements ......... 7,287,000 (2,805,000) 4,187,000
Borrowings under term loans ......................................... 242,000 1,268,000 --
Repayment of term loans ............................................. -- -- (1,623,000)
Principal payments under capitalized lease obligations .............. (327,000) (62,000) (52,000)
Proceeds from sale of stock ......................................... 9,182,000 -- 7,801,000
Net payments under notes payable to shareholders .................... -- -- (2,575,000)
Decrease in receivable from underwriter ............................. -- 1,102,000 --
Exercise of stock options ........................................... 856,000 1,776,000 --
Collections (increase) of notes receivable from shareholder, net .... (400,000) (688,000) 16,000
------------ ------------ -----------
Net cash provided by financing activities ....................... 16,840,000 591,000 7,754,000
------------ ------------ -----------
Net (decrease)increase in cash and cash equivalents .................... (4,802,000) 12,942,000 3,369,000
Cash and cash equivalents beginning of year ............................ 17,086,000 4,144,000 775,000
------------ ------------ -----------
Cash and cash equivalents end of year .................................. $ 12,284,000 $ 17,086,000 $ 4,144,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
American United Global, Inc., a Delaware corporation (the "Company") is
engaged in two distinct businesses; a technology business and a distribution
business.
The Company's technology business provides telecommunications products and
services, a proprietary intelligent communications system, as well as software
and networking products. Such products and services are provided by the
Company's wholly and majority owned subsidiaries as follows:
TechStar Communications, Inc. provides consulting services to the wireless
communications industry in the form of network hardware acquisition, zoning,
architectural and engineering consulting services. As discussed in Note 18, in
August, 1997 the Company merged TechStar into IDF International, Inc. ("IDF")
in a reverse triangular merger, resulting in the Company owning approximately
58% of IDF. IDF, through its Heyden/Wegman, Inc. subsidiary ("Heyden Wegman")
provides general construction and engineering services to municipalities and
private industry.
Connectsoft Communications Corp. ("Connectsoft"), a newly formed wholly
owned subsidiary is developing a unified, intelligent communications system
being marketed under the name "FreeAgent". FreeAgent is designed to unify
communications into a single message box, allow access to that message box
through any telephone or online computer, and apply autonomous software
processes known as intelligent agentry to the data flowing into and out of the
message box for the purpose of automating communications and assisting the user
in managing communications.
eXodus, an 80.4%-owned subsidiary, has developed a proprietary application
server software , marketed as NTERPRISE, allows users to run Windows application
server software programs designed for Microsoft Windows NT operating system on
users' existing Unix workstations, X-terminals and other X-windows devices,
Macintosh terminals, Java-enabled network computers and legacy computers that
would otherwise not be Windows compatible or are incapable of running newer
versions of Windows software. Exodus licenses a multi-user software kernal from
Prologue Software, SA under a software license agreement limited to Windows NT
3.51 version only, which expires as early as December, 1997. In September 1997
Microsoft Corporation ("Microsoft") announced that the NTERPRISE protocol would
not be presently considered in the initial releases of Windows NT 4.0 and 5.0.
As a result of these material adverse developments, the Company has scaled back
its Exodus operations pending review of an alternative non-Windows solution. See
further details in Notes 6 and 13.
F-10
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS (CONTINUED)
InterGlobe Networks, Inc., a wholly owned subsidiary, provides network
engineering, design and consultation services, network security, remote network
management and monitoring as well as intranet development. In November 1997 the
Company signed a letter of intent to sell InterGlobe to a third party for cash
of $1,500,000 and certain securities of a privately held company (See Note 13).
Seattle Online, Inc., a wholly owned subsidiary provided a regional
internet/intranet telecommunications service in the form of high bandwidth
internet connectivity and hosting business for the Pacific Northwest. In
November 1997, certain assets and their related liabilities were sold to a third
party for cash of $25,000 and certain securities of a privately held company
(See Note 13).
The Company's distribution group consists of its 56.6% owned subsidiary,
Western Power & Equipment Corp. ("Western"), which operates as a retail
distributor for the sale, servicing, and leasing of light to medium-sized
construction equipment and parts (the "Distribution Service Group"). These sales
are conducted from 23 regional distribution operations owned by Western located
in the states of Washington, Oregon, California, Alaska and Nevada.
Approximately 75% of this equipment is manufactured by Case Corporation
("Case").
The Company had been engaged in a manufacturing business consisting of two
units, National O-Ring, which manufactured and distributed a full range of
standard-size, low-cost, synthetic rubber o-ring sealing devices for use in
automotive and industrial applications, and Stillman Seal, which specialized in
the design, manufacture and distribution of rubber-to-metal bonded sealing
devices and molded rubber shapes for use in commercial aerospace, defense and
communications industry applications (collectively the "Manufacturing Group").
The Manufacturing Group was sold pursuant to the terms of an Asset Purchase
Agreement dated as of November 22, 1995. The effect of the sale on the results
of operations of the Company has been included in discontinued operations in the
accompanying consolidated statements of operations for the year ended July 31,
1996 as more fully described in Note 10.
F-11
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority shareholders' proportionate share of
the equity of Western which was 43.4% at July 31, 1997. There is also a 19.6%
minority interest held in eXodus Technologies, Inc. ("eXodus"), a former
division of Connectsoft, but no minority interest is presented due to
accumulated losses.
CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined
based upon the first-in, first-out method for parts inventory and specific
identification for construction equipment.
INVESTMENT SECURITIES
Investments in marketable debt securities represent primarily treasury
notes which are carried at amortized cost as these investments have been
classified as held-to-maturity securities at July 31, 1996. Held-to-maturity
securities represent those securities that the Company has both the positive
intent and ability to hold until maturity. At July 31, 1997 such securities are
classified as available for sale and carried at amortized cost which
approximated market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, ranging from 3 to 20 years as follows:
Equipment and machinery - 7 years
Computer systems and equipment - 3 to 7 years
Office furniture and fixtures - 5 years
Buildings - 20 years
F-12
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Expenditures for additions and major improvements are capitalized. Repairs
and maintenance costs are expensed as incurred. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts; any gain or loss thereon is included in the results of
operations.
INTANGIBLE ASSETS
Intangible assets acquired in business acquisitions such as goodwill,
technology rights and noncompete agreements represent value to the Company.
Intangibles are amortized using the straight-line method over the assets'
estimated useful lives ranging from 3 to 40 years. Such lives are based on the
factors influencing the acquisition decision and on industry practice.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted cash
flows of the underlying assets whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
Adjustments are made if the sum of the expected future net cash flows is less
than book value. See Note 13 regarding disposition of certain assets and the
determination of impairment of certain intangible assets.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future consequences of temporary differences between the
carrying amounts for financial reporting purposes and the tax bases of assets
and liabilities.
REVENUE RECOGNITION
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Equipment rental and service revenue is generally
recognized over the period such services are provided. Revenue on the sale or
license of the Company's proprietary software is recognized in accordance with
the provisions of AICPA statement of position 91-1, Software Revenue Recognition
(SOP 91-1). Sales and license revenue will be recognized either upon shipment or
the end of the evaluation period, net of estimated future returns. Although the
Company has entered into a software licensing agreement under which customer
payments are due, the Company has not recorded any revenues on such licensing
contract as the recognition criteria of SOP 91-1 have not been met. Accordingly,
funds from the customer have been recorded as deferred revenues. Revenues on
services are recognized over the period in which the services are provided.
F-13
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in conjunction with product development are
charged to research and development expense until technological feasibility is
established. Thereafter, through general release of product, all software
development costs are capitalized and reported at the lower of unamortized cost
or net realizable value. 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 sales, estimated economic life and
changes in the software and hardware technology. After consideration of the
above factors, the Company amortizes capitalized software costs at the greater
of the amount computed using (a) the ratio of current revenues for a product to
the total of current and anticipated future revenues or (b) the straight-line
method over the remaining estimated economic life of the product. The Company
will consider that technological feasibility has been established when the
completeness of a working model and its consistency with the product design has
been confirmed by testing. Unamortized capitalized software development costs
will be compared to the estimated net realizable value of the product at each
balance sheet date and written down, if appropriate. Capitalized software
development costs were included in intangible and other assets in the
accompanying consolidated balance sheet at July 31, 1996 and were written off
during the year ended July 31, 1997 as discussed in Note 13.
RESEARCH AND DEVELOPMENT
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1997, 1996 and 1995 was $999,000, $263,000
and $274,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued liabilities as presented in
the consolidated financial statements approximates fair value based on
F-14
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the short-term nature of these instruments. The recorded amount of long-term
debt approximates fair value as the actual interest rates approximate current
competitive rates. The fair value of investment securities held approximates the
carrying value at July 31, 1997, and is $179,000 less than the carrying value at
July 31, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the fiscal
periods presented. Actual results could differ from those estimates.
EMPLOYEE STOCK OPTIONS
During the year ended July 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 establishes the accounting and reporting
standards for stock-based employee compensation plans, including stock options.
This new standard defines a fair value-based method of accounting for these
equity instruments. This method measures compensation cost based on the value of
the award and recognizes that cost over the service period. The Company elected
to continue using the rules of APB Opinion No. 25 and provides pro forma
disclosures of net income and earning per share as if Statement No. 123 had been
applied.
EARNINGS PER SHARE
Net income (loss) per share is computed by dividing the net income
(loss)available for common shareholders by the weighted average number of shares
of common stock and, if dilutive, common stock equivalents outstanding during
the period using the treasury stock method. The Company's convertible preferred
stock has not been included in the loss per share calculation for the years
ended July 31, 1997 and 1996, as the effect is antidilutive. The additional
shares to be potentially issued to the ConnectSoft shareholders upon occurrence
of certain events (see Note 3) have not been included in the determination of
loss per share for the years ended July 31, 1997 and 1996. Fully diluted
earnings (loss) per share is not presented as it is the same as primary earnings
(loss) per share.
F-15
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Financial Accounting Standard No. 128
"Earnings Per Share" (SFAS 128) in July 1997. This pronouncement changes the
method of calculating earnings per share and is required to be adopted by the
Company for the fiscal year ending July 31, 1998. The impact of the adoption of
Statement 128 is not expected to be material.
In June 1997, the Financing Accounting Standards Board issued FAS 130,
"Reporting Comprehensive Income", which establishes financial accounting and
reporting standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. The Company will adopt Statement 130 in the first
quarter of fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued FAS 131,
"Disclosures About Segments of an Enterprise and Related Information", which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company will adopt
Statement 131 in the first quarter of fiscal 1999.
3. ACQUISITIONS
DISTRIBUTION BUSINESS ACQUISITIONS
Effective February 29, 1996, Western acquired the assets and operations of
two factory-owned stores of Case in the state of California. The acquisition was
consummated for approximately $630,000 in cash, $1,590,000 in installment notes
payable to Case and the assumption of $3,965,000 in inventory floor plan debt
with Case and its affiliates. The results of operations of these two stores have
been included in the consolidated results of operations from the effective date
of the acquisition. The acquisition was accounted for as a purchase and resulted
in the recording of approximately $150,000 in goodwill which is included in
intangible and other long-term assets in the accompanying consolidated financial
statements and is being amortized on a straight-line basis over 20 years.
Effective June 11, 1996, Western acquired the assets and operations of
GCS, Inc. ("GCS"), a California-based closely held distributor of heavy
equipment primarily marketed to municipal and state government agencies
F-16
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
responsible for highway maintenance. The acquisition was consummated for
approximately $1,655,000 in cash. The acquisition was accounted for as a
F-17
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
purchase and resulted in goodwill of approximately $400,000 which is included in
intangible and other long-term assets in the accompanying consolidated financial
statements and is being amortized on the straight-line basis over 20 years. Pro
forma financial information relating to this acquisition has not been provided
because its effect is immaterial. The results of operations of the GCS stores
have been included in the consolidated results of operations of the Company from
the effective date of the acquisition.
On January 17, 1997, the Company acquired the operating assets of Sahlberg
Equipment, Inc. ("Sahlberg"), a four-store Northwest distributor of noncompeting
lines of equipment with facilities in Kent, Washington; Portland, Oregon;
Spokane, Washington; and Anchorage, Alaska. The purchase price for the assets of
Sahlberg was approximately $5,290,000. The acquisition has been accounted for as
a purchase. The results of Sahlberg have been included in the consolidated
results of operations of the Company from the effective date of the acquisition.
The majority of the Sahlberg purchase price was financed through a loan
agreement with Case Credit Corporation ("Case Credit"). Under the loan
agreement, the Company obtained two term loans from Case Credit in the amounts
of $3,844,000 for equipment inventory (the "Equipment Note") and $1,422,000 for
parts inventories and fixed assets (the "Parts Note"), respectively. Both term
loans bear interest at 9.25% which is payable monthly in arrears. The Equipment
Note is payable in a single balloon payment on January 17, 1998, provided,
however, that in the event the Company sells any of the items of inventory
securing the note prior to January 17, 1998, the principal portion of the note
represented by such sold equipment becomes due and payable at that time. The
Parts Note is payable in twelve equal monthly installments of principal and
interest beginning February 21, 1997. Both notes are cross-collateralized and
secured by all the assets acquired in the Sahlberg acquisition as well as
certain accounts receivable of the Company. Simultaneous with the closing of the
Sahlberg acquisition, the Company entered into sublease agreements for each of
the four facilities (all subleases are net leases with payment of insurance,
property taxes, and maintenance costs by the Company).
F-18
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
TECHNOLOGY GROUP ACQUISITIONS
ConnectSoft, Inc. (Old ConnectSoft)
On July 31, 1996, the Company acquired effective control of Old
ConnectSoft under the terms of a written agreement. Pursuant to the terms of the
merger agreement, the Old ConnectSoft shareholders received, on a pro rata
basis, approximately 977,000 unregistered shares of the Company's Series B-1
convertible preferred stock. This preferred stock does not pay dividends, is not
subject to redemption, has a liquidation preference of $3.50 per share over the
Company's common stock and shares voting rights with the Company's common stock
with restrictions on the shareholders' ability to vote the shares until December
31, 1999. Each share of Series B-1 preferred stock is convertible into shares of
the Company's common stock at the shareholders' option on a one-for-one basis.
However, the conversion ratio may be increased to one-for-two or one-for-three
if certain criteria are met by Old ConnectSoft. In the event that the "Combined
Pre-Tax Income", as defined in the merger documents of any of the "Subject
Entities", as defined in the merger document, in any one of the three fiscal
years ending July 31, 1997, 1998 or 1999 equals or exceeds $3,000,000, each
share of preferred stock may be converted into two shares of the Company's
common stock. If the "Combined Pre-Tax Income" equals or exceeds $5,000,000,
each share of preferred stock may be converted into three shares of the
Company's common stock. Additionally, the conversion ratio of the preferred
stock shall be adjusted, such that each share of preferred stock is convertible
into three shares of the Company's common stock, notwithstanding the levels of
"Combined Pre-Tax Income" achieved, if on or before December 31, 1999 (1) the
Company sells the assets or securities of any of the "Subject Entities" for
consideration aggregating $5,000,000 or more, (2) the Company consummates an
initial public offering of any of the "Subject Entities" resulting in gross
proceeds in excess of $10,000,000 or in a market valuation of 100% of the
issuer's common stock equaling or exceeding $50,000,000, or (3) a transaction
occurs with any third party with the result that no shares of the Company's
common stock will be publicly traded on a national securities exchange.
Currently, the conversion ratio remains at one-for-one.
In connection with the acquisition of Old ConnectSoft, the Company
incorporated eXodus, formerly a division of Old ConnectSoft. The net assets
purchased by the Company related to eXodus were sold to eXodus in exchange for a
note payable and shares of eXodus preferred stock issued to the Company.
Minority interest in the common stock of eXodus of approximately 19.6% was
acquired by certain key employees of eXodus in exchange for notes
F-19
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable. To account for the minority interest that was granted to certain
employees of eXodus, the financial
F-20
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
statements include a deferred compensation balance of $50,000 and $500,000 at
July 31, 1997 and 1996 that represents the excess of the estimated value of the
19.6% minority ownership of eXodus over amounts paid by the minority interest at
the date the minority interest was granted. The common stock held by these
minority shareholders contains certain repurchase features. The deferred
compensation will be amortized over the three year term of the repurchase
rights. The minority interest has been charged with the minority interests'
share of eXodus' purchased research and development expense during the year
ended July 31, 1996.
The acquisition of Old ConnectSoft was not closed until August 8, 1996.
However, utilizing the purchase method of accounting, the operating results of
Old ConnectSoft have been included in the consolidated operating results
commencing July 31, 1996 because the Company assumed effective control of Old
ConnectSoft under the terms of a written agreement as of that date. July 31,
1996 was also the date of the Old ConnectSoft shareholders' meeting at which the
merger was approved. The purchase price plus direct costs of acquisition have
been allocated to the assets acquired and the liabilities assumed based on
management's estimates and a valuation of the Company's preferred stock issued
and the assets and liabilities obtained. Issuance of the Company's preferred
stock to the Old ConnectSoft shareholders did not occur until after July 31,
1996.
The convertible preferred stock has been recorded at its fair value as
determined by independent appraisal at May 1, 1996 as the acquisition was
announced to the public proximate to this date. The valuation technique utilized
has considered that the conversion ratio increases based on the earnings of the
"Subject Entities" or other future events. Accordingly, the full acquisition
cost has been determined based on the value of 2,187,000 shares of common stock.
The purchase price has been allocated to the net assets acquired, including
certain intangible assets such as purchased computer software, covenant not to
compete, goodwill and research and development in process.
Summary of assets acquired, liabilities assumed and purchase price paid:
Value of preferred stock............................ $ 6,132,000
Costs of acquisition................................ 1,352,000
Liabilities assumed................................. 10,861,000
-------------
$ 18,345,000
============================================================================
F-21
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
The costs allocated to each of ConnectSoft's assets and liabilities at the
date of acquisition:
Accounts receivable .................................. $ 122,000
Prepaid and other current assets ..................... 406,000
Intangible assets:
Software technology - completed .................... 2,484,000
Software technology - in progress (charged to
research and development expense) ............... 10,033,000
Software license (Note 6) .......................... 800,000
Other identifiable intangibles and goodwill ........ 730,000
Property and equipment ............................... 1,847,000
Other long-term assets ............................... 92,000
Deferred tax asset ................................... 1,831,000
Accounts payable and accrued liabilities ............. (3,602,000)
Debt and capital lease obligations ................... (7,259,000)
------------
$ 7,484,000
================================================================================
In connection with the purchase of Old ConnectSoft, the Company entered
into an agreement with a creditor of Old ConnectSoft whereby the Company
purchased from the creditor a note payable due from Old ConnectSoft for cash and
a $1,500,000 promissory note payable due on April 30, 1999. This creditor was
also a shareholder of Old ConnectSoft and, accordingly, received the Company's
preferred stock as consideration for its shares of Old ConnectSoft. As part of
this agreement, the former creditor granted to the Company an irrevocable right
and option to purchase all or any portion of the Company's securities owned by
the creditor during the period December 31, 1996 to December 31, 1999. These
shares will be purchased at the highest closing price during the 30 days prior
to date of exercise. If the Company exercises its option, the creditor shall
receive at a minimum $4,000,000 from the Company irrespective of whether or not
the purchase price payable for these shares based on the exercise price shall
equal $4,000,000. If the net proceeds are greater than $4,000,000, the first
$1,000,000 greater than $4,000,000 shall be applied to reduce the then
outstanding principal amount of the note payable to the creditor, and to the
extent such note payable shall have then been fully paid, any remaining amounts
shall be allocated 50% to the Company and 50% to the creditor.
F-22
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
InterGlobe
Effective September 20, 1996, the Company acquired all of the outstanding
stock of InterGlobe Networks, Inc. ("InterGlobe"), a private company providing
engineering, design and consulting services for users and providers of
telecommunications facilities on the Internet and other media. The shareholders
of InterGlobe exchanged their shares for $400,000 and 800,000 unregistered
shares of the Company's common stock. The acquisition was accounted for by the
purchase method. Accordingly, the results of operations of InterGlobe have been
included with the results of operations of the Company for periods subsequent to
the date of acquisition.
A summary of assets acquired, liabilities assumed and purchase price paid
is as follows:
Cash paid ..................................... $ 400,000
Value of common stock ......................... 3,445,000
Costs of acquisition .......................... 40,000
Liabilities assumed ........................... 310,000
----------
COST OF ASSETS ACQUIRED ....................... $4,195,000
==========
The allocation of the cost of the assets acquired to each of InterGlobe's
assets and liabilities at the date of the acquisition, as determined in
accordance with the purchase method of accounting, is presented in the table
below:
Cash ............................................. $ 277,000
Accounts receivable .............................. 242,000
Prepaid and other current assets ................. 7,000
Intangible assets ................................ 3,589,000
Property and equipment ........................... 80,000
Accounts payable and accrued liabilities ......... (310,000)
-----------
NET ASSETS ACQUIRED .............................. $ 3,885,000
===========
Additionally, options were granted to certain employees to purchase up to
an additional 800,000 shares of the Company's common stock upon the achievement
of certain Pre-tax Income Goals (as defined) as part of their employment
agreements. Pro forma financial information has not been provided relating to
the acquisition of InterGlobe because the effect is immaterial.
F-23
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
Seattle Online
On November 8, 1996, a newly formed, wholly owned subsidiary of the
Company, Seattle Online Acquisition Corp. ("SOL") acquired the assets of Seattle
Online, Inc. (the "Seller"), a privately held company engaged in providing a
local internet service in the Pacific Northwest.
The assets of the Seller were exchanged for $147,000 in cash, 16,000
shares of the Company's unregistered common stock, warrants for the purchase of
28,333 shares of stock at an exercise price of $6.00 per share and the
assumption of certain liabilities. The acquisition was accounted for by the
purchase method. Accordingly, the results of operations of SOL have been
included with the results of operations of the Company for periods subsequent to
the date of acquisition.
A summary of the purchase price paid is as follows:
Cash paid .............................................. $147,000
Value of common stock .................................. 101,000
Value of warrants issued ............................... 142,000
Liabilities assumed .................................... 119,000
--------
COST OF ASSETS ACQUIRED ................................ $509,000
========
The allocation of the purchase price of each of SOL's assets and
liabilities at the date of the acquisition, as determined in accordance with the
purchase method of accounting, is presented in the table below:
Accounts receivable ................................ $ 18,000
Property and equipment ............................. 27,000
Other assets ....................................... 19,000
Intangible assets .................................. 445,000
Accounts payable and accrued liabilities ........... (69,000)
Note payable ....................................... (50,000)
---------
NET ASSETS ACQUIRED ................................ $ 390,000
=========
Additionally, warrants were granted to the principal stockholder of
Seattle Online, Inc. to purchase up to an additional 305,000 shares of the
Company's common stock in connection with employment agreements. The options
vest and become exercisable upon the achievement of certain Pre-tax Income
F-24
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
Goals (as defined) pursuant to an employment agreement. Pro forma financial
information has not been provided relating to the acquisition of SOL because the
effect is immaterial.
TechStar
Effective December 11, 1996 the Company acquired all of the outstanding
stock of Broadcast Tower Sites, Inc. ("BTS"), a private company providing site
acquisition, zoning, architectural, engineering and consulting services to the
wireless communications industry. The shareholders of BTS exchanged their shares
for $780,000 in cash, 507,246 unregistered shares of the Company's common stock
and three promissory notes aggregating $600,000, bearing interest at the
Citibank, N.A. prime rate (currently 8.50%) and payable in installments of
$100,000, $200,000 and $300,000 on each of November 30, 1997, 1998 and 1999,
respectively.
The acquisition was accounted for by the purchase method. Accordingly, the
results of operations of BTS have been included with the results of operations
of the Company for periods subsequent to the date of acquisition.
Subsequent to acquisition, the Company changed the name of BTS to TechStar
Communications, Inc. ("TechStar").
A summary of the purchase price paid is as follows:
Cash paid ..................................... $ 780,000
Value of common stock ......................... 2,891,000
Promissory Notes given ........................ 600,000
Costs of acquisition .......................... 155,000
Liabilities assumed ........................... 941,000
----------
COST OF ASSETS ACQUIRED ....................... $5,367,000
==========
F-25
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
The allocation of purchase price to each of TechStar's assets and
liabilities at the date of acquisition, as determined in accordance with the
purchase method of accounting is presented in the table below:
Cash ............................................. $ 74,000
Accounts receivable .............................. 1,150,000
Intangible assets ................................ 4,079,000
Property and equipment ........................... 50,000
Other assets ..................................... 14,000
Accounts payable and accrued liabilities ......... (941,000)
-----------
NET ASSETS ACQUIRED .............................. $ 4,426,000
===========
The intangible assets acquired are being amortized using the straight-line
method over 25 years.
Pro forma financial information has not been provided relating to the
acquisition of BTS because the effect is immaterial. As discussed in Note 18, in
August, 1997 the Company acquired 58% of the outstanding common stock of IDF
International, Inc. as a result of its merger of TechStar into IDF.
F-26
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
Pro Forma
The following unaudited pro forma summary combines the consolidated
results of operations as if Old ConnectSoft (1995 and 1996), the factory-owned
stores of Case (1996 and 1995) and Sahlberg (1997 results for 1996 were not made
available to the Company) had been acquired as of the beginning of the periods
presented, including the impact of certain adjustments.
YEAR ENDED JULY 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
Net sales ..................... $ 164,806,000 $ 121,820,000 $ 110,231,000
Net loss ...................... $ (28,338,000) $ (9,621,000) $ (11,860,000)
Loss per share ................ $ (2.86) $ (1.66) $ (2.07)
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisitions had been in effect for the entire
periods presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved from
combined operations.
4. INVENTORIES
Inventories consist of the following:
JULY 31,
-------------------------------
1997 1996
----------- -----------
Parts .................................. $ 8,159,000 $ 6,320,000
Equipment new and used ................. 75,211,000 59,377,000
----------- -----------
$83,370,000 $65,697,000
=========== ===========
At July 31, 1997 and 1996, approximately $18,452,000 and $12,079,000,
respectively, of equipment was being held for rent and, in accordance with
standard industry practice, is included in new and used equipment inventory.
Such equipment is generally being depreciated at an amount equal to 80% of the
rental payments received.
F-27
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JULY 31,
-------------------------------
1997 1996
------------ ------------
Machinery and equipment .................... $ 2,647,000 $ 2,092,000
Furniture and office equipment ............. 2,490,000 1,925,000
Computer equipment ......................... 2,277,000 2,328,000
Land ....................................... 840,000 840,000
Building and leasehold improvements ........ 3,815,000 3,042,000
Vehicles ................................... 1,095,000 892,000
------------ ------------
13,164,000 11,119,000
Less: Accumulated depreciation ............ (3,634,000) (2,241,000)
------------ ------------
$ 9,530,000 $ 8,878,000
============ ============
6. LICENSE AGREEMENT
Effective May 4, 1996 and in connection with the acquisition of Old
ConnectSoft (Note 3), the Company entered into a software licensing agreement
("Prologue License") for technology to be utilized in a software product being
developed by the eXodus. The original term of this license agreement was for
three years commencing June 1, 1996. During the year ended July 31, 1997 the
Company paid a total of $750,000 in royalties under said agreement. Royalties
due under this agreement are 15% of the sales price to third parties subject to
a minimum payment due on each sale. Additionally, the Company has sold 100,000
unregistered shares of its common stock for $1,000 to the licensor which were
issued during the year ended July 31, 1997. The estimated value of the shares
was $350,000. Of the $800,000 cost associated with the license, $262,000 was
expensed as research and development during fiscal 1996. The remaining balance
was expensed in 1997. A total of $450,000 was expensed as royalties paid to
Prologue. The remaining $88,000 was expensed as an impairment loss.
F-28
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LICENSE AGREEMENT (CONTINUED)
In August 1997, the Company, eXodus and Prologue entered into a waiver and
amendment agreement under which an alleged default by Exodus under the Prologue
License was waived and certain amendments were made to the Prologue License. The
most significant of these amendments provide that (i) the Prologue License is a
non-exclusive license, (ii) the term of the Prologue License will expire on May
31, 1998, subject to earlier termination if certain proposed expanded working
relationships with Prologue are not consummated by December 31, 1997, and (iii)
if Prologue receives a license from Microsoft to market WINTIMES-TM- multi-user
software to support WINDOWSNT in 4.0 version, the Prologue License will be
expanded to include such upgraded version. Microsoft announced in September 1997
that only its own Windows T share multi-user client/server protocol and Citrix
Systems' ICA
application server software protocol will be supported in the initial
releases of Microsoft's future Windows NT 4.0 and 5.0 "Hydra" multi-user
operating system products. Alternative multi-user and application server
software protocols belonging to companies other than Microsoft and Citrix will
not be presently considered for Windows NT 4.0 and Windows NT 5.0 releases.
As a result of this adverse market development, the Company determined that the
value of capitalized software cost and goodwill had been impaired and,
consequently recognized an impairment loss of $2,165,000. This amount has been
included in other operating expenses in the accompanying statement of
operations.
7. BORROWINGS
Borrowings consist of the following:
JULY 31,
---------------------------
1997 1996
----------- -----------
Borrowings under floor financing lines ......... $55,490,000 $54,364,000
Line of credit with bank ....................... 6,849,000 2,927,000
Term and mortgage notes payable ................ 6,766,000 3,201,000
Other third party borrowings ................... 1,592,000 1,500,000
----------- -----------
Total borrowings ........................ 70,697,000 61,992,000
Less: Current portions:
Borrowings under floor financing lines ...... 55,490,000 54,364,000
Line of credit with bank .................... 6,849,000 --
F-29
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term and mortgage notes payable ............. 4,902,000 --
Other third party borrowings ................ -- 4,660,000
----------- -----------
Long term borrowings .................... $ 3,456,000 $ 2,968,000
=========== ===========
Scheduled principal payments of all borrowings are as follows:
1998 ......................................................... $ 67,241,000
1999 .......................................................... 1,842,000
2000 .......................................................... 292,000
2001 .......................................................... 301,000
2002 .......................................................... 301,000
Thereafter......................................................... 720,000
------------
$ 70,697,000
============
7. BORROWINGS (CONTINUED)
FLOOR FINANCING LINES
Western has an inventory floor financing line with Case Credit Corporation, the
financing operation of Case Corporation, to purchase Case inventory and with
other finance companies affiliated with other equipment manufacturers. The terms
of these agreements provide for a four-month to twelve-month interest free term
followed by a term during which interest is charged at rates ranging from prime
(8.50% at July 31, 1997) or prime plus 2% (10.50% at July 31, 1997). Principal
payments are generally due at the earlier of sale of the equipment or twelve to
forty-eight months from the invoice date. At July 31, 1997 there was
approximately $34,633,000 outstanding under floor financing arrangements.
Western also has a credit facility with Seafirst Bank to provide up to
$22,000,000 for the purchase of new and used equipment held for sale as well as
equipment held for rental. The credit line calls for monthly interest payments
at prime (8.50% at July 31, 1997). Principal payments are generally due in
periodic installments over terms ranging from twelve months to twenty-four
months from the borrowing date. At July 31, 1997, approximately $20,857,000 was
outstanding under this facility. This credit facility is subject to review and
expires on July 1, 1998.
7. BORROWINGS
F-30
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June, 1997 Western obtained a $75,000,000 inventory flooring and operating
line of credit through Deutsche Financial Services ("DFS"). The DFS credit
facility is a three year, floating rate facility based on prime with rates
between .50% under prime to 1.00% over prime depending upon the amount of total
borrowing under the facility. Amounts may be advanced against Western's accounts
receivable, and inventories. Interest payments on the outstanding balances are
due monthly.
There were no amounts outstanding as of July 31, 1997 under this facility.
OTHER BORROWINGS
Western entered into various term notes with Case for the purchase of used
equipment, parts, shop tools, furniture and fixtures and accounts receivable.
The terms of these notes range from 6 to 24 months, provide for interest charges
at various rates up to prime plus 2% and are collateralized by the related
equipment, parts and fixed assets. As of July 31, 1997 and 1996, approximately
$4,082,000 and $963,000, respectively was outstanding under these notes. In
March 1996, Western consummated an agreement with an institutional lender for a
conventional mortgage on the property in the amount of
7. BORROWINGS (CONTINUED)
$1,330,000, secured by real estate. The agreement calls for principal and
interest payments over a seven year term using a fifteen year amortization
period. The note cannot be prepaid during the first two years of its term.
During fiscal 1996, the Company obtained a $10,000,000 secured demand line
of credit from a commercial bank. This line is secured by the Company's
portfolio of cash and marketable securities held by the bank. In May, 1997, the
Company negotiated an advised line of credit with another lender on similar
terms. On July 31, 1997 approximately $6,849,000 was outstanding under this line
of credit, the principal of which bears interest at LIBOR plus 1.25%. The loan
is due and payable on October 1, 1998. On October 31, 1997, the Company paid the
total balance outstanding on this line of $9,998,810. In addition, the Company
paid off the $4,411,000 related to the standby letter of credit. Simultaneously
the Company entered into a new agreement with the same lender for a credit
facility of up to $2,000,000. The facility is secured by marketable debt
securities, bears interest at a rate of LIBOR plus 1.125% (currently 6.9%) and
is due on October 1, 1998.
8. INCOME TAXES
F-31
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision (benefit) for income taxes from continuing operations comprises
the following:
YEAR ENDED JULY 31,
------------------------------------------------
1997 1996 1995
----------- ----------- ---------
Current:
Federal .............. $(1,884,000) $ 1,429,000 $ 918,000
State ................ 225,000 242,000 60,000
----------- ----------- ---------
................... (1,659,000) 1,671,000 978,000
----------- ----------- ---------
Deferred:
Federal .............. 33,000 (779,000) (252,000)
State ................ (43,000) (2,000) (15,000)
----------- ----------- ---------
(10,000) (781,000) (267,000)
----------- ----------- ---------
$(1,669,000) $ 890,000 $ 711,000
=========== =========== =========
8. INCOME TAXES (CONTINUED)
The principal reasons for the variation from the customary relationship between
income taxes at the statutory federal rate and that shown in the consolidated
statement of income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate ................... $(8,875,000) $(2,828,000) $ 677,000
Valuation allowance ................................. 7,656,000 -- --
State income taxes, net of federal income tax benefit 181,000 82,000 74,000
Purchased research and development .................. 3,532,000
Purchase accounting (313,000) -- --
Other ............................................... (318,000) 104,000 (40,000)
----------- ----------- ---------
$(1,669,000) $ 890,000 $ 711,000
=========== =========== =========
</TABLE>
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows:
F-32
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
JULY 31,
------------------------------
1997 1996
------------ -----------
Depreciation and amortization ............... $ (5,000) $ (587,000)
Valuation allowance ......................... (8,156,000) (500,000)
Deferred income ............................. (170,000) (117,000)
Other ....................................... (234,000)
------------ -----------
Gross deferred tax liabilities .............. (8,565,000) (1,204,000)
------------ -----------
Inventory reserve ........................... 401,000 258,000
Bad debt reserve ............................ 180,000 222,000
Accrued vacation and bonuses ................ 128,000 127,000
Other ....................................... 236,000 310,000
Loss carryforwards .......................... 6,541,000 88,000
Loss on Western initial public offering ..... 131,000 131,000
Stock options ............................... 782,000 1,127,000
Operating lease ............................. 190,000 194,000
Intangible assets ........................... 529,000 2,105,000
Deferred compensation ....................... 203,000 --
Impairment losses ........................... 2,111,000 --
Legal Settlement ............................ 501,000 --
------------ -----------
Gross Deferred Tax Assets.................... 11,933,000 4,562,000
------------ -----------
$ 3,368,000 $ 3,358,000
============ ===========
At July 31, 1997, the Company had federal income tax loss carryforwards of
$19,238,000 which will begin to expire in 2010. Utilization of such net
operating losses may be subject to annual limitations in the event of a change
in ownership of the Company of more than 50%.
9. SHAREHOLDERS' EQUITY
A total of 976,539 shares of the Company's Series B-1 convertible preferred
stock were issued in September 1996 in connection with the fiscal 1996
acquisition of ConnectSoft, Inc. Such shares have a $3.50 per share liquidation
value and are convertible into a minimum of 976,539 and a maximum of 2,929,617
shares of the Company's common stock pursuant to achieving certain performance
goals and other criteria described in the merger agreement.
F-33
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January of 1997, the Company issued 400,000 shares of Series B-2 preferred
stock in a private placement. Proceeds from the private placement totaled
$10,000,000. The Series B-2 preferred stock carry a $25 per share liquidation
preference over the Company's common stock, and pay a 7% cumulative quarterly
dividend, payable at the Company's option in cash or in additional shares of
Series B-2 preferred stock. The Private Placement Preferred Shares are
convertible by the holders into an aggregate of 1,165,501 shares of common
stock, subject to adjustment, at various times during the three year period
ending January 8, 2000 at prices equal to the lesser of (i) the Closing Date
Average Price of $8.58 per share, (ii) 105% of the Anniversary Average Price
(which Anniversary Average Price shall be the Average Price, defined below) on
the date immediately preceding the first anniversary of the Closing Date), but
only if the Anniversary Average Price is less than the Closing Date Average
Price, or (iii) 82.5% of the Conversion Date Average Price. For purposes of
determining the Private Placement Preferred Shares conversion rate, the Average
Price equals the average daily closing bid price of the Company's Common Stock
as reported on Nasdaq or other national securities exchange for the ten(10)
trading days immediately preceding the date of sale of such Private Placement
Preferred Shares, the anniversary of such sale, or the conversion date, as the
case may be. The Private Placement Preferred Shares are convertible on a
cumulative basis in 33-1/3% increments in 1997, commencing March 9, April 8 and
May 8, respectively. As of July 31, 1997, a total of 280,000 of the preferred
shares had been converted into approximately 2,046,000 common share at prices
ranging from $3.31 to $3.80. All of the remaining 120,000 preferred shares
outstanding at July 31, 1997 were converted into approximately 585,000 shares at
a price of $5.67 in September, 1997.
The discount conversion feature has been accounted for as a dividend to the
preferred shareholders. A total of $2,121,000 has been recognized as a dividend
imputed by this discount conversion feature for the year ended July 31, 1997.
In addition, purchasers of the preferred shares acquired 350,000 five-year
warrants at a purchase price of $.01 per warrant, entitling the holders to
purchase 350,000 shares of Company common stock at $8.58 per share. In the event
of an initial public offering of common stock of the Company's
In May 1997, the Company issued 192,754 shares of common stock valued at
$771,000 as compensation to a director of the Company.
Exodus subsidiary, purchasers of the preferred shares shall have the right to
purchase, for $.01 each, 350,000 five year warrants to purchase up to 350,000
shares of Exodus common stock at an exercise price equal to the initial price
per share offered to the public.
F-34
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 25, 1994, the Company completed a public offering of 920,000 units
at $5.25 per unit, each unit consisting of one share of common stock, $.01 par
value, and one redeemable common stock purchase warrant. Each warrant entitled
the holder to purchase one share of common stock until July 31, 1998, at an
exercise price of $7.50. During fiscal 1996, the exercise period for the 920,000
warrants issued in fiscal 1994 was extended to July 31, 1998. The warrants are
subject to redemption by the Company at a redemption price of $.10 per warrant
under certain circumstances.
During fiscal 1995, Western completed an initial public offering of 1,495,000
shares of common stock at $6.50 per share. The net proceeds of the offering were
approximately $7,801,000.
Prior to the offering, Western issued promissory notes totaling $250,000 (the
"Bridge Loans"), and 38,462 shares of its common stock to certain investors. The
shares were valued at the estimated offering price and recorded as deferred debt
issuance costs. Such costs were written off in June 1995 when the Bridge Loans
were retired using proceeds from the offering. The net proceeds per share from
Western's offering and the Bridge Loans were lower than the Company's per share
basis in Western at the time of the offering. Accordingly, the Company
recognized a $386,000 pretax loss in connection with the transaction during the
year ended July 31, 1995.
Western has been authorized to issue 10,000,000 shares of "blank check"
preferred stock, with respect to which all the conditions and privileges thereof
can be determined solely by action of Western's Board of Directors without
further action of its shareholders. As of July 31, 1997 none were issued and
outstanding.
10. DISCONTINUED OPERATIONS
Pursuant to the terms of an Asset Purchase Agreement, dated as of November 22,
1995, on January 19, 1996 all of the assets of the National O-Ring and Stillman
Seal businesses (the "Manufacturing Business") were sold to, and substantially
all of the liabilities associated with operation of the Manufacturing Business
were assumed by, subsidiaries of Hutchinson Corporation (the "Hutchinson
Transaction").
10. DISCONTINUED OPERATIONS (CONTINUED)
The Purchase Price for the Manufacturing Business was $24,500,000, $20,825,000
of which was paid in cash and the aggregate $3,675,000 balance was paid by
delivery of two 24-month non-interest bearing promissory notes
F-35
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
("the "Notes") issued by Hutchinson. The Notes, which have been discounted for
financial statement presentation by $172,000 and $638,000 at July 31, 1997 and
1996, respectively, are non-interest bearing and guaranteed by Total America,
Inc., the parent corporation of Hutchinson, whose securities are listed on the
New York Stock Exchange. The discounted note balance aggregates $3,503,000 and
$3,198,000 at July 31, 1997 and 1996, respectively.
At the closing of the Hutchinson Transaction, the Company, Hutchinson (as
guarantor) and Robert Rubin, who is the chairman and a director of the Company,
entered into a five-year Non-Competition Agreement in favor of Hutchinson and
its affiliates, pursuant to which Mr. Rubin and the Company agreed not to
compete with the business acquired in the Hutchinson Transaction. Under the
terms of the Non-Competition Agreement, Mr. Rubin will receive payments
aggregating $200,000 over a seven-year period. In addition, Hutchinson engaged
Mr. Rubin as a consultant to provide advisory services relating to the acquired
Manufacturing Business over a seven-year period, for which services Mr. Rubin
will receive payments aggregating $1,000,000.
On January 19, 1996, as a result of the Hutchinson Transaction, Mr. John Shahid,
the former president, chief executive officer and director of the Company and
the Company entered into a Termination Agreement whereby Mr. Shahid resigned as
an officer and director of the Company and each of its subsidiaries in
consideration for the payment of an aggregate of $816,000, representing salary
payments under his Employment Agreement through December 31, 1998, as well as a
bonus payment for fiscal year 1996 in the amount of $90,000. The Termination
Agreement also provides that the Company shall retain Mr. Shahid as a consultant
for a period of two years, commencing April 1, 1996, for which consulting
services he will be paid quarterly an aggregate of $200,000. Benefits under the
termination agreement as well as the two-year consulting agreement were fully
expensed during fiscal 1996. Additionally, the Company recognized $506,000 in
compensation expense resulting from amendments made to its employee stock option
plans (see Note 12). These charges, along with other costs of the Hutchinson
Transaction were included in determining the gain on the sale of the
Manufacturing Business.
10. DISCONTINUED OPERATIONS (CONTINUED)
Details of this transaction are as follows:
F-36
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales price ............................................... $ 23,862,000
Basis of net assets sold .................................. (9,634,000)
Expenses of sale .......................................... (1,726,000)
------------
Gain on sale before income taxes .......................... 12,502,000
Income tax provision ...................................... (5,042,000)
------------
Gain on sale of wholly owned subsidiaries ................. $ 7,460,000
============
Although the results of National O-Ring and Stillman Seal subsidiaries have
previously been reported in the consolidated financial statements, these
subsidiaries were operated as a separate line of business whose products,
activities and class of customers differed from other operations of the Company.
Based upon this determination, the disposal of these two subsidiaries has been
accounted for as discontinued operations and accordingly, their operating
results are segregated in the accompanying statement of operations.
Results of National O-Ring and Stillman Seal for the prior fiscal year prior to
the disposition and through the date of disposition are as follows:
5-1/2 MONTHS
ENDED YEAR ENDED
JANUARY 19, JULY 31,
1996 1995
----------- -----------
Net sales ................................ $16,928,000 $37,441,000
Costs and expenses ....................... 16,410,000 35,511,000
----------- -----------
Income before taxes ...................... 518,000 1,930,000
Provision for income taxes ............... 203,000 826,000
----------- -----------
Net income ............................... $ 315,000 $ 1,104,000
=========== ===========
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company and Western lease certain facilities and certain computer equipment
and software under noncancelable lease agreements. The building portion of two
of the Western's facility leases qualify under SFAS 13 as "capital leases"
(i.e., an acquisition of an asset and incurrence of a liability).
F-37
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The remaining facility lease agreements have terms ranging from one to five
years. Certain of the facility lease agreements provide for options to renew and
generally require the Company and Western to pay property taxes,
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
insurance, and maintenance and repair costs. Total rent expense under all
operating leases aggregated $1,971,000, $1,100,000 and $733,000 for the fiscal
years 1997, 1996 and 1995, respectively. The computer equipment leases expire in
1999 and meet certain specific criteria to be accounted for as capital leases.
In connection with the acquisition of the original seven stores, Western entered
into a purchase agreement for the Auburn, Washington facility subject to the
completion by Case of certain environmental remediation. In December 1995, after
completion of the remediation, Western entered into a sale-leaseback transaction
with an unrelated party regarding the Auburn facility which resulted in no gain
or loss to Western. The term of the lease is 20 years at an initial annual rate
of $204,000. In addition to base rent, Western is responsible for the payment of
all related taxes and other assessments, utilities, insurance and repairs with
respect to the leased real property during the term of the lease. In accordance
with SFAS 13, the building portion of the lease is being accounted for as a
capital lease while the land portion of the lease qualifies for treatment as an
operating lease.
Assets recorded under capital leases are as follows:
JULY 31,
----------------------------------------
1997 1996 1995
----------- ----------- ---------
Capitalized asset value ............. $ 3,836,000 $ 3,668,000 $ 170,000
Less: Accumulated amortization ..... (448,000) (287,000) (54,000)
----------- ----------- ---------
$ 3,388,000 $ 3,381,000 $ 116,000
=========== =========== =========
F-38
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under all noncancelable leases as of July 31,
1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
---------- -----------
<C> <C> <C>
1998 .................................................................. $ 941,000 $ 1,931,000
1999 .................................................................. 1,388,000 1,407,000
2000 .................................................................. 1,068,000 1,257,000
2001 .................................................................. 280,000 830,000
2002 .................................................................. 307,000 414,000
Thereafter ............................................................ 5,696,000 4,507,000
---------- -----------
Total annual lease payments ........................................... 9,680,000 $10,346,000
===========
Less: Amount representing interest with imputed rates from 6% to 16.5% 5,242,000
-----------
Present value of minimum lease payments ............................... 4,438,000
Less: Current portion ................................................ 412,000
-----------
Long-term portion ..................................................... $4,026,000
===========
</TABLE>
LEGAL PROCEEDINGS
Except as set forth below, there are no pending material legal proceeds in which
the Company or any of its subsidiaries is a party, or to which any of their
respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In September 1997, an action was commenced by Prudential Securities Incorporated
("Prudential") in the United States District Court for the Western District of
Washington seeking an investment banking fee of approximately $550,000 in
connection with the Company's acquisition of Old ConnectSoft. The Company
believes that, although Prudential had originally been engaged by Old
ConnectSoft as an investment banker, Prudential did not
F-39
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directly or indirectly introduce the Company to Old ConnectSoft and had
abandoned efforts to finance, or otherwise provide investment banking services
to Old ConnectSoft well prior to the Company's involvement with Old ConnectSoft.
Accordingly, the Company does not believe that Prudential is entitled to any
fee, and will vigorously defend any such action and assert against Prudential
what it believes are meritorious counterclaims on behalf of Old ConnectSoft.
F-40
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS
EMPLOYEE STOCK BONUS PLAN (THE "TRANSFER PLAN")
In March 1991, the Company granted incentive options under the Transfer Plan to
purchase an aggregate of 38,496 shares of common stock at purchase prices of
$1.63 and $6.50 per share. During fiscal 1996, 23,558 options were exercised
under the Transfer Plan. No options were exercised during fiscal 1995. All
options granted under this plan have been exercised.
THE 1991 EMPLOYEE INCENTIVE STOCK OPTION PLAN (THE "1991 STOCK OPTION
PLAN")
Key employees of the Company can receive incentive options to purchase an
aggregate of 750,000 shares of common stock at initial exercise prices equal to
100% of the market price per share of the Company's common stock on the date of
grant. The 1991 Stock Option Plan was approved by the Board of Directors and
shareholders in June 1991 and became effective from May 21, 1991. In the fiscal
year ending July 31, 1997, 126,550 options were granted to the principal
shareholder under this plan.
STOCK OPTION BONUS PLAN (THE "STOCK BONUS PLAN")
The Stock Bonus Plan was established in October 1991, and granted certain key
employees non-qualified options to acquire 171,000 shares of stock, which
options were only exercisable in the event that the Company realized certain
targeted annual earnings in fiscal years 1992 to 1994. The Company did not meet
its annual earnings target in 1992; however, it met its annual earnings targets
in 1993 and 1994 and 114,000 options were granted at exercise prices equal to
the market price at the date of grant. During 1997 and 1996, 14,375 and 99,625
options were exercised, respectively, under the Stock Bonus Plan.
AMENDMENTS TO THE PLANS
On May 5, 1995, the Company's Board of Directors approved the re-pricing of
options outstanding under all three plans. With the exception of the $1.63
options under the Transfer Plan, all outstanding options were repriced to
$3.125, which was the closing market price on May 5, 1995.
In connection with the Hutchinson Transaction described in Note 10, the Company
amended the Transfer Plan, 1991 Stock Option Plan and the Stock Bonus Plan by
accelerating the vesting period and extending the exercise term for all options
under these plans. The amendment was subject to the consummation of the
Hutchinson Transaction and affected 761,008 options
F-41
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (CONTINUED)
outstanding on the closing date. The difference between the fair market
price on the date of closing and the respective exercise prices applied to the
options totaled $506,000 which was included as an expense in determining the net
gain on Hutchinson Transaction.
1996 EMPLOYEE STOCK OPTION PLAN (THE "1996 PLAN")
In April 1996, the Company's Board of Directors authorized and approved the
creation of the 1996 Plan for which two million shares of the Company's common
stock has been reserved. Concurrent with the 1996 Plan's adoption, options to
acquire 800,000 shares at an exercise price of $3.76 per share were granted to
the Company's principal shareholder and management. In May 1996, options to
acquire an additional 250,000 shares at an exercise price of $5.25 were granted
to two other employees. All exercise prices represented the fair market value of
the Company's common stock on the date of grant. Options for 100,000 shares
granted at $5.25 have been canceled and options for 126,550 shares issued to the
principal shareholder at an exercise price of $3.78 have been canceled.
The 1996 Plan as originally adopted required shareholder approval which had not
been obtained by the end of the fiscal year. On July 30, 1996, the Board amended
the 1996 Plan so that shareholder approval was not required. The difference
between the fair market value on the date of the amendment and the respective
exercise prices applied to the options was recognized as compensation expense
based on the options' vesting schedule. This resulted in a fiscal 1996 expense
of approximately $1,671,000 and $293,000 of deferred compensation to be
recognized over the next two fiscal years.
During the year ended July 31, 1997, a total of 605,000 options were granted to
employees under the 1996 Plan at prices ranging from $4.375 to $5.25. All
exercise prices represented the fair market value of the Company's common stock
on the date of grant. These options generally vest one third upon issuance and
one third upon the first and second anniversary date of the issuance. The life
of the options issued under the 1996 plan is five years from the date of the
grant.
OTHER OPTIONS AND WARRANTS GRANTED
Prior to fiscal 1996, the Company granted warrants and options to certain
consultants of the Company in consideration for services rendered to the
Company. Of these, warrants and options for 522,500 shares were outstanding at
July 31, 1997 with exercise prices ranging from $3.13-$7.00. During fiscal 1996,
options for 100,000 shares with an exercise price of $5.25 were
F-42
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
granted to the president of one of the Company's subsidiaries. Of these options,
all were unexercised and 50,000 were vested at July 31, 1997.
12. STOCK OPTION PLANS (CONTINUED)
Pursuant to the acquisition of Connectsoft Inc., the Company granted 300,000
options at a price of $6.625. At July 31, 1997, a total of 130,200 of these
options remain outstanding. The decrease is due to the cancellation of 169,800
options.
For the year ended July 31, 1997, the Company issued 70,000 options to
non-employees resulting in a $271,000 charge to operations representing their
estimated fair value. As discussed in Note 18, 150,000 warrants valued at
$300,000 were issued subsequent to year end in connection with a settlement and
charged to other operating expenses.
WESTERN STOCK OPTION PLAN
In March 1995, the Company, as the sole shareholder of Western, approved
Western's 1995 Stock Option Plan, as previously adopted by the Board of
Directors (the "Plan"), under which key employees, officers, directors and
consultants of Western can receive incentive stock options and non-qualified
stock options to purchase up to an aggregate of 300,000 shares of common stock.
In December 1995, the shareholders amended the 1995 stock option plan to
increase the number of shares underlying the plan from 300,000 to 850,000
shares. In December 1996 the stockholders amended the 1985 stock option plan to
increase the number of shares underlying the plan to 1,500,000 shares. The Plan
provides that the exercise price of incentive stock options be at least equal to
100 percent of the fair market value of the common stock on the date of grant.
With respect to non-qualified stock options, the Plan requires that the exercise
price be at least 85 percent of fair value on the date such option is granted.
Upon approval of the Plan, Western's Board of Directors awarded non-qualified
stock options for an aggregate of 200,000 shares, all of which provide for an
exercise price of $6.50 per share. On December 28, 1995, the exercise price of
the options previously granted was lowered to $4.50 per share, the market price
as of that date. All outstanding options are exercisable commencing August 1,
1996 and expire on July 31, 2005.
On August 1, 1996, Western's Board of Directors approved the grant of an
additional 347,000 options to employees, directors and consultants of Western at
an exercise price of $4.375 per share, the market price as of the date of grant.
These options vest ratably over a two-year period commencing August 1, 1996.
EXODUS STOCK OPTION COMMITMENT
In connection with the Company's acquisition of ConnectSoft, employees of eXodus
are entitled to receive stock options, under terms similar to the Company's 1996
Plan, of not less than 15% of the outstanding shares of eXodus immediately prior
to an initial public offering of eXodus.
F-43
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (CONTINUED)
The following table includes option information for the Company's plans:
WEIGHTED
AVERAGE
FAIR VALUE OF
NUMBER OF WEIGHTED OPTION
STOCK OPTION ACTIVITY SHARES EXERCISE PRICE GRANTED
------ -------------- -------
July 31, 1994 445,000 $4.66
Options granted 738,000 3.13
Options exercised --
Options canceled (1,000) 3.13
---------
July 31, 1995 1,182,000 3.70
Options granted 1,150,000 5.01 2.395
Options exercised (527,000) 3.13
Options canceled (100,000) 5.25
---------
July 31, 1996 1,705,000 5.07
Options granted 3,015,000 5.79 3.032
Options exercised (236,000) 3.57
Options canceled (346,000) 5.39
---------
July 31, 1997 4,138,000 5.55
=========
The following table summarizes stock options outstanding and exercisable for the
Company at July 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- -------------------- ------ ---- ----- ------ -----
<C> <C> <C> <C> <C> <C>
$3.13 to 3.78 858,000 3.2 $3.64 808,000 $3.63
$4.38 to 4.75 575,000 3.6 4.47 290,000 4.57
$5.13 to 5.50 1,299,000 6.9 5.22 292,000 5.19
</TABLE>
F-44
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<C> <C> <C> <C> <C> <C>
$6.00 to 8.50 1,406,000 $ 3.9 $ 6.63 $ 301,000 $ 6.41
--------- --------- --------- --------- ---------
$3.13 to 8.50 4,138,000 4.7 5.27 1,691,000 $ 4.56
========= ========= ========= ========= =========
</TABLE>
F-45
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for options
granted to employees and directors. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in fiscal 1997 and fiscal 1996 in accordance with the provisions of SFAS
No. 123, the Company's net loss per share would have changed to the pro forma
amounts indicated below:
YEAR ENDED JULY 31,
--------------------------------------
1997 1996
-------------- ---------------
Net loss, as reported $ (27,257,000) $ (1,835,000)
Net loss, pro forma $ (29,238,000) $ (3,558,000)
Net loss per share, as reported $ (2.75) $ (.32)
Net loss per share, pro forma $ (2.95) $ (.61)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED JULY 31,
------------------------------
1997 1996
------------ ------------
Expected volatility.......................... 0.67 - 0.73 0.61 - 0.62
Risk-free interest rate...................... 6.08% - 6.57% 6.30% - 6.48%
Expected life of options in years............ 5.0 5.0
Expected dividend yield...................... 0.00% 0.00%
13. INTANGIBLE ASSETS
Intangible and other assets consist of the following:
JULY 31,
-----------------------------
1997 1996
---------- ----------
Goodwill ............................... $8,104,000 $2,779,000
Capitalized software ................... -- 2,484,000
Noncompete agreement ................... 175,000 695,000
Software license ....................... -- 538,000
Other assets ........................... 303,000 132,000
---------- ----------
$8,582,000 $6,628,000
========== ==========
F-46
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INTANGIBLE ASSETS (CONTINUED)
During the year ended July 31, 1997, The Company assessed the carrying value of
the intangible assets within the Technology Group, including the non-compete
agreement and capitalized software for Old ConnectSoft, the goodwill for
InterGlobe, SOL, and the purchased technology, goodwill and license agreement
for eXodus for permanent impairment by evaluating the future undiscounted cash
flows of these assets. Based on changes to the operational focus of Old
ConnectSoft and losses incurred by Old ConnectSoft to date; the subsequent sale
and proposed sale, respectively, of InterGlobe and SOL; and the scaling back of
eXodus operations after the Microsoft announcement (see Note 1), it was
determined that the sum of the expected future cash flows was less than book
value. As a result of this evaluation, the Company recorded a total of
$5,725,000 in impairment losses. The impairment loss has been recorded as other
operating expenses in the consolidated statement of operations.
Goodwill is amortized over lives ranging from 25 to 40 years and the non-compete
agreement is amortized over 2 years.
1 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
The Company paid interest of $4,307,000, $1,877,000 and $1,091,000
during the fiscal years 1997, 1996, and 1995, respectively. The Company paid
$1,621,000, $2,084,000 and $1,575,000 in income taxes during fiscal 1997, 1996
and 1995, respectively.
In September 1994, Western acquired the assets and operations of two stores in
California and Nevada for approximately $557,000 in cash (including $108,000 of
indirect expenses), $4,153,000 in installment notes payable and the assumption
of $5,019,000 in inventory floor plan debt.
In February 1996, Western acquired the assets and operations of two stores in
California for approximately $630,000 in cash, $1,590,000 in installment notes
payable and the assumption of $3,965,000 in inventory floor plan debt. In
addition, a capital lease obligation of $740,000 was incurred related to the
lease of the Sacramento facility.
On July 31, 1996, the Company acquired ConnectSoft in exchange for shares of its
Series B-1 Preferred Stock valued at $6,132,000 and incurred $1,352,000 in
acquisition costs.
A capital lease obligation of $926,000 was incurred in fiscal 1996 when the
Company consummated a sale-leaseback transaction. A note receivable of
$3,037,000 arose due to the sale of the Manufacturing Group in fiscal 1996.
Capital lease obligations of $356,000 were incurred during the year ended July
31, 1997 when the Company entered into various leases for computer hardware and
software.
As detailed in Note 3, the Company obtained term loans and issued common
stock and warrants relating to certain acquisitions.
F-47
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES
The real property and improvements used in connection with the Sacramento
Operations of Western, and upon which the Sacramento Operation is located, were
sold by Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a
Delaware limited liability company the owners of which are Messrs. C. Dean
McLain, the president of Western and a director of Western, and Robert M. Rubin,
the chairman, chief executive officer, a director and principal shareholder of
the Company. Simultaneous with its acquisition of the Sacramento Operation real
property and improvements, MRR leased such real property and improvements to
Western under the terms of a 20 year commercial lease agreement dated March 1,
1996 with Western paying an initial annual rate of $168,000. Under the lease,
such annual rate increases to $192,000 after five years and is subject to fair
market adjustments at the end of ten years. In addition to base rent, the
Company is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 11) while the land portion of the
lease qualifies for treatment as an operating lease.
On February 9, 1996, the Company loaned an aggregate of $450,000 to Diplomat
Corporation ("Diplomat") in connection with Diplomat's acquisition of
BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a
director. Before the BioBottoms, Inc. transaction, Mr. Rubin held approximately
22% of Diplomat's outstanding capital stock. The loan to Diplomat earned
interest at the prime rate plus 2% and was repaid in May 1996.
In connection with the above transaction, Mr. Rubin personally made a
secured loan to Diplomat in the aggregate principal amount of $2,353,100 which
matures in February 1999, and committed to make available a stand-by loan of up
to $300,000 aggregate principal. In consideration for making his loan to
Diplomat and committing to make this stand-by commitment, Mr. Rubin received
shares of Diplomat convertible preferred stock.
Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between the
Company and ERD Waste Corp. ("ERD"), the Company agreed to provide certain
financial accommodation to ERD by making available a $4.4 million standby letter
of credit expiring May 31, 1998 issued by Citibank, N.A. in favor of Chemical
Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the principal
lender to ERD and its subsidiaries, and upon issuance of the Letter of Chase
Bank (formerly Chemical Bank) made available $4.4 million of additional funding
to ERD under ERD's existing lending facility.
F-48
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES (CONTINUED)
The funding was used to refinance certain outstanding indebtedness of
Environmental Services of America, Inc. ("ENSA"), a wholly owned
F-49
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES (CONTINUED)
subsidiary of ERD. Robert M. Rubin, the Chairman and Chief Executive Officer,
and a principal stockholder of the Company is also the Chairman, Chief Executive
Officer, a director and a principal stockholder of ERD, owning approximately
23.0% of the outstanding ERD Common Stock.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in certain machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses in connection with making the Letter of Credit available, as well
as the amount of all interest paid by the Company on drawings under the Letter
of Credit prior to their repayment by ERD.
In September 1996, a subsidiary of ERD which operated a waste facility in Nassau
County, New York was cited by the New York State Department of Environmental
Conservation ("DEC") for violating certain DEC regulations. Such waste facility
had accounted for approximately 13% of ERD's consolidated revenues. The Company
has been advised by ERD that under the terms of a Settlement Agreement reached
with the State of New York in November 1996, all violations alleged by the DEC
have been resolved in consideration for, among other things, ERD's agreement to
voluntarily cease incineration operations at the waste facility on or before
March 31, 1997. Such incineration operations ceased on April 15, 1997.
On November 8, 1996, the Company and ERD amended and restated their agreements
to provide that if and to the extent that the Letter of Credit provided by the
Company is called for payment, ERD will issue to the Company its convertible
note bearing interest at 12% per annum, payable monthly, and payable as to
principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's receipt of
the initial proceeds from any public or private placement of debt or equity
securities of ERD, or (iii) completion of any bank refinancing by ERD, to the
extent of all proceeds available after payment of other secured indebtedness. In
addition, the ERD notes, if issued, will be convertible, at any time at the
option of the Company, into ERD Common Stock at a conversion price equal to
$4.40 per share, or a maximum of 1,000,000 ERD shares if the entire $4.4 million
note is issued and converted into ERD Common Stock. In addition to the
collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
F-50
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES (CONTINUED)
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M. Rubin
agreed to indemnify the Company for all losses, if any, incurred by the Company
as a result of issuance of the Letter of Credit for the benefit of ERD. In
consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial ownership in the outstanding Company Common Stock as of May 30, 1996)
of all losses that the Company may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by the Company
from the sale of ERD capital stock described above.
In February of 1997, the Company loaned $500,000 to ERD Waste Corp. The loan is
secured by a short term note bearing interest at 2% above the prime lending rate
of the Company's commercial bank and a second collateral and security position
on all accounts receivable of ERD subject to the primary collateral position
held by Chase Bank. Principal together with accrued interest is due October 5,
1997.
In September 1997 ERD filed for protection from creditors under Chapter 11 of
federal bankruptcy laws. In October, 1997 Chase bank drew the $4.4 million
available on the standby letter of credit. As a result, the Company recorded a
loss of approximately $5.0 million, related to the February 1997 Note and the
May 1, 1996 letter of credit. Mr. Rubin has personally guaranteed approximately
$1.6 million of the ERD loss.
On June 28, 1996 the Company entered into a credit agreement with Mr. Rubin
pursuant to which Mr. Rubin delivered a demand promissory note for up to
$1,200,000. The note is payable on demand but no later than July 31, 1998. At
July 31, 1997 and 1996, $1,238,000 and $838,000, respectively, was outstanding
on the promissory note.
Mr. Rubin's indebtedness is secured by his pledge of 150,000 shares of company
common stock and his collateral assignment of all payments to him under the
terms of his consulting and non-competition agreements with Hutchinson, which
currently aggregate $1,200,000.
As of July 31, 1997 the Company owns 50,000 shares of common stock of a publicly
traded company that Mr. Rubin serves as a director and holds a minority
interest.
F-51
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OPERATING BUSINESS GROUPS
As described in Note 1, the Company historically has been engaged in two
distinct businesses consisting of the Manufacturing Group and the Distribution
Service Group. During fiscal 1996, as more fully described in Note 3, through
the acquisition of TechStar, Connectsoft, Old ConnectSoft, InterGlobe, eXodus
and SOL, the Company added a Technology Group to its businesses. Total revenue
by segment represents sales to unaffiliated customers. Inter-segment sales are
not material. Operating profit (loss) represents total revenue less operating
expenses. In computing operating profit (loss) none of the following items has
been added or deducted: general corporate expenses, interest expense, income
taxes or extraordinary gains.
Identifiable assets are those assets used in the operations of each industry
segment. Corporate assets primarily consist of cash, investments and certain
prepaid expenses.
As discussed in Note 10, the Manufacturing Business was sold during fiscal 1996.
All operating results of the Manufacturing Business have been included in the
gain on discontinued operations.
The Company has no foreign assets and export sales amount to less than 1% of the
Company's total sales. No material amounts of the Company's sales are dependent
upon a single customer; however, approximately 75% of the Distribution Service
Group's revenues resulted from sales, leasing and servicing of equipment and
parts manufactured by Case.
Summarized financial information by business group for fiscal 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
TECHNOLOGY SERVICE
GROUP GROUP CORPORATE TOTAL
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
1997:
Revenue ..................... $ 6,415,000 $148,130,000 $ -- $ 154,545,000
Operating (loss) profit ..... (14,251,000) 5,182,000 (14,008,000) (23,077,000)
Identifiable assets ......... 11,664,000 107,423,000 25,636,000 144,723,000
Depreciation and amortization 1,373,000 1,264,000 9,000 2,646,000
Capital expenditures ........ 613,000 602,000 7,000 1,222,000
1996:
Revenue ..................... $ -- $106,555,000 $ -- $ 106,555,000
Operating (loss) profit ..... (10,295,000) 5,201,000 (2,087,000) (7,181,000)
Identifiable assets ......... 8,049,000 85,290,000 25,716,000 119,055,000
Depreciation and amortization -- 820,000 71,000 891,000
</TABLE>
F-52
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Capital expenditures ........ -- 695,000 -- 695,000
1995:
Revenue ..................... $ 86,173,000 $ -- $ 86,173,000
Operating profit (loss) ..... 3,983,000 (183,000) 3,800,000
Identifiable assets ......... 66,852,000 425,000 67,277,000
Depreciation and amortization 1,068,000 -- 1,068,000
Capital expenditures ........ 332,000 -- 332,000
</TABLE>
F-53
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. EMPLOYEE SAVINGS PLAN
The Company has a voluntary savings plan pursuant to Section 401(k) of the
Internal Revenue Code, whereby eligible participants may contribute a percentage
of compensation subject to certain limitations. The Company has the option to
make discretionary qualified contributions to the plan, however, no Company
contributions were made for fiscal 1997, 1996 or 1995.
18. SUBSEQUENT EVENTS
During August, 1997 the Company merged TechStar into IDF, pursuant to an
agreement and plan of merger dated July 31, 1997, among the Company, IDF, and an
acquisition subsidiary of IDF (the "IDF Merger Agreement"). Upon consummation of
the transaction, the Company received 6,171,553 shares of IDF common stock,
representing approximately 58% of the fully diluted outstanding IDF common
stock, as a result of which, the Company was deemed to have acquired IDF. Solon
Kandel, Sergio Luciani and Simontov Moskona, the senior executives of TechStar,
received three year options to purchase an aggregate of 856,550 shares of IDF
common stock (the "IDF Options"), representing approximately an additional 8% of
such fully diluted outstanding IDF common stock. In connection with the
transaction, (i) all options granted by the Company under employment agreements
entitling Messrs. Kandel, Luciani and Moskona to purchase an aggregate of
780,000 shares of the Company's common stock, and all additional authorized but
ungranted employee stock options for 120,000 shares were cancelled, (ii) Messrs.
Kandel, Luciani and Moskona tendered their resignations as directors of the
Company, (iii) each of Messrs. Kandel, Luciani and Moskona publicly sold all but
174,900 of their remaining shares of Company stock and utilized $600,000 of the
net proceeds to invest in convertible securities of IDF.
The following unaudited pro forma summary combines the consolidated results of
operations as if IDF had been acquired by the beginning of the periods
presented, including the impact of certain adjustments.
YEAR ENDED JULY 31,
-------------------------------------
1997 1996
------------- -------------
Revenue .......................... $ 165,815,000 $ 118,280,000
Net loss ......................... $ (28,309,000) $ (9,978,000)
Loss per share ................... $ (2.88) $ (1.72)
Messrs. Kandel, Luciani and Moskona are currently the senior executives and
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. Pursuant to such agreements, Messrs. Kandel,
F-54
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Luciani and Moskona are entitled to receive, in addition to their base salaries
and annual bonuses, options to acquire IDF shares which vest based upon IDF and
its consolidating subsidiaries, including TechStar and
F-55
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUBSEQUENT EVENTS (CONTINUED)
Heyden Wegman, achieving all or certain pro-rated portions of annual pre-tax
income targets in each of fiscal years ending July 31, 1998, 1999 and 2000. In
the event that any or all of such IDF Options do not vest, the number of shares
of IDF common stock that would have been issued upon the exercise of such IDF
Options shall be issued to the Company as additional merger consideration.
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer and
Chairman of the Board and a Director of the Company, respectively, are also
principal stockholders and members of the board of directors of IDF. Prior to
the consummation of the transactions contemplated by the IDF Merger Agreement,
(i) Mr. Rubin converted an $800,000 loan previously made to IDF into preferred
stock convertible into 400,000 shares of common stock and (ii) through GV
Capital Inc., an affiliate of Mr. Kaplan, IDF sold $3,000,000 of its five year
notes convertible into IDF common stock at 1.25 per share, including $600,000 of
such notes sold to Messrs. Kandel, Luciani and Moskona. Mr. Kaplan's affiliate
received separate compensation for acting as placement agent in connection with
such private offering of IDF securities.
On September 4, 1997 Connectsoft filed a registration statement with
the Securities and Exchange Commission relating to a proposed underwritten
public offering of common stock of Connectsoft. Such registration statement has
yet to become effective, and there can be no assurances that the proposed
Connectsoft public offering will be consummated or, if consummated, that such
offering terms will provide Connectsoft with sufficient capital to develop its
FreeAgent product.
In August 1997, the Company agreed to pay the former principal shareholder of
Seattle Online, Inc. $1,500,000 and issue five-year warrants to purchase 150,000
shares of common stock exercisable at $6.25 per share and valued at $300,000 in
connection with a settlement of an arbitration proceeding commenced by such
shareholder against the Company in which such stockholder alleged wrongful
termination of his employment and breach of contract. As part of the settlement,
previously issued warrants issued to purchase 305,000 common shares have been
canceled. The amount of $1,800,000 has been recorded in the financial statements
for the year ended July 31, 1997 as other operating expenses.
On September 30, 1997, the Company received a loan in the amount of $500,000
from an unrelated third party. The loan bears interest at 10% and is payable on
demand. The Company subsequently exchanged 250,000 shares of common stock in
full settlement of the debt.
F-56
<PAGE>
SCHEDULE II
AMERICAN UNITED GLOBAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1997, 1996, and 1995 (000's)
<TABLE>
<CAPTION>
Balance at Charges to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Descriptions Period
----------- --------- -------- -------- ------------ ------
ACCOUNTS RECEIVABLES RESERVE:
<S> <C> <C> <C> <C> <C>
Fiscal year ended July 31, 1997 $652 $875 $285 $ (1,005) $807
Fiscal year ended July 31, 1996 370 486 -- (204) 652
Fiscal year ended July 31, 1995 233 215 -- (78) 370
INVENTORY RESERVE:
Fiscal year ended July 31, 1997 1,212 598 -- (213) 1,597
Fiscal year ended July 31, 1996 449 768 -- (5) 1,212
Fiscal year ended July 31, 1995 439 50 -- (40) 449
</TABLE>
S-1
AMERICAN UNITED GLOBAL, INC.
1996 EMPLOYEE STOCK OPTION PLAN
1. PURPOSES
The purposes of the American United Global, Inc. 1996 Employee Stock Option
Plan (the "Plan") are to aid American United Global, Inc. and its "subsidiaries"
or "parents" (as defined under the federal securities laws) (together the
"Company") in attracting and retaining highly capable employees and to enable
selected key employees and consultants or other representatives of the Company
to acquire or increase ownership interest in the Company on a basis that will
encourage them to perform at increasing levels of effectiveness and use their
best efforts to promote the growth and profitability of the Company. Consistent
with these objectives, this Plan authorizes the granting to selected key
employees and consultants of options to acquire shares of the Company's voting
Common Stock, par value $.01 per share (the "Common Stock"), pursuant to the
terms and conditions hereinafter set forth.
Options granted hereunder may be (i) "Incentive Options" (which term, as
used herein, shall mean options that are intended to be "incentive stock
options" within the meaning of Code Section 422), or (ii) "Nonqualified Options"
(which term, as used herein, shall mean options that are not intended to be
Incentive Options).
2. EFFECTIVE DATE
Following approval by the holders of a majority of the outstanding shares
of common stock, this Plan shall become effective on April 25, 1996 (the
"Effective Date").
3. ADMINISTRATION
(a) This Plan shall be administered by a committee (the "Committee")
consisting of not less than two members of the Board of Directors of the Company
(the "Board of Directors"), who are selected by the Board of Directors. If, at
any time, there are less than two members of the Committee, the Board of
Directors shall appoint one or more other members of the Board of Directors to
serve on the Committee. All Committee members shall serve, and may be removed,
at the pleasure of the Board of Directors.
(b) A majority of the members of the Committee (but not less than two)
shall constitute a quorum, and any action taken by a majority of such members
present at any meeting at which a quorum is present, or acts approved in writing
by all such members, shall be the acts of the Committee.
(c) Subject to the other provisions of this Plan, the Committee shall have
full authority to decide the date or dates on which options (the "Options") to
acquire shares of Common Stock will be granted under this Plan (the "Date of
Grant"), to determine whether the Options to be granted shall be Incentive
Options or Nonqualified Options, or a combination of both, to select the persons
to whom the Options will be granted and to determine the number of shares of
Common Stock to be covered by each Option, the price at which such shares may be
purchased upon the exercise of such option (the "Option Exercise Price"), and
other terms and conditions of the Options. In making those determinations, the
Committee shall solicit the recommendations of the President and Chairman of the
Board of the Company and may take into account the proposed optionee's present
and potential contributions to the Company's business and any other factors
which the Committee may deem relevant. Subject to the other provisions of this
Plan, the Committee shall also have full authority to interpret this Plan and
any stock option agreements evidencing Options granted hereunder, to issue rules
for administering this Plan, to change, alter, amend or rescind such rules, and
to make all other determinations necessary or appropriate for the administration
of this Plan. All determinations, interpretations and constructions made by the
Committee pursuant to this Section 3 shall be final and conclusive. No member of
the Board of Directors or the Committee shall be liable for any action,
determination or omission taken or made in good faith with respect to this Plan
or any Option granted hereunder.
4. ELIGIBILITY
<PAGE>
Subject to the provisions of Section 7 below, key employees of the Company
(including officers and directors who are employees) and consultants and other
representatives of the Company shall be eligible to receive Options under this
Plan.
5. OPTION SHARES
(a) The shares subject to Options granted under this Plan shall be shares
of Common Stock and, except as otherwise required or permitted by Subsection
5(b) below, the aggregate number of shares with respect to which Options may be
granted shall not exceed 2,000,000 shares. If an Option expires, terminates or
is otherwise surrendered, in whole or in part, the shares allocable to the
unexercised portion of such Option shall again become available for grants of
Options hereunder. As determined from time to time by the Board of Directors,
the shares available under this Plan for grants of Options may consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock which have been reacquired by the Company or a subsidiary following
original issuance.
(b) The aggregate number of shares of Common Stock as to which Options may
be granted hereunder, as provided in Subsection 5(a) above, the number of shares
covered by each outstanding Option and the Option Exercise Price shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split or other subdivision or
consolidation of shares or other capital adjustment, or the payment of a stock
dividend; PROVIDED, HOWEVER, that any fractional shares resulting from any such
adjustment shall be eliminated.
(c) The aggregate fair market value, determined on the Date of Grant (as
such term is defined in Section 6(a) below), of the shares of stock with respect
to which Incentive Options are exercisable for the first time by an Optionee (as
such term as defined in Section 6 below) during any calendar year (under all
incentive stock option plans of the Company and its subsidiaries) may not exceed
$100,000.
6. TERMS AND CONDITIONS OF OPTIONS
The Committee may, in its discretion, grant to a key employee only
Incentive Options, only Nonqualified Options, or a combination of both, and each
Option granted shall be clearly identified as to its status. Recipients other
than employees of the Company can only receive Nonqualified Options. Each Option
granted pursuant to this Plan shall be evidenced by a stock option agreement
between the Company and the recipient to whom the option is granted (the
"Optionee") in such form or forms as the Committee, from time to time, shall
prescribe, which agreements need not be identical to each other but shall comply
with and be subject to the following terms and conditions:
(a) OPTION EXERCISE PRICE. The Option Exercise Price at which each share of
Common Stock may be purchased pursuant to an Option shall be determined by the
Committee, except that (i) the Option Exercise Price at which each share of
Common Stock may be purchased pursuant to an Incentive Option shall be not less
than 100% of the fair market value for each such share on the Date of Grant of
such Incentive Option and (ii) the Option Exercise Price at which each share of
Common Stock may be purchased pursuant to a Non-Qualified Option shall not be
less than 85% of the fair market value for each share on the Date of Grant of
such Nonqualified Option. Anything contained in this Section 6(a) to the
contrary notwithstanding, in the event that the number of shares of Common Stock
subject to any Option is adjusted pursuant to Section 5(b) above, a
corresponding adjustment shall be made in the Option Exercise Price per share.
(b) DURATION OF OPTIONS. The duration of each Option granted hereunder
shall be determined by the Committee, except that each Nonqualified Option
granted hereunder shall expire and all rights to purchase shares of Common Stock
pursuant thereto shall cease one day before the tenth anniversary of the Date of
Grant of such Option and each Incentive Option granted hereunder shall expire
and all rights to purchase shares of Common Stock pursuant thereto shall cease
one day before the tenth anniversary of the Date of Grant of such Option (in
each case, the "Expiration Date").
(c) VESTING OF OPTIONS. The vesting of each Option granted hereunder shall
be determined by the Committee. Only such vested portions of Options may be
exercised. Anything contained in this Section 6(c) to the contrary
notwithstanding, an Optionee shall become fully (100%) vested in each of his or
her Options upon his or her termination of employment with the Company or any of
its subsidiaries for reasons of death, disability or retirement. The Committee
shall, in its sole discretion, determine whether or not disability or retirement
has occurred.
2
<PAGE>
(d) MERGER, CONSOLIDATION, ETC. In the event the Company shall, pursuant to
action by its Board of Directors, at any time propose to merge into, consolidate
with, or sell or otherwise transfer all or substantially all of its assets to,
another corporation and provision is not made pursuant to the terms of such
transaction for (i) the assumption by the surviving, resulting or acquiring
corporation of outstanding Options, (ii) the substitution therefor of new
options granting reasonably similar rights and privileges, or (iii) the payment
of cash or other consideration in respect thereof, the Committee shall cause
written notice of the proposed transaction to be given to each Optionee not less
than 30 days prior to the announced anticipated effective date of the proposed
transaction, and the Committee shall specify in such notice a date, which date
shall be not less than 10 days prior to the announced anticipated effective date
of the proposed transaction (the "Vesting Date"), upon which Vesting Date each
Optionee's Options shall become fully (100%) vested. Each Optionee shall have
the right to exercise his or her Options to purchase any or all shares then
subject to such Options during the period commencing on the Vesting Date and
ending at 5:00 p.m. on the day which is two (2) days prior to the announced
anticipated effective date of the proposed transaction. If the transaction is
consummated, each Option, to the extent not previously exercised prior to the
effective date of the transaction, shall terminate on such effective date. If
the transaction is abandoned or otherwise not consummated, then to the extent
that any Option not exercised prior to such abandonment shall have vested solely
by operation of this Section 6(d), such vesting shall be annulled and be of no
further force or effect and the vesting period set forth in Section 6(c) above
shall be reinstituted as of the date of such abandonment.
(e) EXERCISE OF OPTIONS. A person entitled to exercise an Option, or any
portion thereof, may exercise it (or such vested portion thereof) in whole at
any time, or in part from time to time, by delivering to the Company at its
principal office, directed to the attention of its Chairman, President or such
other duly elected officer as shall be designated in writing by the Committee to
the Optionee, written notice specifying the number of shares of Common Stock
with respect to which the Option is being exercised, together with payment in
full of the Option Exercise Price for such shares. Such payment shall be made in
cash or by certified check or bank draft to the order of the Company; PROVIDED,
HOWEVER, that the Committee may, in its sole discretion, authorize such payment,
in whole or in part, in any other form, including payment by personal check or
by the exchange of shares of Common Stock of the Company previously acquired by
the person entitled to exercise the Option and having a fair market value on the
date of exercise equal to the price for which the shares of Common Stock may be
purchased pursuant to the Option.
(f) NONTRANSFERABILITY. Options shall not be transferable other than by
will or the laws of descent and distribution and no Option may be exercised by
anyone other than the Optionee; that if the Optionee dies or becomes
incapacitated, the Option may be exercised by his or her estate, legal
representative or beneficiary, as the case may be, subject to all other terms
and conditions contained in this Plan.
(g) TERMINATION OF EMPLOYMENT. The following rules shall apply in the event
that an Optionee is an employee of the Company as regards such Optionee's
termination of employment with the Company:
(i) In the event of an Optionee's termination of employment with the
Company either (1) by the Company for Cause (as defined in any relevant
employment agreement to which Optionee is a party) or for fraud, dishonesty,
habitual drunkenness or drug use, or willful disregard of assigned duties by
such Optionee in the absence of such an agreement, or (2) by the Optionee
voluntarily otherwise than at the end of an employment term under a relevant
employment agreement to which Optionee is a party and without the written
consent of the Company, then the Option shall immediately terminate.
(ii) In the event of the Optionee's termination of employment with the
Company for reason of retirement or under circumstances other than those
specified in subsection (g)(i) immediately above, and for reasons other than
death or disability, the Option shall terminate three months after the date of
such termination of employment or on the Expiration Date, whichever shall first
occur; PROVIDED, HOWEVER, that if the Optionee dies within such 3-month period,
the time period set forth in subsection (g) (iii) immediately below shall apply.
(iii) In the event of the death or disability, of the Optionee while the
Optionee is employed by the Company, the Option shall terminate on the first
anniversary of the Optionee's date of termination of employment, or on the
Expiration Date, whichever shall first occur.
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(iv) Anything contained in this Section 6 to the contrary notwithstanding,
the Option may only be exercised following the Optionee's termination of
employment with the Company for reasons other than death, disability or
retirement if, and to the extent that, the Option was exercisable immediately
prior to such termination of employment.
(v) The Optionee's transfer of employment between American United Global,
Inc. and its "subsidiaries" and "parents" (as defined under the federal
securities laws) shall not constitute a termination of employment and the
Committee shall determine in each case whether an authorized leave of absence
for military service or otherwise shall constitute a termination of employment.
(vi) Termination of the Optionee's employment shall not affect the vesting
schedule of the Optionee's Option.
(h) NO RIGHTS AS STOCKHOLDER OR TO CONTINUED EMPLOYMENT. No Optionee shall
have any rights as a stockholder of the Company with respect to any shares
covered by an Option prior to the date of issuance to such Optionee of the
certificate or certificates for such shares, and neither this Plan nor any
Option granted hereunder shall confer upon an Optionee any right to continuance
of employment by the Company or interferes in any way with the right of the
Company to terminate the employment of such Optionee.
(i) Each stock option agreement shall specify whether the Options granted
thereunder are Incentive Options, Nonqualified Options, or a combination of
both.
7. TEN PERCENT STOCKHOLDERS
The Committee shall not grant an Incentive Option to an individual who
owns, at the time such Incentive Option is granted (directly or by attribution
pursuant to Section 425(d) of the Code), shares of capital stock of the Company
possessing more than 10% of the voting power of all classes of capital stock of
the Company unless, at the time such Incentive Option is granted, the price at
which each share of Common Stock may be purchased pursuant to the Incentive
Option is at least 110% of the fair market value of each such share on the Date
of Grant and such Incentive Option, by its terms, is not exercisable after the
expiration of five years from the Date of Grant.
8. ISSUANCE OF SHARES; RESTRICTIONS
(a) Subject to the conditions and restrictions provided in this Section 8,
the Company shall, within 20 business days after an Option has been duly
exercised in whole or in part, deliver to the person who exercised the Option
one or more certificates, registered in the name of such person, for the number
of shares of Common Stock with respect to which the Option has been exercised.
The Company may legend any stock certificate issued hereunder to reflect any
restrictions provided for in this Section 8.
(b) Unless the shares subject to Options granted under the Plan have been
registered under the Securities Act of 1933, as amended (the "Act") (and, in the
case of any Optionee who may be deemed an "affiliate" of the Company as such
term is defined in Rule 405 under the Act, such shares have been registered
under the Act for resale by the Optionee), or the Company has determined that an
exemption from registration under the Act is available, the Company may require
prior to and as a condition of the issuance of any shares of Common Stock, that
the person exercising an Option hereunder (i) sign such agreements with respect
thereto as the Company may require in any Option Agreement by and between the
Company and the Optionee, and (ii) furnish the Company with a written
representation in a form prescribed by the Committee to the effect that such
person is acquiring such shares solely with a view to investment for his or her
own account and not with a view to the resale or distribution of all or any part
thereof, and that such person will not dispose of any of such shares otherwise
than in accordance with the provisions of Rule 144 under the Act unless and
until either the distribution of such shares is registered under the Act or the
Company is satisfied that an exemption from such registration is available.
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(c) Anything contained herein to the contrary notwithstanding, the Company
shall not be obliged to sell or issue any shares of Common Stock pursuant to the
exercise of an Option granted hereunder unless and until the Company is
satisfied that such sale or issuance complies with all applicable provisions of
the Act and all other laws or regulations by which the Company is bound or to
which the Company or such shares are subject.
9. SUBSTITUTE OPTIONS
Anything contained herein to the contrary notwithstanding, Options may, at
the discretion of the Board of Directors, be granted under this Plan in
substitution for options to purchase shares of capital stock of another
corporation which is merged into, consolidated with, or all or a substantial
portion of the property or stock of which is acquired by, the Company or a
subsidiary. The terms, provisions and benefits to Optionees of such substitute
options shall in all respects be as similar as reasonably practicable to the
terms, provisions and benefits to Optionees of the Options of the other
corporation on the date of substitution, except that such substitute Options
shall provide for the purchase of shares of Common Stock of the Company instead
of shares of such other corporation.
10. TERM OF THE PLAN
Unless the plan has been sooner terminated pursuant to Section 11 below,
this Plan shall terminate on, and no Options shall be granted after, the tenth
anniversary of the Effective Date. The provisions of this Plan, however, shall
continue thereafter to govern all Options theretofore granted, until the
exercise, expiration or cancellation of such Options.
11. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors at any time may terminate this Plan or amend it from
time to time in such respects as it deems desirable; PROVIDED, HOWEVER, that,
without the further approval of the stockholders of the Company, no amendment
shall (i) increase the maximum aggregate number of shares of Common Stock with
respect to which Options may be granted under this Plan, (ii) change the
eligibility provisions of Section 4 hereof, or (iv) create a "modification" of
any Incentive Stock Options previously granted or otherwise modify the Plan with
respect to the granting of Incentive Stock Options, as those terms are defined
under the Code; and PROVIDED, FURTHER, that, subject to the provisions of
Section 6 hereof, no termination of or amendment hereto shall adversely affect
the rights of an Optionee or other person holding an option theretofore granted
hereunder without the consent of such Optionee or other person, as the case may
be.
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FIRST AMENDMENT TO
AMERICAN UNITED GLOBAL, INC.
1996 EMPLOYEE STOCK OPTION PLAN
The AMERICAN UNITED GLOBAL, INC. 1996 EMPLOYEE STOCK OPTION PLAN (the
"Plan"), pursuant to authority granted by the Board of Directors of American
United Global, Inc. (the "Company") and the 1996 Plan Committee of the Company's
Board of Directors, does hereby amend Section 2 of the Plan to the effect that
stockholder approval of the Plan shall not be necessary for the Plan to be
effective, by deleting the existing Section 2 of the Plan in its entirety and
substituting therefor the following language:
"2. EFFECTIVE DATE
This Plan shall become effective on April 25, 1996 (the "Effective
Date")."
IN WITNESS WHEREOF, the Plan is hereby amended as aforesaid as of
the date hereinafter set forth.
DATE: as of July 30, 1996 AMERICAN UNITED GLOBAL, INC.
By:
-----------------------------
Robert M. Rubin, President
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), entered into this __ day
of July 1997 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation
("AUGI"), having its principal offices at 11130 NE 33rd Place, Suite 250,
Bellevue, Washington 98004; IDF INTERNATIONAL, INC., a New York corporation
("IDF") having its office and principal place of business located at 330 West
42nd Street, New York, New York 10036; TECHSTAR ACQUISITION CORP., a Delaware
corporation ("Mergerco"), having its principal offices at 330 West 42nd Street,
New York, New York 10036; and TECHSTAR COMMUNICATIONS, INC., a Delaware
corporation ("TechStar"), having its principal offices at 4340 East West
Highway, Suite 1000, Bethesda, Maryland 20814.
W I T N E S S E T H:
WHEREAS, AUGI is the record and beneficial owner of one hundred percent
(100%) of the issued and outstanding shares of the capital stock of TechStar;
and
WHEREAS, (a) Mergerco, a wholly-owned direct subsidiary of IDF, has been
formed solely for the purpose of merging with TechStar; the effect of which
merger is to enable IDF to acquire all of the issued and outstanding shares of
capital stock of TechStar as at the effective date of the merger (hereinafter,
referred to as the "Stock") pursuant to the merger and for the consideration
hereinafter provided for (the "Merger"); and
WHEREAS, AUGI, the respective Boards of Directors of each of (a) IDF, (b)
TechStar, (c) Mergerco, and (d) AUGI (as the sole stockholder of TechStar), have
all authorized and approved the Merger and the consummation of the other
transactions contemplated by this Agreement, all on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth, the parties hereby covenant and agree
as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:
1.1 "Affiliate". of a specified person means a person who directly
or indirectly through one or more intermediaries controls, is controlled by, or
is under common control with, such specified person;
1.2 "beneficial owner". with respect to any shares means a person
who shall be deemed to be the beneficial owner of such shares (i) which
such person or any of its affiliates or associates (as such term is
defined in Rule 12b-2 promulgated under the Exchange Act) beneficially
owns, directly or indirectly, (ii) which such person or any of its
affiliates or associates has, directly or indirectly, (A) the right to
acquire (whether such right is exercisable immediately or subject only to
the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of consideration rights, exchange
rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding or (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom
such person or any of its affiliates
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or associates or any person with whom such person or any of its affiliates
or associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any such shares;
1.3 "business day". means any day on which the principal offices of
the Securities and Exchange Commission ("SEC") in Washington, D.C. are
open to accept filings, or, in the case of determining a date when any
payment is due, any day on which banks are not required or authorized to
close in the City of New York, New York;
1.4 "IDF Business". shall mean the business of providing
professional engineering and consulting services to state and local
governmental agencies, major corporations, developers and other clients
concentrated primarily in the northeast region of the United States.
1.5 "IDF 8% Debentures". shall mean the $________ (not to exceed
$50,000) of IDF's 8% senior subordinated convertible debentures due 1995,
which are currently convertible into shares of IDF Common Stock at a
conversion price of approximately $.179 per share.
1.6 "TechStar Business". shall mean the business of providing site
acquisition, zoning, architectural and engineering services to the
wireless communications industry.
1.7 "IDF Group" shall mean IDF, its Subsidiaries, including H-W and
(following the Merger) TechStar, and any partnerships in which IDF or any
Subsidiary has an interest, when taken as a whole;
1.8 "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise;
1.9 "Governmental Authority" shall mean any nation or government,
foreign or domestic, and any territory, possession, protectorate,
province, state, county, parish, regional authority, metropolitan
authority, city, town, village, other locality, or other political
subdivision or agency, regulatory body, or other authority, commission,
tribunal, representative or official thereof, and any Person (as such term
is hereinafter defined) exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.
1.10 "Knowledge" means (a) as to TechStar, the actual knowledge of
any of Solon L. Kandel ("Kandel"), Sergio Luciani ("Luciani") and Simantov
Moskona ("Moskona"), together with the knowledge that Kandel, Luciani or
Moskona would have had after making due inquiry of the officers of
TechStar who have responsibility for the subject matter in question and
who report directly to them; and (b) as to IDF, the actual knowledge of
Lembit Kald and Donald Shipley, together with the knowledge that Lembit
Kald or Donald Shipley would have had after making due inquiry of the
officers of IDF
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and H-W who have responsibility for the subject matter in question and who
report directly to them.
1.11 "person" means an individual, corporation, limited liability
company, partnership, limited partnership, syndicate, person (including,
without limitation, a "person" as defined in Section 13(d)(3) of the
Exchange Act), trust, association or entity or government, political
subdivision, agency or instrumentality of a government;
1.12 "Real Estate" means, with respect to the person in question or
any Subsidiary of such person, as applicable, all of the fee or leasehold
ownership right, title and interest of such person, in and to all real
estate and improvements owned or leased by any such person and which is
used by any such person in connection with the operation of its business.
1.13 "Subsidiary" or "Subsidiaries" of any person means any
corporation, partnership, joint venture or other legal entity of which
such person (either above or through or together with any other
subsidiary), owns, directly or indirectly, 50% or more of the stock or
other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity. H-W is a Subsidiary of IDF.
1.14 "Fully-Diluted IDF Equity". shall mean, as at the applicable
date, the sum of (i) all of the shares of IDF capital stock which shall be
issued and outstanding, plus (ii) that number of additional shares of IDF
capital stock which are issuable upon the exercise of all IDF stock options and
warrants which are issued and outstanding (including the TechStar Options) or
upon conversion into common stock of all IDF notes, preferred stock, notes,
debentures, rights or other securities convertible into IDF common stock;
provided, however, that the term "Fully-Diluted IDF Equity" shall not include or
give effect to any shares of IDF capital stock issuable upon the conversion of
any notes or other securities, or upon the exercise of any warrants, issued in
connection with the Merger Financing.
1.15 "H-W". shall mean Hayden/Wegman, Inc., a New York corporation,
and an indirect wholly-owned Subsidiary of IDF.
1.16 "IDF Common Stock". shall mean the 120,000,000 shares of common
stock, $.001 par value per share, of IDF authorized for issuance pursuant to the
Certificate of Incorporation of IDF.
1.17 "Merger Financing". shall mean the sale solely to accredited
investors (as defined in Regulation D under the Securities Act of 1933, as
amended) of additional shares of capital stock and/or subordinated long-term
notes of IDF (which notes shall automatically convert to IDF preferred stock,
once authorized by the IDF shareholders, at the rate of $1.25 per share, subject
to adjustment, and shall be convertible into shares of common stock of IDF
pending such authorization), which shall result in an aggregate amount of not
less than $1.75 million and not more than $2.25 million of gross proceeds to IDF
(inclusive of $250,000 of such securities to be purchased by Kandel, Luciani and
Moskona), all upon such terms and conditions as are set forth in Exhibit A
annexed hereto and made a part hereof, or upon such other terms and conditions
as shall be satisfactory to the respective Boards of Directors of each of IDF,
AUGI and TechStar.
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1.18 "TechStar Option Shares". shall mean the aggregate of 988,327
shares of IDF Common Stock represented by the sum of: (a) the 856,550 shares of
IDF Common Stock issuable upon permitted exercise of certain incentive stock
options (the "TechStar Options") to be issued to Kandel, Luciani and Moskona
pursuant to the TechStar Employment Agreements; and (b) the 131,777 shares of
IDF Common Stock issuable upon permitted exercise of certain TechStar Options
granted to certain key employees of TechStar pursuant to the Side Letter
Agreement annexed hereto as Exhibit G and made a part hereof.
1.19 "TechStar Employment Agreements". shall mean the separate
employment agreements expiring November 30, 2000 among IDF, TechStar and H-W
with each of Messrs. Kandel, Luciani and Moskona, in substantially the form of
Exhibits B-1, B-2 and B-3 annexed hereto.
1.19 "Lien" shall mean any mortgage, deed of trust, trust, pledge,
vendors' or other lien or charge of any kind (including any agreement to give
any of the foregoing), any conditional sale or other title retention agreement,
any lease in the nature of any of the foregoing, any claim, security interest,
assignment, or encumbrance of any kind, any negative lien and the filing of or
agreement to give any financing statement or similar notice of security
interest.
1.20 "Permit" shall mean any license, permit, franchise, clearance,
waiver, certificate, registration, order, authorization, consent, approval,
administrative finding or directive of, or release by any Governmental
Authority, except for such, the failure to have, maintain or continue in force
(including by reason of the Merger), has not and is not expected to have, a
material adverse effect on TechStar or IDF and its properties, assets or
businesses.
2. THE MERGER.
2.1 The Merger.
At the time of the Closing on the Closing Date (as such terms
are hereinafter defined) and in accordance with the provisions of this Agreement
and the applicable provisions of the Delaware General TechStar Law ("Delaware
Law"), Mergerco shall be merged with and into TechStar, with TechStar as the
surviving corporation of the Merger. The Merger shall be in accordance with the
terms and conditions of this Agreement and a certificate of merger in
substantially the form of Exhibit "A" annexed hereto (the "Certificate of
Merger"), with TechStar as the surviving corporation of such Merger (TechStar
being hereinafter sometimes referred to as the "Surviving Corporation").
Thereupon, the separate existence of Mergerco shall cease, and TechStar as the
Surviving Corporation of the Merger, shall continue its corporate existence
under Delaware Law.
2.2 Effectiveness of the Merger. As soon as practicable upon or
after the satisfaction or waiver of the conditions precedent set forth in
Section 7 below, or waiver of such performance by the party or parties for whose
benefit such covenants or agreements are to be performed, Mergerco and TechStar
(if required under Delaware Law) will execute the Certificate of Merger (subject
to such revisions as to form (but not substance) as may be required by the
relevant provisions of Delaware Law), and shall file or cause to be filed such
Certificate of
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Merger with the Secretary of State of Delaware; and the Merger shall become
effective as of the date of the filing of such Certificate of Merger, which
shall occur on the "Closing Date" (as hereinafter defined), and the Closing
shall be deemed to occur as of such Closing Date in accordance with Section 10
hereof.
2.3 Effect of the Merger. Upon the effectiveness of the Merger: (a)
the Surviving Corporation shall own and possess all assets and property of every
kind and description, and every interest therein, wherever located, and all
rights, privileges, immunities, powers, franchises and authority of a public as
well as of a private nature, of each of Mergerco and TechStar (the "Constituent
Corporations"), and all obligations owed to, belonging to or due to each of the
Constituent Corporations, all of which shall be vested in the Surviving
Corporation pursuant to Delaware Law without further act or deed, and (b) the
Surviving Corporation shall be liable for all claims, liabilities and
obligations of the Constituent Corporations, all of which shall become and
remain the obligations of the Surviving Corporation pursuant to Delaware Law
without further act or deed.
2.4 Surviving Corporation. Upon the effectiveness of the Merger, the
Certificate of Incorporation, By-Laws and directors of the Surviving Corporation
shall be identical to those of TechStar as in effect immediately prior to the
effectiveness of the Merger.
2.5 Status and Conversion of Securities. At the Closing Date and
upon the effectiveness of the Merger:
(a) Treasury Stock. Each share of capital stock of TechStar,
if any, held by TechStar as treasury stock immediately prior to the
effectiveness of the Merger shall be canceled and extinguished, and no payment
or issuance of any consideration shall be payable or shall be made in respect
thereof;
(b) Options and Warrants. As of the date of this Agreement
there are, and at the Closing Date there shall be, no options, warrants, rights,
or other agreements to acquire any securities of TechStar, or any securities
directly or indirectly convertible into or exchangeable for or exercisable to
acquire the same, and no agreements to issue or acquire or dispose of any of the
foregoing.
(c) Treatment of Mergerco Common Stock. Each of the one
hundred (100) issued and outstanding shares of common stock of Mergerco, $.01
par value per share (the "Mergerco Common Stock"), all of which shall be owned
by IDF immediately prior to the Closing Date of the Merger, shall, upon the
effectiveness of the Merger, be converted into one (1) share of Common Stock,
$.01 par value per share, of TechStar.
(d) Treatment of TechStar Stock. Each share of the Stock of
TechStar outstanding immediately prior to the effectiveness of the Merger shall
be canceled and extinguished and converted into the right to receive the Merger
Consideration payable pursuant to Section 3 below. Such Merger Consideration
shall be paid and delivered to AUGI, as the sole record and beneficial owner of
the outstanding Stock upon surrender to the Surviving Corporation of the
certificates representing such shares of outstanding Stock (all of which shall
be delivered free and clear of any and all pledges, Liens (as such term is
hereinafter defined), claims, charges, options, calls, encumbrances,
restrictions and assessments whatsoever, except any restrictions which may be
created by operation of state or federal securities laws) at the time
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and place of the Closing as provided in Section 10 below.
2.6 Books and Records. On the Closing Date, all of the stock books,
records and minute books of TechStar, all financial and accounting books and
records of TechStar and, except as may otherwise be agreed by the parties to
this Agreement at the Closing, all referral, client, customer and sales records
of TechStar, shall be the property of the Surviving Corporation.
2.7 Tax Free Reorganization. The parties to this Agreement intend
for the transactions whereby TechStar, as the Surviving Corporation upon
consummation of the Merger, will become a wholly-owned subsidiary of IDF and
AUGI shall receive the Merger Consideration upon consummation of the Merger,
shall be treated as a tax free reorganization within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code").
3. MERGER CONSIDERATION.
3.1 Merger Consideration. On consummation of the Merger, AUGI, as
the record owner of all of the outstanding shares of Stock of TechStar, shall
receive in consideration for the Stock (the "Merger Consideration") that number
of shares of the voting capital stock of IDF as shall represent (a) sixty-six
(66%) percent of the Fully-Diluted IDF Equity immediately after giving effect to
consummation of the the Merger, less (b) the TechStar Option Shares. Based upon
(i) the Fully Diluted IDF Equity outstanding as at the date of this Agreement,
and (ii) assuming the full cash redemption and retirement of all outstanding IDF
8% Debentures as provided in Section 7.4(c) hereof, it is intended that the
aggregate Merger Consideration issuable to AUGI on the Closing Date shall
consist of 6,039,776 shares of IDF Common Stock. Such Merger Consideration shall
be subject to adjustment as provided in Section 3.3 hereof.
3.2 Contemplated IDF Capitalization. Subject to adjustment as
provided in Section 3.3 below, it is anticipated that the pro-forma equity
capital of IDF will be allocated, as follows: (a) 56.7% of the Fully-Diluted IDF
Equity immediately after giving effect to consummation of the the Merger, or
6,039,776 shares of IDF Common Stock will be owned by AUGI, (b) 9.3% of the
Fully-Diluted IDF Equity immediately after giving effect to consummation of the
the Merger, or 988,327 shares of IDF Common Stock, are represented by TechStar
Option Shares, and (c) 34% of the Fully-Diluted IDF Equity immediately after
giving effect to consummation of the the Merger, or 3,620,538 shares of IDF
Common Stock shall be owned of record by existing IDF stockholders or are
issuable upon exercise of stock options held by current IDF stockholders and
option holders.
3.3 Adjustment to Merger Consideration. The aggregate number of
shares of IDF Common Stock constituting the Merger Consideration and the
aggregate number of shares of IDF Common Stock constituting the TechStar Option
Shares shall be subject to adjustment on or after the Closing Date, upon the
occurrence of any of the following:
(a) In the event of issuance of any additional shares of IDF
Common Stock or other Fully-Diluted IDF Equity between the date of this
Agreement and the Closing Date, the 6,039,776 shares of IDF Common Stock and the
988,327 TechStar Option Shares, shall be proportionately increased to such
number of shares as shall represent 56.7% and 9.3%,
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respectively of the Fully-Diluted IDF Equity as at the Closing Date immediately
after consummation of the Merger and after giving effect to (i) the issuance of
such Merger Consideration, and (ii) the potential issuance of TechStar Option
Shares;
(b) In the event of issuance of any additional shares of IDF
Common Stock subsequent to the Closing Date pursuant to the exercise or
conversion of Fully-Diluted IDF Equity outstanding at the Closing Date
(including, without limitation, all shares of IDF Common Stock potentially
issuable upon conversion of remaining IDF 8% Debentures), the shares of IDF
Common Stock representing the Merger Consideration and the TechStar Option
Shares, shall be proportionately increased to such number of shares as shall
represent 56.7% and 9.3%, respectively of the Fully-Diluted IDF Equity as at the
Closing Date immediately after consummation of the Merger and after giving
effect to (i) the exercise or conversion of such Fully-Diluted IDF Equity, (ii)
the issuance of such Merger Consideration and (iii) the potential issuance of
TechStar Option Shares;
(c) In the event that any of the TechStar Options issued
pursuant to the TechStar Employment Agreements shall, following the Closing
Date, terminate or be cancelled without having vested and being exercised, AUGI
shall be entitled to receive, as additional Merger Consideration, that number of
shares of IDF Common Stock which shall be equal to the number of TechStar Option
Shares not issued as a result of the termination or cancellation of such
TechStar Options.
4. REPRESENTATIONS AND WARRANTIES OF AUGI AND TECHSTAR.
Each of TechStar and AUGI hereby jointly and severally represent and
warrant to Mergerco and IDF as follows, it being understood and agreed that
neither IDF nor Mergerco is or will be required to undertake any independent
investigation to determine the truth, accuracy and completeness of the
representations and warranties made by AUGI in this Agreement, and it being
further understood and agreed that the survival of each such representation and
warranty shall be as set forth in Section 12.2(d) of this Agreement:
4.1 Ownership of the Stock.
The number of shares of authorized and outstanding Stock, the
record owner thereof, and the record addresses and social security number or tax
identification number of AUGI, is as set forth on Schedule 4.1 annexed hereto.
AUGI is the legal and beneficial owner of all of the shares of the Stock listed
on Schedule 4.1 hereto, free and clear of all pledges, Liens, claims, charges,
options, calls, encumbrances, restrictions and assessments whatsoever, except
for (i) certain rights of Kandel, Luciani and Moskona under their respective
employment agreements with TechStar, dated as of December 11, 1996 for Luciani
and Moskona and as of May 12, 1997 for Kandel (the "Prior Employment
Agreements") which shall be cancelled and rescinded ab initio as at the Closing
Date of the Merger, or (ii) any restrictions which may be created by operation
of state or federal securities laws (which restrictions are set forth on such
Schedule 4.1). All of the Stock has been duly authorized and validly issued, and
is fully paid and non-assessable and has been issued pursuant to an appropriate
exemption from the registration requirements of the Securities Act and the
various states. TechStar has no treasury stock.
4.2 Valid and Binding Agreement.
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(a) The execution, delivery and performance by AUGI and
TechStar of this Agreement, the Certificate of Merger, the Non-Competition and
Non-Disclosure Agreement (as defined in Section 7.1(g) hereof), and the other
instruments, agreements and written undertakings of AUGI and TechStar, and each
of them, which are executed in connection therewith and to which it or they,
respectively are parties (collectively, the "AUGI Transaction Agreements") and
the consummation of the Merger and the other transactions contemplated hereby,
have been duly and validly authorized by the Board of Directors of TechStar and
AUGI, and each of AUGI and TechStar has the full corporate right, power and
authority to execute and deliver this Agreement and the AUGI Transaction
Agreements to which each is a party, to perform its and their respective
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. This Agreement constitutes, and when executed
and delivered, the AUGI Transaction Agreements to which each is a party will
constitute, respectively, the legal, valid and binding obligation of AUGI and
TechStar, enforceable against them in accordance with its and their respective
terms, except to the extent limited by bankruptcy, insolvency, reorganization
and other laws affecting creditors rights generally, and except with respect to
remedies, the enforcement of which vests in the discretion of courts of
equitable jurisdiction.
(b) AUGI and TechStar each has full legal right, power and
authority to execute and deliver this Agreement and the AUGI Transaction
Agreements to which such person is a party, and to consummate the transactions
contemplated hereby and thereby. This Agreement and, when executed and
delivered, the AUGI Transaction Agreements to which AUGI and/or TechStar is a
party, constitutes and will constitute the legal, valid and binding obligations
of such person, enforceable against such person in accordance with their
respective terms, except to the extent limited by bankruptcy, insolvency,
reorganization and other laws affecting creditors rights generally, and except
with respect to remedies, the enforcement of which vests in the discretion of
courts of equitable jurisdiction.
4.3 Organization, Good Standing and Qualification; Ownership of
Assets of Business.
(a) Each of AUGI and TechStar: (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; (ii) has all necessary corporate power and authority to carry on its
business and to own, lease and operate its properties; and (iii) is not
required, by the nature of its properties or business, to be qualified to do
business as a foreign corporation in any other foreign jurisdiction in which the
failure to be so qualified would have a material adverse effect on AUGI or
TechStar, its properties or assets, its business, or its condition (financial or
otherwise). Neither AUGI nor TechStar is required to be registered as an
investment advisor or investment company, as such terms are defined in the
Investment Advisers Act of 1940 and Investment Company Act of 1940,
respectively.
(b) TechStar has no Subsidiary corporations.
(c) True and complete copies of the Certificate of
Incorporation and By-Laws of TechStar (including all amendments thereto), and a
correct and complete list of the officers and directors of TechStar, are annexed
hereto as Schedule 4.3.
(d) TechStar owns all of the assets, including Intellectual
Property (as
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that term is hereinafter defined), if any, used in connection with the operation
of the TechStar Business, free and clear of all liens, pledges, claims, charges,
encumbrances, assessments and other restrictions and limitations whatsoever.
4.4 Capital Structure; Stock Ownership.
(a) Except as set forth in Schedule 4.4 annexed hereto (all of
which agreements and commitments will be terminated and canceled as of the
Closing Date, without any payment by TechStar, if there are any at the date
hereof), there are no outstanding subscriptions, options, rights, warrants,
convertible securities or other agreements or calls, demands or commitments: (i)
obligating TechStar to issue, transfer or purchase any shares of its capital
stock, or (ii) obligating AUGI to transfer any shares of the Stock owned by such
stockholder. Other than in respect of the stock purchase rights described in
Schedule 4.4 (all of which shall be terminated and canceled as of the Closing
Date, without any payment by TechStar, if there are any at the date hereof), no
shares of capital stock of TechStar are reserved for issuance pursuant to stock
options, warrants, agreements or other rights to purchase capital stock.
(b) When issued and delivered pursuant to this Agreement, all
of the Stock will be validly issued, fully-paid and non-assessable, owned by
AUGI free and clear of all pledges, Liens, claims, charges, encumbrances,
assessments, pre-emptive rights and other restrictions and limitations
whatsoever.
4.5 TechStar Investments. TechStar does not own, directly or
indirectly, any stock or other equity securities of any corporation or entity,
and does not have any direct or indirect equity or ownership interest in any
person other than the businesses conducted by TechStar.
4.6 Financial Information.
(a) Annexed hereto as Schedule 4.6(a) are (i) the unaudited
financial statements of TechStar as at April 30, 1997 and for the fiscal period
from December 12, 1996 to April 30, 1997, including balance sheet, statements of
operations, statements of stockholders' equity, and statements of cash flow, all
as prepared by the management of TechStar (the "TechStar Unaudited Financial
Statements"); and (ii) the audited financial statements of TechStar as at
December 31, 1995 and September 30, 1996 and for the fiscal year and nine (9)
months then ended, including balance sheets, statements of operations,
statements of stockholders' equity, and statements of cash flow, as audited by
Feldman Radin & Co., P.C., independent public accountants (the "TechStar Audited
Financial Statements"). Such TechStar Unaudited Financial Statements and
TechStar Audited Financial Statements are herein collectively referred to as the
"TechStar Financial Statements."
(b) The TechStar Financial Statements: (i) are true, complete
and correct in all respects and present fairly the financial position of
TechStar as of the dates thereof and for the periods reflected therein, all in
conformity with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis; (ii) make full and adequate provision, in
accordance with GAAP, for the various assets and liabilities of TechStar on a
basis and the results of its operations and
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transactions in its accounts, as of the dates and for the periods referred to
therein; (iii) reflect only assets and liabilities and results of operations and
transactions of TechStar, and do not include or reflect any assets, liabilities
or transactions of any corporation or entity except TechStar; and (iv) were
prepared from, and are consistent with, the books and records of TechStar, which
accurately and consistently reflect all transactions to which TechStar was and
is a party; provided, that the TechStar Unaudited Financial Statements omit
footnote disclosures required under GAAP and are subject to fiscal year end
audit adjustments which would not, individually or in the aggregate, be
material. All such TechStar Financial Statements are incorporated in and made a
part hereof and have been made part of the offering materials with respect to
the Merger Financing.
(c) Except as expressly set forth in the TechStar Financial
Statements and/or in the Schedules to this Agreement, or arising in the normal
course of TechStar's business since April 30, 1997, there are as at the date
hereof, no liabilities or obligations (including, without limitation, any tax
liabilities or accruals) of TechStar, whether absolute, accrued, contingent or
otherwise and whether due or to become due, that are, singly or in the
aggregate, material.
4.7 No Material Changes. Except as and to the extent described in
Schedule 4.7 annexed hereto (which Schedule may make reference to any other
Schedule hereto or to any other document(s) referred to in this Agreement which
has heretofore or herewith been delivered to IDF), since April 30, 1997, the
business of TechStar has continued to be operated only in the ordinary course,
and there has not been:
(a) Any material adverse change in the condition (financial or
otherwise), operations, business, properties, or prospects of TechStar from that
shown in the most recent TechStar Unaudited Financial Statements, or any
material transaction or commitment effected or entered into outside of the
normal course of the TechStar Business other than in connection with the Merger;
(b) Any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting the business, operations,
assets, properties, condition (financial or otherwise), or prospects of
TechStar;
(c) Any declaration, setting aside or payment of any dividend
or other distribution with respect to the Stock, any other payment of any kind
by TechStar to AUGI or any of its Affiliates outside of the ordinary course of
business, any forgiveness of any debt or obligation owed to TechStar by any of
its stockholders or any of their respective Affiliates, or any direct or
indirect redemption, purchase or other acquisition by TechStar of any capital
stock of TechStar;
(d) Any other event or condition arising from or out of or in
connection with the operation of TechStar which has materially and adversely
affected, or may reasonably be expected to materially and adversely affect,
TechStar, its assets or properties, its business, condition (financial or
otherwise), or prospects;
(e) Except to the extent set forth in the Prior TechStar
Employment Agreements or on Schedule 4.7 annexed hereto, no bonuses or salary
increases shall be made to senior executive officers or other members of the
management of TechStar; or
(f) no shares of Stock or other securities of TechStar shall
be redeemed or
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otherwise repurchased and no additional shares of voting capital stock of
TechStar, or notes, debentures, warrants or other securities exercisable into or
convertible for shares of voting capital stock of TechStar, shall be issued to
any person other than AUGI.
4.8 Tax Returns and Tax Audits.
(a) Except as and to the extent disclosed in Schedule 4.8
annexed hereto: (i) on the date hereof, all foreign, federal, state, and local
tax returns and tax reports required to be filed by TechStar on or before the
date of this Agreement have been timely filed with the appropriate governmental
agencies in all jurisdictions in which such returns and reports are required to
be filed, except for such prior failures to file in timely fashion as have been
subsequently followed by complete and proper filing and payment of all amounts
due in respect thereof, including interest and penalties, if any; (ii) all
foreign, federal, state, and local income, franchise, sales, use, property,
excise, and other taxes (including interest and penalties and including
estimated tax installments where required to be filed and paid) due from or with
respect to TechStar as of the date hereof have been fully paid, and appropriate
accruals shall have been made on TechStar's books for taxes not yet due and
payable; (iii) as of the date hereof, all taxes and other assessments and levies
which TechStar is required by law to withhold or to collect on or before the
date hereof have been duly withheld and collected, and have been paid over to
the proper governmental authorities to the extent due and payable on or before
the date hereof; (iv) there are no outstanding or pending claims, deficiencies
or assessments for taxes, interest or penalties with respect to any taxable
period of TechStar, except claims for taxes not yet due and payable; and (v) no
tax Liens have been filed on TechStar's assets. At and after the Closing Date,
TechStar will have no liability for any foreign, federal, state, or local income
tax with respect to any taxable period ending on or before the Closing Date,
except as and to the extent disclosed in Schedule 4.8, if any.
(b) There are no audits pending or, to the knowledge of
TechStar and AUGI, threatened, with respect to any foreign, federal, state, or
local tax returns of TechStar, and no waivers of statutes of limitations have
been given or requested with respect to any tax years or tax filings of
TechStar. No presently pending assessments of tax deficiencies have been made
against TechStar or with respect to its income, receipts or net worth, and no
extensions of time are in effect for the assessment of deficiencies against
TechStar. TechStar has not received notice of any claim by any authority in a
jurisdiction in which TechStar does business and does not file tax returns that
TechStar or its income, receipts or net worth may be subject to tax in that
jurisdiction. TechStar is not a party to any tax-sharing or allocation
agreement, nor does TechStar owe any amount under any tax-sharing or allocation
agreement. TechStar has no liability for unpaid taxes because it once was a
member of an "affiliated group" within the meaning of Section 1502 of the Code.
4.9 Personal Property; Liens. TechStar has and owns good and
marketable title to all of its personal property, including without limitation,
all computer software, database and other intellectual property, free and clear
of all Liens whatsoever, except for: (a) Liens securing TechStar's indebtedness
for money borrowed, if any, as reflected in the Financial Statements, pursuant
to the security agreements listed in Schedule 4.9 annexed hereto; (b) Liens
securing the deferred purchase price of machinery, equipment, vehicles and/or
other fixed assets, if any, as reflected in the Financial Statements or as
incurred after the date thereof in the ordinary course of
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business of TechStar, pursuant to security agreements listed in Schedule 4.9;
(c) materialmen's, workmen's and other similar statutory liens arising in the
ordinary course of business, none of which are material singly or in the
aggregate, (d) Liens for taxes not yet due and payable, and (e) other Liens
which individually or in the aggregate are immaterial in amount and character
(each of the Liens described in clauses (a) through (e) of this sentence being
hereinafter referred to as "Permitted Liens"). The aggregate book value of all
items of machinery, equipment, vehicles, and other fixed assets owned or leased
by TechStar does not exceed $500,000, and all of such fixed assets are in good
operating condition and repair (reasonable wear and tear excepted) and are
adequate for their use in the TechStar Business as presently conducted.
4.10 Real Property.
(a) TechStar neither owns nor has any interest of any kind
(whether ownership, lease or otherwise) in any real property except to the
extent of TechStar's leasehold interests under the leases for its business
premises, if any, true and complete copies of which leases (including all
amendments thereto) are annexed hereto as Schedule 4.10 (the "Leases").
(b) TechStar and, to TechStar's and AUGI's knowledge, the
landlords thereunder are presently in compliance in all material respects with
all of their respective obligations under the Leases, and the premises leased
thereunder are in good condition (reasonable wear and tear excepted) and are
adequate for the operation of the TechStar Business.
(c) TechStar is in actual possession of the properties demised
under the Leases. The Leases are free and clear of any Lien or any sublease or
right of occupancy granted by TechStar, except as set forth on Schedule 4.10
hereto, if at all.
(d) TechStar has the right of ingress and egress through a
public road or street, to and from the properties demised under the Leases.
(e) The properties demised under the Leases and the
improvements thereon constitute all of the real property and leases currently
used exclusively or materially for the TechStar Business and are adequate and
sufficient for the current operations of TechStar and the TechStar Business.
(f) To the knowledge of TechStar and AUGI, there is no pending
proceeding for the taking or condemnation of all or any portion of the
properties demised under the Leases or pending taking or condemnation proceeding
which would result in a termination of any Lease of real property, and none of
the same is threatened.
(g) There are no material items of maintenance that have been
materially deferred with respect to any of the improvements on the real property
demised under the Leases.
(h) TechStar has received no uncured notice from applicable
governmental authorities of any outstanding violations of any building or zoning
laws, codes or regulations, or governmental or judicial orders issued pursuant
thereto, with respect to the real property and the improvements thereon demised
under the Leases, and there are no such violations.
4.11 Accounts Receivable. All accounts receivable shown on the
balance sheet as of April 30, 1997 included in the TechStar Financial Statements
(the "Balance Sheet"), and all
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accounts receivable thereafter created or acquired by TechStar prior to the
Closing Date, have arisen or will arise in the ordinary course of the TechStar
Business. Except as set forth on Schedule 4.11 annexed hereto, to the best of
AUGI's knowledge (but without guaranteeing the collectibility of any accounts
receivable) all of such accounts receivable (a) are and will be subject to no
counterclaims, set-offs, allowances or discounts of any kind, except to the
extent of the allowance for doubtful accounts as of the April 30, 1997 reflected
in the Balance Sheet, and (b) have been, are and will be valid and collectible
in the ordinary course of business within two hundred and ten (210) days after
the Closing Date (subject to the aforesaid allowance for doubtful accounts),
without necessity of instituting any legal proceedings for collection.
4.12 Inventories. All supplies and other inventories shown on the
Balance Sheet, and all inventories thereafter acquired by TechStar prior to the
Closing Date, have been and will be valued at the lower of cost or market, are
owned by TechStar, which has good and marketable title thereto, and consisted
and will consist of items which are of a quality and quantity which are clean,
current, saleable and useable in the ordinary course of the TechStar Business
for customary commercial purposes, and are substantially at TechStar's normal
working levels of the same in the current conduct of its businesses in the
ordinary course.
4.13 Insurance Policies. Schedule 4.13 annexed hereto contains a
true and correct schedule of all insurance coverages held by TechStar concerning
its businesses and properties (including but not limited to professional
liability insurance). All such policies are in full force and effect and
TechStar is not in default thereunder in any material respect. To the knowledge
of TechStar and AUGI, such policies provide adequate insurance coverage for
TechStar, its properties and businesses, as presently conducted.
4.14 Permits and Licenses; Consents. TechStar possesses and is in
material compliance with every Permit of any Governmental Authority having
jurisdiction over TechStar, or its businesses, properties, or assets, necessary
in order to operate its businesses in the manner presently conducted; all of
TechStar's Permits are valid, current and in full force and effect; and none of
such Permits will be voided, revoked or terminated, or are voidable, revocable
or terminable, upon and by reason of the Merger and the change of ownership of
TechStar pursuant to this Agreement. Schedule 4.14 hereto lists all of the
Permits of or in respect of any Governmental Authority or any other Person (as
such term is hereinafter defined) which are required for the execution or
delivery by TechStar and AUGI of this Agreement and the consummation of the
transactions contemplated hereby.
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4.15 Contracts and Commitments.
(a) Schedule 4.15 annexed hereto lists all material contracts,
leases, commitments, technology agreements, software development agreements,
software licenses, indentures and other agreements to which TechStar is a party
(collectively, "Material Contracts") including, without limitation, the
following: (i) any contract for the purchase of equipment, supplies, other
materials, or other inventory items other than purchase orders for supplies
entered into in the ordinary course of business; (ii) any contract related to
the purchase or lease of any capital asset involving aggregate payments of more
than $5,000 per annum that is not cancelable by TechStar on less than thirty
(30) days notice; (iii) all technology agreements, software development
agreements and software licenses (except for pre-printed shrinkwrap licenses for
commercially available and non-custom software applications) involving TechStar
or any Affiliate of TechStar, regardless of the duration thereof or the amount
of payments called for or required thereunder; (iv) any guarantee, make-whole
agreement, or similar agreement or undertaking to support, directly or
indirectly, the financial or other condition of any other person or entity; (v)
each contract for or relating to the employment of any officer, employee,
technician, agent, consultant, or advisor to or for TechStar that is not
cancelable by TechStar without penalty, premium or liability (for severance or
otherwise) on less than thirty (30) days' prior written notice; (vi) license,
royalty, franchise, distributorship, dealer, manufacturer's representative,
agency and advertising agreements; (vii) any contract with any collective
bargaining unit; (viii) any mortgage of real property; (ix) any factoring
agreement with respect to the accounts receivable of TechStar; (x) any pledge or
other security agreement by TechStar other than guaranties entered into in the
ordinary course of business which are not material to TechStar, (xi) any joint
venture agreement or similar arrangement; (xii) any non-competition agreement or
similar arrangement; and (xiii) any contract, lease, commitment, indenture, or
other agreement to which TechStar is a party that may not be terminated without
penalty, premium or liability by TechStar on not more than thirty (30) days'
prior written notice.
(b) Except as set forth in Schedule 4.15: (i) all Material
Contracts are in full force and effect; (ii) TechStar and, to the knowledge of
TechStar and AUGI, the other parties thereto, each are in compliance with all of
their respective obligations under the Material Contracts in all material
respects, and are not in breach or default thereunder, nor has there occurred
any condition or event which, after notice or lapse of time or both, would
constitute a default thereunder; and (iii) none of the Material Contracts will
be voided, revoked or terminated, or voidable, revocable or terminable, in whole
or in part, upon and by reason of the Merger and the change of ownership of
TechStar pursuant to this Agreement or otherwise as a result of the transactions
contemplated hereby.
(c) No purchase commitment by TechStar is in excess of the
normal, ordinary and usual requirements of the business of TechStar.
(d) There is no outstanding power of attorney granted by
TechStar to any person, firm or corporation for any purpose whatsoever.
4.16 Customers and Suppliers. Neither AUGI nor TechStar has actual
knowledge of any existing, announced or anticipated changes in the policies of,
or the relationships with, or the business of, any material clients, customers,
or suppliers of TechStar which could materially adversely affect TechStar or its
condition, financial or otherwise, business, or prospects.
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4.17 Labor, Benefit and Employment Agreements.
(a) Except as set forth in Schedule 4.17 annexed hereto,
TechStar is not a party to any agreement with respect to the employment or
compensation of any non-hourly and/or non-union employee(s). TechStar is not
now, nor has it ever been, a party to or subject to any collective bargaining
agreement or other labor agreement. Schedule 4.17 sets forth the amount of all
compensation or remuneration (including any discretionary bonuses) paid by
TechStar during the 1996 calendar year or to be paid by TechStar during the 1997
calendar year to employees or consultants who presently receive aggregate
compensation or remuneration at an annual rate in excess of $50,000.
(b) No union is now certified or, to the best of the knowledge
of TechStar and AUGI, claims to be certified as a collective bargaining agent to
represent any employees of TechStar, and there are no labor disputes existing
or, to the best of the knowledge of TechStar and AUGI, threatened, involving
strikes, slowdowns, work stoppages, job actions or lockouts of any employees of
TechStar.
(c) There are no unfair labor practice charges or petitions
for election pending or being litigated before the National Labor Relations
Board or any other federal or state labor commission relating to any employees
of TechStar. Except as set forth on Schedule 4.17, TechStar has not received any
written notice of any actual or alleged violation of any law, regulation, order
or contract term affecting the collective bargaining rights of employees, equal
opportunity in employment, or employee health, safety, welfare or wages and
hours.
(d) TechStar has not, at any time, been and is not now
required to make contributions to, be a party to or covered by (or had any of
its employees covered by), and has not withdrawn from (partially or otherwise),
and has not had and does not have any obligations to or in respect of any
"multiemployer plan" (as defined in Section 3(37) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")).
(e) Except as disclosed in Schedule 4.17, TechStar does not
maintain, or have any liabilities or obligations of any kind with respect to,
any bonus, commission, deferred compensation, excess benefits, pension, thrift,
savings, employee ownership, salary continuation, severance, profit sharing,
retirement, supplemental retirement, or other such benefit plan, and does not
have any potential or contingent liability in respect of any actions or
transactions relating to any such plan other than to make contributions thereto
if, as, and when due in respect of periods subsequent to the date hereof.
Without limitation of the foregoing, (i) TechStar has made all required
contributions to or in respect of any and all such benefit plans, (ii) no
"accumulated funding deficiency" (as defined in Section 412 of the Code has been
incurred in respect of any of such benefit plans, and the present value of all
vested accrued benefits thereunder does not, on the date hereof, exceed the
assets of any such plan allocable to the vested accrued benefits thereunder,
(iii) there has been no "prohibited transaction" (as defined in Section 4975 of
the Code) with respect to any such plan, and no transaction which could give
rise to any tax or penalty under Section 4975 of the Code or Section 502 of
ERISA, and (iv) there has been no "reportable event" (within the meaning of
Section 4043(b) of ERISA) with respect to any such plan. All of such plans which
constitute, are intended to constitute, or have been treated by TechStar as
"employee pension benefit plans" or other plans within Section 3 of ERISA have
been determined by the Internal Revenue Service to be "qualified" under Section
401(a) of the
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Code, and have been administered and are in compliance with ERISA and the Code;
and neither TechStar nor AUGI has any knowledge of any state of facts,
conditions or occurrences such as would impair the "qualified" status of any of
such plans.
(f) Except for the group insurance programs or 401(k) plan
listed in Schedule 4.17, TechStar does not maintain any medical, health, life,
dental, short- or long-term disability, hospitalization, accident, death
benefits, or other employee benefit insurance programs, or sick leave or
vacation or holiday or leave policies, or any welfare plans (within the meaning
of Section 3(1) of ERISA) for the benefit of any current or former employees,
and, except as required by law, TechStar has no liability, fixed or contingent,
for health or medical benefits to any former employee.
4.18 No Breach of Statute, Decree or Other Instrument.
(a) Except as set forth in Schedule 4.18 annexed hereto and as
otherwise would not have a material adverse effect on the existing businesses,
assets, financial condition or prospects of TechStar: (i) neither the execution
and delivery of this Agreement or any other TechStar Agreement by TechStar
and/or AUGI, nor the performance of, or compliance with, the terms and
provisions of this Agreement or any other TechStar Agreement on the part of
TechStar and/or AUGI, will violate or conflict with any term of the Certificate
of Incorporation or By-Laws of TechStar or, to the knowledge of TechStar and
AUGI, any statute, law, rule or regulation of any governmental authority
affecting the existing business of TechStar, or will cause or permit the
material modification of the effect of, the imposition of any Lien in respect
of, or the acceleration of any obligations or terms or the termination of any
rights or imposition of any burdens under, or conflict with, result in a breach
of, or constitute a default under, any of the terms, conditions or provisions of
any judgment, order, award, injunction or decree, or any of the material terms,
conditions or provisions of any contract, lease, agreement, indenture or other
instrument to which TechStar or AUGI is a party or by which TechStar or AUGI is
bound; and (ii) no consent, authorization or approval of or filing with any
governmental authority or agency, or any third party, will be required on the
part of TechStar or AUGI as conditions precedent to the consummation of the
transactions contemplated hereby, or result in the cancellation of any Permits
presently held by TechStar which are required for the operation of its business
as conducted on the date hereof.
(b) In connection with and as respects the Merger, TechStar
and AUGI have waived any and all rights which it or they may have (by way of
right of first refusal, right of first offer, or otherwise) to purchase any of
the Stock by reason of the proposed disposition thereof by AUGI pursuant to the
Merger. In addition, by its execution of this Agreement, AUGI does hereby waive
any rights of appraisal which it may have under the Delaware General Corporation
Law.
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4.19 Compliance with Laws.
(a) Except as set forth in Schedule 4.19 to this Agreement,
TechStar has been, and is now in compliance (except to the extent, disclosed on
Schedule 4.19, that incidental and non-material non-compliance has not had and
can not reasonably be expected to have a material adverse effect on TechStar,
its properties or assets, its businesses, its condition (financial or
otherwise), or its prospects) with each of the following which is applicable to
or binding upon or affecting TechStar or its properties, assets, or business, or
to which TechStar, or its properties, assets, or business are subject: every
statute, ordinance, code or other law, treaty, rule, regulation, order,
technical or other standard, requirement or procedure existing, enacted,
adopted, administered, enforced, or promulgated, by any Governmental Authority
(each of the foregoing, a "Law"), and every Permit, and every order, judgment,
writ, injunction, award, decree, demand, assessment or determination of any
arbitrator and of every Governmental Authority (each of the foregoing, an
"Order"; each Law, Permit, and Order being sometimes hereinafter referred to as
a "Requirement of Law"). Neither TechStar nor its properties, assets, or
business are subject to or directly affected by any Requirement of Law of any
Governmental Authority, other than those similarly affecting similar enterprises
engaged in a material way in the same business activities.
(b) TechStar has not, at any time, to the knowledge of AUGI:
(i) acquired, handled, utilized, stored, generated, processed, transported, or
disposed of any hazardous or toxic substances, whether in violation of any
foreign, federal, state, or local environmental or occupational health and
safety laws or regulations or otherwise, (ii) otherwise committed any material
violation of any foreign, federal, state, or local environmental or occupational
health and safety laws or regulations (including, without limitation, the
provisions of the Environmental Protection Act and other applicable
environmental statutes and regulations) or any violation of the Occupational
Safety and Health Act, or (iii) been in violation of any material requirements
of its insurance carriers from time to time.
(c) Neither TechStar nor any of its directors, officers or
employees has received any written notice of default or violation, nor, to the
best of the knowledge of TechStar and AUGI, is TechStar or any of its directors,
officers or employees in default or violation, with respect to any judgment,
order, writ, injunction, decree, demand or assessment issued by any court or any
federal, state, local, municipal, or other governmental agency, board,
commission, bureau, instrumentality or department, domestic or foreign, relating
to any aspect of TechStar's business, affairs, properties, or assets. Neither
TechStar nor any of its directors, officers or employees, has received written
notice of, been charged with, or, to its or their knowledge, is under
investigation with respect to, any violation of any provision of any federal,
state, local, municipal, or other law or administrative rule or regulation,
domestic or foreign, relating to any aspect of TechStar's business, affairs,
properties or assets, which violation would have a material adverse effect on
TechStar, its properties or assets, its businesses, its condition (financial or
otherwise), or its prospects.
(d) Schedule 4.19 sets forth the date(s), if any, of the last
known audits or inspections (if any) of TechStar conducted by or on behalf of
the Environmental Protection Agency, the Occupational Safety and Health
Administration, and any other Governmental Authority.
4.20 Litigation. Except as disclosed in Schedule 4.20 annexed
hereto, there
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are no private or governmental orders, claims, actions, suits, arbitrations,
investigations, administrative or other proceedings (including, without
limitation, any claim alleging the invalidity, infringement or interference of
any patent, patent application, software, technology or other intellectual
property rights owned or licensed by TechStar) or investigations (collectively,
the "Actions") pending or, to the knowledge of TechStar or any of AUGI, are any
Actions threatened, against TechStar or relating to its businesses or
properties, at law or in equity or before or by any court or any Governmental
Authority or challenging the validity or propriety of the transaction
contemplated hereby. Except as disclosed in Schedule 4.20 annexed hereto,
neither TechStar nor any of AUGI is aware of any state of facts, events,
conditions or occurrences which might properly constitute grounds for or the
basis of any meritorious Action against or with respect to TechStar, which
would, if determined adversely, have a material adverse effect on TechStar, the
TechStar Business or any material portion of its assets, or impair the ability
of AUGI to deliver in the Merger all of its shares of Stock free and clear of
all pledges, Liens, claims, charges, options, calls, encumbrances, restrictions
and assessments whatsoever (except any restrictions which may be created by
operation of state or federal securities laws).
4.21 Intellectual Property. Schedule 4.21 annexed hereto correctly
sets forth a list and brief description of the nature and ownership of: (a) all
patents, patent applications, copyright registrations and applications,
registered trade names, service marks, trademark registrations and applications,
both domestic and foreign, which are presently owned, filed or held by TechStar
and/or any of its directors, officers, stockholders or employees and which in
any way relate to or are used in the TechStar Business; (b) all licenses,
computer software licenses, and software access or joint development agreements,
both domestic and foreign, which are owned or controlled by TechStar and/or any
of its directors, officers, stockholders or employees and which in any way
relate to or are used in the TechStar Business; and (c) all franchises, licenses
and/or similar arrangements granted to TechStar by others and/or to others by
TechStar (collectively, the "Intellectual Property"). None of the Intellectual
Property set forth or required to be set forth in Schedule 4.21 is subject to
any pending challenge known to AUGI or TechStar, infringes on or misappropriates
the rights of any others, or is subject to loss or expiration in the near future
(or the threat of such loss or expiration). Except as set forth on Schedule
4.21, TechStar owns good and marketable title to the Intellectual Property free
and clear of any Liens.
4.22 Transactions with Affiliates. No material asset employed in the
business of TechStar is owned by, leased from or leased to the stockholder of
TechStar, any of its Affiliates, members of their families or any partnership,
corporation, trust or other entity for their benefit, or any other officer,
director or employee of TechStar or any Affiliate of TechStar (collectively,
"TechStar Affiliates"). TechStar has made no loans to nor conducted any
transactions with any TechStar Affiliates except as disclosed on the schedules
hereto.
4.23 Bank Accounts. Annexed hereto as Schedule 4.23 is a correct and
complete list of all bank accounts, lock boxes and safe deposit boxes maintained
by or on behalf of TechStar, with indication of all persons having signatory,
access or other authority with respect thereto.
4.24 Schedules Incorporated by Reference. The making of any
recitation in any Schedule hereto shall be deemed to constitute a representation
and warranty that such recitation is an accurate statement and disclosure of the
information required by the corresponding Section(s)
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of this Agreement (or taken as a whole), as, to the extent, and subject to the
qualifications and limitations, set forth in such corresponding Section(s).
4.25 Certain Legal Proceedings. Except as described in writing to
IDF by TechStar, during the past five-year period, neither TechStar, any officer
or director of TechStar, nor any person intended to become an officer or
director of TechStar or as a nominee of TechStar to become a director of IDF
upon the Merger, has been the subject of:
(a) a petition under the Federal bankruptcy laws or any other
insolvency law or has a receiver, fiscal agent or similar officer been appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an executive
officer at or within two years before the time of such filing;
(b) a conviction in a criminal proceeding or a named subject
of a pending criminal proceeding (excluding minor traffic violations which do
not relate to driving while intoxicated or driving under the influence);
(c) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from, or otherwise limiting, the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the united States
Commodity Futures Trading Commission or any associated person of any of the
foregoing, or as an investment advisor, underwriter, broker or company, bank,
savings and loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of Federal, state or other securities laws or commodities laws;
(d) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal, state or local authority barring,
suspending or otherwise limiting for more than 60 days the right of such person
to engage in any activity described in the preceding sub-paragraph, or to be
associated with persons engaged in any such activity;
(e) a finding by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission (the "Commission") to have
violated any securities law, regulation or decree and the judgment in such civil
action or finding by the Commission has not been subsequently reversed,
suspended or vacated; or
(f) a finding by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
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4.26 Investment. AUGI purchased the outstanding capital stock of
TechStar for its own account, for investment purposes only, and not with a view
to the resale or distribution thereof.
4.27 No Misleading Statements. None of the information supplied or
to be supplied by or about TechStar for inclusion or incorporation by reference
in the offering materials concerning the Merger Financing or in any information
supplied to IDF concerning the Merger contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
5. REPRESENTATIONS AND WARRANTIES OF IDF AND MERGERCO.
IDF and Mergerco hereby jointly and severally represent and warrant
to AUGI, as follows, it being understood and agreed that (i) unless the context
otherwise indicates, all references in this Article 5 to IDF includes IDF and
its consolidated direct and indirect Subsidiaries, including H-W; and (ii)
neither AUGI nor TechStar is or will be required to undertake any independent
investigation to determine the truth, accuracy and completeness of the
representations and warranties made by IDF or Mergerco in this Agreement:
5.1 Organization, Good Standing and Qualification. Each of Mergerco
and IDF is a corporation duly organized, validly existing and in good standing
under the laws of the States of Delaware and New York, respectively, with all
necessary power and authority to execute and deliver this Agreement, the
TechStar Employment Agreements, and the other instruments, agreements and
written undertakings of IDF and Mergerco, and each of them, which are executed
in connection therewith and to which it or they, respectively are parties
(collectively, the "IDF Transaction Agreements"), to perform its obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. True and complete copies of the Certificate of Incorporation and
By-Laws of Mergerco and of IDF (including all amendments thereto), and a correct
and complete list of the officers and directors of Mergerco and of IDF, are
annexed hereto as Schedule 5.1.
5.2 Authorization of Agreement. The execution, delivery and
performance of this Agreement and the IDF Transaction Agreements and the
consummation of the Merger and the other transactions contemplated hereby and
thereby by Mergerco and IDF have been duly and validly authorized by the Board
of Director and sole stockholder of Mergerco, and by the Board of Directors of
IDF; and Mergerco and IDF have the full corporate right, power and authority to
execute and deliver this Agreement and the IDF Transaction Agreements, to
perform their respective obligations hereunder and thereunder, and to consummate
the transactions contemplated hereby and thereby. No further corporate
authorization is necessary on the part of Mergerco or IDF to consummate the
transactions contemplated hereby and thereby.
5.3 Valid and Binding Agreement. This Agreement and the other IDF
Transaction Agreements constitutes the legal, valid and binding obligation of
Mergerco, enforceable against Mergerco in accordance with its and their terms,
except to the extent limited by bankruptcy, insolvency, reorganization and other
laws affecting creditors rights generally, and except with respect to remedies,
the enforcement of which vests in the discretion of courts of equitable
jurisdiction, and this Agreement and, when executed and delivered by IDF, and
the
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other IDF Transaction Agreements constitute, and will constitute, the legal,
valid and binding obligations of Mergerco and IDF (as the case may be),
enforceable against Mergerco and IDF in accordance with its and their respective
terms, except to the extent limited by bankruptcy, insolvency, reorganization
and other laws affecting creditors rights generally, and except with respect to
remedies, the enforcement of which vests in the discretion of courts of
equitable jurisdiction.
5.4 No Breach of Statute or Contract. Neither the execution and
delivery of this Agreement and the other IDF Transaction Agreements by Mergerco
or IDF, nor compliance with the terms and provisions of this Agreement or the
other IDF Transaction Agreements on the part of Mergerco or IDF, will: (a)
violate any statute or regulation of any Governmental Authority affecting
Mergerco or IDF; (b) require the issuance of any authorization, license, consent
or approval of any Governmental Authority; or (c) conflict with or result in a
breach of any of the terms, conditions or provisions of any judgment, order,
injunction, decree, note, indenture, loan agreement or other agreement or
instrument to which Mergerco or IDF is a party, or by which Mergerco or IDF is
bound, or constitute a default thereunder.
5.5 Capitalization of IDF.
(a) Schedule 5.5 annexed contains a description of: (i) the
authorized, issued and outstanding shares of IDF Common Stock; and (ii) all
Fully-Diluted IDF Equity which may be issued upon exercise of all outstanding
stock options or warrants, or upon conversion of all issued and outstanding
notes, preferred stock, rights or other securities convertible or exchangeable
for shares of IDF Common Stock.
(b) When issued and delivered pursuant to this Agreement, all
of the Merger Consideration will be validly issued, fully-paid and
non-assessable, owned by IDF free and clear of all pledges, Liens, claims,
charges, encumbrances, assessments, pre-emptive rights and other restrictions
and limitations whatsoever.
5.6 Investment. IDF owns the outstanding capital stock of Mergerco
for its own account, for investment purposes only, and not with a view to the
resale or distribution thereof.
5.7 Business of Mergerco. Mergerco has been formed solely for the
purposes of consummating the transactions contemplated by this Merger Agreement,
has not conducted and will not conduct any independent business operations until
the Closing Date of the Merger.
5.8 Financial Information.
(a) Annexed hereto as Schedule 5.8(a) are (i) the unaudited
consolidated financial statements of IDF as at December 31, 1996 and for the six
months ended December 31, 1996, including balance sheet, statements of
operations, statements of stockholders' equity, and statements of cash flow, as
reviewed but not audited by Lazar, Levine & Company LLP, and the unaudited
consolidated balance sheet and statement of operations as at March 31, 1997 and
for the nine months then ended, as prepared by management of IDF (collectively,
the "IDF Unaudited Financial Statements"); and (ii) the audited consolidated
financial statements of IDF as at June 30, 1996 and June 30, 1995 and for the
two fiscal years then ended, including balance sheets, statements of operations,
statements of stockholders'
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equity, and statements of cash flow, as audited by Lazar, Levine & Company LLP
(the "IDF Audited Financial Statements"). Such IDF Unaudited Financial
Statements and IDF Audited Financial Statements are herein collectively referred
to as the "IDF Financial Statements."
(b) The IDF Financial Statements: (i) are true, complete and
correct in all respects and present fairly the consolidated financial position
of IDF and its Subsidiaries as of the dates thereof and for the periods
reflected therein, all in conformity with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis; (ii) make full and
adequate provision, in accordance with GAAP for the various assets and
liabilities of IDF on a basis and the results of its operations and transactions
in its accounts, as of the dates and for the periods referred to therein; (iii)
reflect only assets and liabilities and results of operations and transactions
of IDF, and do not include or reflect any assets, liabilities or transactions of
any corporation or entity except IDF and its Subsidiaries; and (iv) were
prepared from, and are consistent with, the books and records of IDF, which
accurately and consistently reflect all transactions to which IDF was and is a
party; provided, that the IDF Unaudited Financial Statements omit footnote
disclosures required under GAAP and are subject to fiscal year end audit
adjustments which would not, individually or in the aggregate, be material.
(c) Except as expressly set forth in the IDF Financial
Statements and/or in the Schedules to this Agreement, or arising in the normal
course of IDF's business since March 31, 1997, there are as at the date hereof,
no liabilities or obligations (including, without limitation, any tax
liabilities or accruals) of IDF, whether absolute, accrued, contingent or
otherwise and whether due or to become due, that are, singly or in the
aggregate, material.
5.9 No Material Changes. Except as and to the extent described in
Schedule 5.9 annexed hereto (which Schedule may make reference to any other
Schedule hereto or to any other document(s) referred to in this Agreement which
has heretofore or herewith been delivered to IDF), since March 31, 1997, the
business of IDF has continued to be operated only in the ordinary course, and
there has not been:
(a) Any material adverse change in the condition (financial or
otherwise), operations, business, properties, or prospects of IDF from that
shown in the most recent IDF Unaudited Financial Statements, or any material
transaction or commitment effected or entered into outside of the normal course
of the IDF Business other than in connection with the Merger;
(b) Any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting the business, operations,
assets, properties, condition (financial or otherwise), or prospects of IDF;
(c) Any declaration, setting aside or payment of any dividend
or other distribution with respect to the Stock, any other payment of any kind
by IDF to any of its stockholders or Affiliates outside of the ordinary course
of business, any forgiveness of any debt or obligation owed to IDF by any of its
stockholders or any of their respective Affiliates, or any direct or indirect
redemption, purchase or other acquisition by IDF of any capital stock of IDF; or
(d) Any other event or condition arising from or out of or in
connection with the operation of IDF which has materially and adversely
affected, or may
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reasonably be expected to materially and adversely affect, IDF, the IDF
Business, its assets or properties, its business, condition (financial or
otherwise), or prospects.
5.10 Tax Returns and Tax Audits.
(a) Except as and to the extent disclosed in Schedule 5.10
annexed hereto: (i) on the date hereof, all foreign, federal, state, and local
tax returns and tax reports required to be filed by IDF on or before the date of
this Agreement have been timely filed with the appropriate governmental agencies
in all jurisdictions in which such returns and reports are required to be filed,
except for such prior failures to file in timely fashion as have been
subsequently followed by complete and proper filing and payment of all amounts
due in respect thereof, including interest and penalties, if any; (ii) all
foreign, federal, state, and local income, franchise, sales, use, property,
excise, and other taxes (including interest and penalties and including
estimated tax installments where required to be filed and paid) due from or with
respect to IDF as of the date hereof have been fully paid, and appropriate
accruals shall have been made on IDF's books for taxes not yet due and payable;
(iii) as of the date hereof, all taxes and other assessments and levies which
IDF is required by law to withhold or to collect on or before the date hereof
have been duly withheld and collected, and have been paid over to the proper
governmental authorities to the extent due and payable on or before the date
hereof; (iv) there are no outstanding or pending claims, deficiencies or
assessments for taxes, interest or penalties with respect to any taxable period
of IDF, except claims for taxes not yet due and payable; and (v) no tax Liens
have been filed on IDF's assets. At and after the Closing Date, IDF will have no
liability for any foreign, federal, state, or local income tax with respect to
any taxable period ending on or before the Closing Date, except as and to the
extent disclosed in Schedule 5.10, if any.
(b) There are no audits pending or, to the knowledge of IDF,
threatened, with respect to any foreign, federal, state, or local tax returns of
IDF, and no waivers of statutes of limitations have been given or requested with
respect to any tax years or tax filings of IDF. No presently pending assessments
of tax deficiencies have been made against IDF or with respect to its income,
receipts or net worth, and no extensions of time are in effect for the
assessment of deficiencies against IDF. IDF has not received notice of any claim
by any authority in a jurisdiction in which IDF does business and does not file
tax returns that IDF or its income, receipts or net worth may be subject to tax
in that jurisdiction. IDF is not a party to any tax-sharing or allocation
agreement, nor does IDF owe any amount under any tax-sharing or allocation
agreement. IDF has no liability for unpaid taxes because it once was a member of
an "affiliated group" within the meaning of Section 1502 of the Code.
5.11 Personal Property; Liens. IDF has and owns good and marketable
title to all of its personal property, including without limitation, all
computer software, database and other intellectual property, free and clear of
all Liens whatsoever, except for: (a) Liens securing IDF's indebtedness for
money borrowed, if any, as reflected in the Financial Statements, pursuant to
the security agreements listed in Schedule 5.11 annexed hereto; (b) Liens
securing the deferred purchase price of machinery, equipment, vehicles and/or
other fixed assets, if any, as reflected in the Financial Statements or as
incurred after the date thereof in the ordinary course of business of IDF,
pursuant to security agreements listed in Schedule 5.11; (c) materialmen's,
workmen's and other similar statutory liens arising in the ordinary course of
business, none of which are material singly or in the aggregate, (d) Liens for
taxes not yet due and payable, and (e) other Liens which individually or in the
aggregate are immaterial in amount and character (each
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of the Liens described in clauses (a) through (e) of this sentence being
hereinafter referred to as "Permitted Liens"). The aggregate book value of all
items of machinery, equipment, vehicles, and other fixed assets owned or leased
by IDF does not exceed $500,000, and all of such fixed assets are in good
operating condition and repair (reasonable wear and tear excepted) and are
adequate for their use in IDF's business as presently conducted.
5.12 Real Property.
(a) IDF neither owns nor has any interest of any kind (whether
ownership, lease or otherwise) in any real property except to the extent of
IDF's leasehold interests under the leases for its business premises, if any,
true and complete copies of which leases (including all amendments thereto) are
annexed hereto as Schedule 5.12 (the "Leases").
(b) Except as set forth on Schedule 5.12, IDF and, to IDF's
knowledge, the landlords thereunder are presently in compliance in all material
respects with all of their respective obligations under the Leases, and the
premises leased thereunder are in good condition (reasonable wear and tear
excepted) and are adequate for the operation of IDF's current business.
(c) IDF is in actual possession of the properties demised
under the Leases. The Leases are free and clear of any Lien or any sublease or
right of occupancy granted by IDF, except as set forth on Schedule 5.12 hereto,
if at all.
(d) IDF has the right of ingress and egress through a public
road or street, to and from the properties demised under the Leases.
(e) The properties demised under the Leases and the
improvements thereon constitute all of the real property and leases currently
used exclusively or materially for the IDF Business and are adequate and
sufficient for the current operations of IDF and the IDF Business.
(f) To the knowledge of IDF, there is no pending proceeding
for the taking or condemnation of all or any portion of the properties demised
under the Leases or pending taking or condemnation proceeding which would result
in a termination of any Lease of real property, and none of the same is
threatened.
(g) There are no material items of maintenance that have been
materially deferred with respect to any of the improvements on the real property
demised under the Leases.
(h) IDF has received no uncured notice from applicable
governmental authorities of any outstanding violations of any building or zoning
laws, codes or regulations, or governmental or judicial orders issued pursuant
thereto, with respect to the real property and the improvements thereon demised
under the Leases, and there are no such violations.
5.13 Accounts Receivable. All accounts receivable shown on the
balance sheet as of March 31, 1997 included in the IDF Financial Statements (the
"Balance Sheet"), and all accounts receivable thereafter created or acquired by
IDF prior to the Closing Date, have arisen or will arise in the ordinary course
of the IDF Business. Except as set forth on Schedule 4.11 annexed hereto, to
IDF's knowledge (but without guaranteeing the collectability of any accounts
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receivable), all of such accounts receivable (a) are and will be subject to no
counterclaims, set-offs, allowances or discounts of any kind, except to the
extent of the allowance for doubtful accounts as of the March 31, 1997 reflected
in the Balance Sheet, and (b) have been, are and will be valid and collectible
in the ordinary course of business within 210 days after the Closing Date
(subject to the aforesaid allowance for doubtful accounts), without necessity of
instituting any legal proceedings for collection.
5.14 Inventories. All supplies and other inventories shown on the
Balance Sheet, and all inventories thereafter acquired by IDF prior to the
Closing Date, have been and will be valued at the lower of cost or market, and
consisted and will consist of items which are of a quality and quantity which
are useable in the ordinary course of IDF's business for customary commercial
purposes, and are substantially at IDF's normal working levels of the same in
the current conduct of its businesses in the ordinary course.
5.15 Insurance Policies. Schedule 5.15 annexed hereto contains a
true and correct schedule of all insurance coverages held by IDF concerning its
businesses and properties (including but not limited to professional liability
insurance). All such policies are in full force and effect and IDF is not in
default thereunder in any material respect. To the knowledge of IDF, such
policies provide adequate insurance coverage for IDF, its properties and
businesses, as presently conducted.
5.16 Permits and Licenses; Consents. IDF possesses and is in
material compliance with every Permit of any Governmental Authority having
jurisdiction over IDF, or its businesses, properties, or assets, necessary in
order to operate its businesses in the manner presently conducted; all of IDF's
Permits are valid, current and in full force and effect; and none of such
Permits will be voided, revoked or terminated, or are voidable, revocable or
terminable, upon and by reason of the Merger and the change of control of IDF
pursuant to this Agreement. Schedule 5.16 hereto lists all of the Permits of or
in respect of any Governmental Authority or any other Person (as such term is
hereinafter defined) which are required for the execution or delivery by IDF of
this Agreement and the consummation of the transactions contemplated hereby.
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5.17 Contracts and Commitments.
(a) Schedule 5.17 annexed hereto lists all material contracts,
leases, commitments, technology agreements, software development agreements,
software licenses, indentures and other agreements to which IDF is a party
(collectively, "Material Contracts") including, without limitation, the
following: (i) any contract for the purchase of equipment, supplies, other
materials, or other inventory items other than purchase orders for supplies
entered into in the ordinary course of business; (ii) any contract related to
the purchase or lease of any capital asset involving aggregate payments of more
than $5,000 per annum that is not cancelable by IDF on less than thirty (30)
days notice; (iii) all technology agreements, software development agreements
and software licenses (except for pre-printed licenses for commercially
available and non-custom software applications) involving IDF or any Affiliate,
regardless of the duration thereof or the amount of payments called for or
required thereunder; (iv) any guarantee, make-whole agreement, or similar
agreement or undertaking to support, directly or indirectly, the financial or
other condition of any other person or entity; (v) each contract for or relating
to the employment of any officer, employee, technician, agent, consultant, or
advisor to or for IDF that is not cancelable by IDF without penalty, premium or
liability (for severance or otherwise) on less than thirty (30) days' prior
written notice; (vi) license, royalty, franchise, distributorship, dealer,
manufacturer's representative, agency and advertising agreements; (vii) any
contract with any collective bargaining unit; (viii) any mortgage of real
property; (ix) any factoring agreement with respect to the accounts receivable
of IDF; (x) any pledge or other security agreement by IDF other than guaranties
entered into in the ordinary course of business which are not material to IDF,
(xi) any joint venture agreement or similar arrangement; (xii) any
non-competition agreement or similar arrangement; and (xiii) any contract,
lease, commitment, indenture, or other agreement to which IDF is a party that
may not be terminated without penalty, premium or liability by IDF on not more
than thirty (30) days' prior written notice. The term "Material Contract" shall
not include any contract or agreement, the failure of which to maintain, perform
or continue in effect (including by reason of the Merger) has not and is not
reasonably expected to adversely affect IDF and its assets, properties,
businesses or financial condition.
(b) Except as set forth in Schedule 5.17: (i) all Material
Contracts are in full force and effect; (ii) IDF and, to the knowledge of IDF,
the other parties thereto, each are in compliance with all of their respective
obligations under the Material Contracts in all material respects, and are not
in breach or default thereunder, nor has there occurred any condition or event
which, after notice or lapse of time or both, would constitute a default
thereunder; and (iii) none of the Material Contracts will be voided, revoked or
terminated, or voidable, revocable or terminable, in whole or in part, upon and
by reason of the Merger and the change of ownership of IDF pursuant to this
Agreement.
(c) No purchase commitment by IDF is in excess of the normal,
ordinary and usual requirements of the business of IDF.
(d) There is no outstanding power of attorney granted by IDF
to any person, firm or corporation for any purpose whatsoever, except which may
be included as part of the terms of a security agreement or other Material
Contract entered into by IDF in connection with a financing or otherwise in the
ordinary course of its businesses.
5.18 Customers and Suppliers. IDF has no actual knowledge of any
existing, announced or anticipated changes in the policies of, or the
relationships with, or the business of,
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any material clients, customers, or suppliers of IDF which will materially
adversely affect IDF or its condition, financial or otherwise, business, or
prospects.
5.19 Labor, Benefit and Employment Agreements.
(a) Except as set forth in Schedule 5.19 annexed hereto, IDF
is not a party to any agreement with respect to the employment or compensation
of any non-hourly and/or non-union employee(s). IDF is not now, nor has it ever
been, a party to or subject to any collective bargaining agreement or other
labor agreement. Schedule 5.19 sets forth the amount of all compensation or
remuneration (including any discretionary bonuses) paid by IDF during the 1996
calendar year or to be paid by IDF during the 1997 calendar year to employees or
consultants who presently receive aggregate compensation or remuneration at an
annual rate in excess of $50,000.
(b) No union is now certified or, to the best of the knowledge
of IDF and each of AUGI, claims to be certified as a collective bargaining agent
to represent any employees of IDF, and there are no labor disputes existing or,
to the best of the knowledge of IDF, threatened, involving strikes, slowdowns,
work stoppages, job actions or lockouts of any employees of IDF.
(c) There are no unfair labor practice charges or petitions
for election pending or being litigated before the National Labor Relations
Board or any other federal or state labor commission relating to any employees
of IDF. Except as set forth on Schedule 5.19, IDF has not received any written
notice of any actual or alleged violation of any law, regulation, order or
contract term affecting the collective bargaining rights of employees, equal
opportunity in employment, or employee health, safety, welfare, or wages and
hours.
(d) IDF has not, at any time, been and is not now required to
make contributions to, be a party to or covered by (or had any of its employees
covered by), and has not withdrawn from (partially or otherwise), and has not
had and does not have any obligations to or in respect of any "multiemployer
plan" (as defined in Section 3(37) of ERISA.
(e) Except as disclosed in Schedule 5.19, IDF does not
maintain, or have any liabilities or obligations of any kind with respect to,
any bonus, commission, deferred compensation, excess benefits, pension, thrift,
savings, employee ownership, salary continuation, severance, profit sharing,
retirement, supplemental retirement, or other such benefit plan, and does not
have any potential or contingent liability in respect of any actions or
transactions relating to any such plan other than to make contributions thereto
if, as, and when due in respect of periods subsequent to the date hereof.
Without limitation of the foregoing, (i) IDF has made all required contributions
to or in respect of any and all such benefit plans, (ii) no "accumulated funding
deficiency" (as defined in Section 412 of the Code has been incurred in respect
of any of such benefit plans, and the present value of all vested accrued
benefits thereunder does not, on the date hereof, exceed the assets of any such
plan allocable to the vested accrued benefits thereunder, (iii) there has been
no "prohibited transaction" (as defined in Section 4975 of the Code) with
respect to any such plan, and no transaction which could give rise to any tax or
penalty under Section 4975 of the Code or Section 502 of ERISA, and (iv) there
has been no "reportable event" (within the meaning of Section 4043(b) of ERISA)
with respect to any such plan. All of such plans which constitute, are intended
to constitute, or have been treated by IDF as "employee pension benefit plans"
or other plans within Section 3 of ERISA have been
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determined by the Internal Revenue Service to be "qualified" under Section
401(a) of the Code, and have been administered and are in compliance with ERISA
and the Code; and AUGI has no knowledge of any state of facts, conditions or
occurrences such as would impair the "qualified" status of any of such plans.
(f) Except for the group insurance programs listed in Schedule
5.19, IDF does not maintain any medical, health, life, dental, short- or
long-term disability, hospitalization, accident, death benefits, or other
employee benefit insurance programs, or sick leave or vacation or holiday or
leave policies, or any welfare plans (within the meaning of Section 3(1) of
ERISA) for the benefit of any current or former employees, and, except as
required by law, IDF has no liability, fixed or contingent, for health or
medical benefits to any former employee.
5.20 No Breach of Statute, Decree or Other Instrument.
Except as set forth in Schedule 5.20 annexed hereto and as
otherwise would not have a material adverse effect on the existing businesses,
assets, financial condition or prospects of IDF: (i) neither the execution and
delivery of this Agreement by IDF, nor the performance of, or compliance with,
the terms and provisions of this Agreement on the part of IDF, will violate or
conflict with any term of the Certificate of Incorporation or By-Laws of IDF or,
to the knowledge of IDF, any statute, law, rule or regulation of any
governmental authority affecting the existing businesses of IDF, or will cause
or permit the material modification of the effect of, the imposition of any Lien
in respect of, or the acceleration of any obligations or terms or the
termination of any rights or imposition of any burdens under, or conflict with,
result in a breach of, or constitute a default under, any of the terms,
conditions or provisions of any judgment, order, award, injunction or decree, or
any of the material terms, conditions or provisions of any contract, lease,
agreement, indenture or other instrument to which IDF is a party or by which IDF
is bound; and (ii) no consent, authorization or approval of or filing with any
governmental authority or agency, or any third party, will be required on the
part of IDF as conditions precedent to the consummation of the transactions
contemplated hereby, or result in the cancellation of any Permits presently held
by IDF which are required for the operation of its business as conducted on the
date hereof.
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5.21 Compliance with Laws.
(a) Except as set forth in Schedule 5.21 to this Agreement,
IDF has been, and is now in compliance (except to the extent, disclosed on
Schedule 5.21, that incidental and non-material non-compliance has not had and
can not reasonably be expected to have a material adverse effect on IDF, its
properties or assets, its businesses, its condition (financial or otherwise), or
its prospects) with each of the following which is applicable to or binding upon
or affecting IDF or its property, assets, or business, or to which IDF, or its
property, assets, or business are subject: every statute, ordinance, code or
other law, treaty, rule, regulation, order, technical or other standard,
requirement or procedure existing, enacted, adopted, administered, enforced, or
promulgated, by any Governmental Authority (each of the foregoing, a "Law"), and
every Permit, and every order, judgment, writ, injunction, award, decree,
demand, assessment or determination of any arbitrator and of every Governmental
Authority (each of the foregoing, an "Order"; each Law, Permit, and Order being
sometimes hereinafter referred to as a "Requirement of Law"). Neither IDF nor
its properties, assets, or business are subject to or directly affected by any
Requirement of Law of any Governmental Authority, other than those similarly
affecting similar enterprises engaged in a material way in the same business
activities.
(b) IDF has not, at any time: (i) acquired, handled, utilized,
stored, generated, processed, transported, or disposed of any hazardous or toxic
substances, whether in violation of any foreign, federal, state, or local
environmental or occupational health and safety laws or regulations or
otherwise, (ii) otherwise committed any material violation of any foreign,
federal, state, or local environmental or occupational health and safety laws or
regulations (including, without limitation, the provisions of the Environmental
Protection Act and other applicable environmental statutes and regulations) or
any violation of the Occupational Safety and Health Act, or (iii) been in
violation of any material requirements of its insurance carriers from time to
time.
(c) Neither IDF nor any of its directors, officers or
employees has received any written notice of default or violation, nor, to the
best of the knowledge of IDF, is IDF or any of its directors, officers or
employees in default or violation, with respect to any judgment, order, writ,
injunction, decree, demand or assessment issued by any court or any federal,
state, local, municipal, or other governmental agency, board, commission,
bureau, instrumentality or department, domestic or foreign, relating to any
aspect of IDF's business, affairs, properties, or assets. Neither IDF nor any of
its directors, officers or employees, has received written notice of, been
charged with, or, to its or their knowledge, is under investigation with respect
to, any violation of any provision of any federal, state, local, municipal, or
other law or administrative rule or regulation, domestic or foreign, relating to
any aspect of IDF's business, affairs, properties or assets, which violation
would have a material adverse effect on IDF, its properties or assets, its
businesses, its condition (financial or otherwise), or its prospects.
(d) Schedule 5.21 sets forth the date(s), if any, of the last
known audits or inspections (if any) of IDF conducted by or on behalf of the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and any other Governmental Authority.
5.22 Litigation. Except as disclosed in Schedule 5.22 annexed
hereto, there are no private or governmental orders, claims, actions, suits,
arbitrations, investigations,
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administrative or other proceedings (including, without limitation, any claim
alleging the invalidity, infringement or interference of any patent, patent
application, software, technology or other intellectual property rights owned or
licensed by IDF) or investigations (collectively, the "Actions") pending or, to
the knowledge of IDF, are any Actions threatened, against IDF or relating to its
businesses or properties, at law or in equity or before or by any court or any
Governmental Authority. Except as disclosed in Schedule 5.22 annexed hereto, IDF
is not aware of any state of facts, events, conditions or occurrences which
might properly constitute grounds for or the basis of any meritorious Action
against or with respect to IDF, which would, if determined adversely, have a
material adverse effect on IDF, the IDF Business or any material portion of its
assets, or impair the ability of IDF to deliver the Merger Consideration free
and clear of all pledges, Liens, claims, charges, options, calls, encumbrances,
restrictions and assessments whatsoever (except any restrictions which may be
created by operation of state or federal securities laws).
5.23 Intellectual Property. Schedule 5.23 annexed hereto correctly
sets forth a list and brief description of the nature and ownership of: (a) all
patents, patent applications, copyright registrations and applications,
registered trade names, service marks, trademark registrations and applications,
both domestic and foreign, which are presently owned, filed or held by IDF
and/or any of its directors, officers, stockholders or employees and which in
any way relate to or are used in the business of IDF; (b) all licenses, computer
software licenses, and software access or joint development agreements, both
domestic and foreign, which are owned or controlled by IDF and/or any of its
directors, officers, stockholders or employees and which in any way relate to or
are used in the business of IDF; and (c) all franchises, licenses and/or similar
arrangements granted to IDF by others and/or to others by IDF (collectively, the
"Intellectual Property"). None of the Intellectual Property set forth or
required to be set forth in Schedule 5.23 is subject to any pending challenge
known to IDF, infringes on or misappropriates the rights of any others, or is
subject to loss or expiration in the near future (or the threat of such loss or
expiration). Except as set forth on Schedule 5.23, IDF owns good and marketable
title to the same free and clear of any Liens.
5.24 Transactions with Affiliates. Except as set forth on Schedule
5.24, no material asset employed in the business of IDF is owned by, leased from
or leased to any of the stockholders of IDF, any of their respective Affiliates,
members of their families or any partnership, corporation or trust for their
benefit, or any other officer, director or employee of IDF or any Affiliate of
IDF.
5.25 Bank Accounts. Annexed hereto as Schedule 5.25 is a correct and
complete list of all bank accounts and safe deposit boxes maintained by or on
behalf of IDF, with indication of all persons having signatory, access or other
authority with respect thereto.
5.26 Certain Legal Proceedings. Except as described in writing to
AUGI by the IDF Group, during the past five-year period, neither the IDF Group,
any officer or director of the IDF Group, nor any person intended to become an
officer or director of the IDF Group or as a nominee of the IDF Group to become
a director of IDF upon the Merger, has been the subject of:
(a) a petition under the Federal bankruptcy laws or any other
insolvency law or has a receiver, fiscal agent or similar officer been appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or
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within two years before the time of such filing, or any corporation or business
association of which he was an executive officer at or within two years before
the time of such filing;
(b) a conviction in a criminal proceeding or a named subject
of a pending criminal proceeding (excluding minor traffic violations which do
not relate to driving while intoxicated or driving under the influence);
(c) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from, or otherwise limiting, the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the united States
Commodity Futures Trading Commission or any associated person of any of the
foregoing, or as an investment advisor, underwriter, broker or company, bank,
savings and loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of Federal, state or other securities laws or commodities laws;
(d) any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal, state or local authority barring,
suspending or otherwise limiting for more than 60 days the right of such person
to engage in any activity described in the preceding sub-paragraph, or to be
associated with persons engaged in any such activity;
(e) a finding by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission (the "Commission") to have
violated any securities law, regulation or decree and the judgment in such civil
action or finding by the Commission has not been subsequently reversed,
suspended or vacated; or
(f) a finding by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
5.27 No Misleading Statements. None of the information supplied or
to be supplied by or about the IDF Group for inclusion or incorporation by
reference in the offering materials concerning the Merger Financing or in any
information supplied to IDF concerning the Merger contains any untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
5.28 Schedules Incorporated by Reference. The making of any
recitation in any Schedule hereto shall be deemed to constitute a representation
and warranty that such recitation is an accurate statement and disclosure of the
information required by the corresponding Section(s)
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of this Agreement (or taken as a whole), as, to the extent, and subject to the
qualifications and limitations, set forth in such corresponding Section(s).
6. NOTICES.
6.1 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice is
to be given, or by confirmation of facsimile delivery or by nationwide overnight
delivery service, or on the third day after mailing if mailed to the party to
whom notice is to be given, by first class mail, registered or certified,
postage prepaid, and properly addressed as follows:
(a) If to AUGI or TechStar:
TechStar Communications, Inc.
4340 East West Highway, Suite 1000
Bethesda, Maryland 20814
Attn: Solon L. Kandel, President
-and-
American United Global, Inc.
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
Attention: Robert M. Rubin, Chief Executive Officer
with a copy sent concurrently to:
Greenberg Traurig Hoffman
Lipoff Rosen & Quentel
153 East 53rd Street
New York, New York 10022
Attention: Stephen A. Weiss, Esq.
(b) If to IDF or Mergerco:
IDF International, Inc.
d/b/a Hayden/Wegman, Inc.
330 West 42nd Street
New York, New York 10036
Attn: Lambit Kald, President
with a copy sent concurrently to:
David N. Feldman, Esq.
36 West 44th Street, Suite 1201
New York, New York 10036
or to such other address as any party shall have specified by notice in writing
given to all other
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parties.
7. CONDITIONS PRECEDENT TO CLOSING; ADDITIONAL AGREEMENTS OF THE PARTIES.
7.1 IDF and Mergerco's Conditions Precedent. The obligations of IDF
and Mergerco to close the transactions contemplated by this Merger Agreement are
hereby conditioned upon the fulfillment by AUGI or TechStar, at or prior to the
Closing, of the following conditions precedent, unless waived in writing by IDF:
(a) Accuracy of Representations and Warranties of AUGI and
TechStar. All representations and warranties made by AUGI and TechStar in this
Agreement, in any Schedule(s) hereto, and/or in any AUGI Transaction Agreement
delivered to Mergerco or IDF under, pursuant to, or in connection with, this
Agreement will be true and correct in all material respects on and as of the
date hereof and will be true and correct in all material respects on the Closing
Date, unless such warranty is specifically stated to be as of an earlier date,
in which case it shall be true and correct as of such earlier date, and AUGI and
TechStar shall deliver a certificate to such effect.
(b) Performance by TechStar and AUGI. TechStar and AUGI shall
have performed, satisfied and complied with all covenants, agreements and
conditions required by this Agreement and any AUGI Transaction Agreement to be
performed, satisfied or complied with by them on or before the Closing Date
hereof.
(c) Execution and Delivery of Certificate of Merger. TechStar
and Mergerco and, to the extent necessary or appropriate, their respective
officers and directors, shall have executed and delivered the Certificate of
Merger in the form of Exhibit A to this Agreement for filing with the
appropriate governmental authority immediately upon execution and delivery of
this Agreement.
(d) Execution and Delivery of TechStar Employment Agreements.
Each of Kandel, Luciani and Moskona shall have executed and delivered to IDF
their respective TechStar Employment Agreement in the form of Exhibits B-1, B-2,
and B-3 to this Agreement.
(e) Certain IDF and TechStar Indebtedness. IDF is currently
indebted to Robert M. Rubin in the amount of approximately $800,000, inclusive
of accrued interest, and TechStar is currently indebted to AUGI in the amount of
$300,000. On the Closing Date of the Merger, all of such indebtedness shall be
exchanged for five year notes of IDF in substantially the form of Exhibit C
annexed hereto (the "IDF Notes"); which IDF Notes shall:
(i) be guaranteed as to payment, jointly and severally,
by all of the IDF Subsidiaries, including H-W and TechStar;
(ii) bear interest at the rate of 8% per annum payable
quarterly; and
(iii) be due and payable as to principal on a date which
shall be the earlier to occur of: (A) five years from the
Closing Date of the
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Merger, or (B) to the maximum extent and in the manner set
forth on Schedule 7.1(e) annexed hereto, the consummation of
any public or private placement of securities (other than the
Merger Financing) of IDF or any of its Subsidiaries, which
individually or in the aggregate results in gross cash
proceeds of $2.5 million or more; provided, however, that the
$300,000 payable to AUGI may be prepaid by TechStar on or
before December 31, 1997 out of available cash resources of
TechStar but not out of any of the proceeds of the Merger
Financing.
(f) Certain AUGI Indebtedness. AUGI is currently indebted to
Messrs. Luciani and Moskona in the amount of $600,000 pursuant to a three year
Citibank NA prime rate notes, payable as to $100,000 in December 1997, $200,000
in December 1998 and $300,000 in December 1999 (the "AUGI Notes"). On the
Closing Date of the Merger, the 1998 and 1999 payments under such AUGI Notes
shall be assigned by AUGI to TechStar and assumed by TechStar; provided, that
AUGI shall make the 1997 principal payment and all interest payments under the
AUGI Notes, and unconditionally guaranty all payments by TechStar of such AUGI
Notes which have been assumed by TechStar. Annexed hereto as Exhibit D is a true
copy of the assignment and assumption agreement between AUGI and TechStar in
respect of such AUGI Notes to be executed and delivered on the Closing Date of
the Merger.
(g) Execution and Delivery of Non-Competition Agreement. On
the Closing Date of the Merger, AUGI shall have executed and delivered to IDF a
non-competition and non-disclosure agreement in the form of Exhibit E to this
Agreement (the "Non-Competition Agreement"), pursuant to which, inter alia, AUGI
shall agree not to engage in competition with the TechStar Business and the IDF
Business upon the terms and for the period specified in such Non-Competition
Agreement.
(h) Due Diligence. IDF shall be satisfied in all respects with
the results of its due diligence investigation of TechStar.
(i) Merger Financing. Simultaneous with the Closing of the
Merger, IDF shall obtain proceeds of not less than $1.75 million and not more
than $2.25 million from the Merger Financing, prior to expenses related to such
Merger Financing as disclosed on Exhibit A.
(j) Investment by TechStar Management. As part of the Merger
Financing referred to in Section 7.1(h) above, Messrs. Kandel, Moskona and
Luciani shall, in the aggregate, have invested not less than $250,000 in IDF on
the same terms and conditions as the other investors in the Merger Financing.
(k) Operation of TechStar Business. At all times prior to the
Closing Date of the Merger, the business of TechStar will have been operated in
the normal course, with no material variations in historic payment or collection
practices or expense, with no incurrence of any material obligations outside of
the normal course of business, and with no material adverse change from the
results of operations reflected in the financial information previously
provided.
(l) Third Party Consents. TechStar shall have caused to be
obtained and there shall be in full force and effect at the Closing Date,
without burden to the ongoing
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business of TechStar, all material consents, waivers or other approvals from any
lessor, supplier, government agency, customer, or other party which may be
required in order for TechStar to continue the normal course of the operation of
its business from and after the Closing Date.
(m) Fairness Opinion. IDF shall have obtained a written
opinion from an independent investment banking firm which shall be satisfactory
to the Board of Directors of IDF, to the effect that the Merger is fair to the
shareholders of IDF from a financial point of view.
(n) Conduct of Business; Payments of Compensation, Dividends
and Distributions. From and after June 16, 1997 (the date of execution of a
letter of intent among the parties hereto) through and including the Closing
Date and except as set forth in this Merger Agreement or on any Schedule to this
Agreement:
(i) other than as disclosed in writing to IDF, no assets
of TechStar shall have been paid as a dividend or distributed to AUGI or
any AUGI Affiliate prior to the Closing Date, except to the extent
necessary to pay taxes on income of TechStar earned through the Closing
Date; and
(ii) neither of AUGI nor TechStar shall have engaged in
any of the following without, in each instance, the prior written consent
of AUGI:
(1) amended TechStar's Certificate of
Incorporation or By-Laws;
(2) issued any shares of TechStar's capital stock;
(3) issued or created any warrants, obligations,
subscriptions, options, convertible securities or other
commitments under which any additional shares of TechStar's
capital stock might be directly or indirectly issued;
(4) amended, canceled or modified any existing
Material Contract binding on TechStar, except in the ordinary
course of the TechStar Business;
(5) paid, granted or authorized any salary
increases or bonuses or entered into or amended or terminated
any employment, consulting or management agreements by or on
behalf of TechStar, other than raises or bonuses previously
committed and disclosed to IDF and in the ordinary course of
the TechStar Business;
(6) except in the ordinary course of the TechStar
Business, modified any agreement to which TechStar is a party
or by which it may be bound, or modify any payment terms with
any creditor;
(7) made any material change in TechStar's
management personnel;
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(8) except pursuant to commitments in effect on
the date hereof (to the extent disclosed in this Agreement or
in any Schedule hereto), made any capital expenditure(s) or
commitment(s) on behalf of TechStar, whether by means of
purchase, lease or otherwise, or any operating lease
commitment(s), in excess of $25,000 in the aggregate;
(9) sold, assigned or disposed of any capital
asset(s) of TechStar with a net book value in excess of
$25,000 as to any one item;
(10) changed the method of TechStar's collection
of accounts or notes receivable, accelerated or slowed its
payment of accounts payable, or prepaid any of its obligations
or liabilities, other than prepayments to take advantage of
trade discounts not otherwise inconsistent with or in excess
of historical prepayment practices;
(11) voluntarily subjected any of the assets or
properties of TechStar to any further Liens or encumbrances;
(12) forgiven any liability or indebtedness owed
to TechStar by AUGI or any of TechStar's or AUGI's Affiliates;
or
(13) agreed to do, or take any action in
furtherance of, any of the foregoing.
(o) Termination of Prior Employment Agreements. The Prior
Employment Agreements among TechStar (formerly BTS Acquisition Corp.) and each
of Messrs. Kandel, Luciani and Moskona shall have been terminated and superseded
in all respects by the TechStar Employment Agreements.
(p) Conversion of Mergerco Shares. The outstanding shares of
capital stock of Mergerco shall have been converted, pursuant to the Merger,
into outstanding shares of Stock.
7.2 AUGI's and TechStar's Conditions. The obligations of AUGI and
TechStar to close transactions contemplated by this Merger Agreement is hereby
conditioned upon the fulfillment by IDF and/or H-W, at or prior to the Closing,
of the following conditions precedent, unless waived in writing by AUGI:
(a) Accuracy of Representations and Warranties of IDF and
Mergerco. All representations and warranties made by Mergerco and/or IDF in this
Agreement, in any Schedule(s) hereto, and/or in any IDF Transaction Agreement
delivered to TechStar or AUGI under, pursuant to, or in connection with, this
Agreement are true and correct in all material respects on and as of the date
hereof and will be true and correct in all material respects on the Closing
Date, unless such warranty is specifically stated to be as of an earlier date,
in which case it shall be true and correct as of such earlier date, and IDF and
Mergerco shall deliver a certificate to such effect.
(b) Performance by Mergerco and IDF. Mergerco and IDF shall
have performed, satisfied and complied with all covenants, agreements and
conditions required by this
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Agreement to be performed, satisfied or complied with by them on or before the
Closing Date.
(c) Delivery of Merger Consideration. IDF shall have delivered
to AUGI, upon the consummation of the Merger, certificates of IDF Common Stock
representing the full Merger Consideration.
(d) Execution and Delivery of Certificate of Merger. TechStar
and Mergerco and, to the extent necessary or appropriate, their respective
officers and directors, shall have executed and delivered the Certificate of
Merger in the form of Exhibit A to this Agreement for filing with the
appropriate governmental authority immediately upon execution and delivery of
this Agreement.
(e) Execution and Delivery of Employment Agreements. Each of
Kandel, Luciani and Moskona shall have executed and delivered their respective
TechStar Employment Agreement in the form of Exhibits B-1, B-2, and B-3 to this
Agreement, and Kald shall have executed and delivered his employment agreement
in the form of Exhibit I to this Agreement.
(f) IDF Notes. IDF and TechStar shall have delivered to each
of Robert M. Rubin and AUGI, respectively, $800,000 and $300,000 IDF Notes in
accordance with Exhibit C annexed hereto in cancellation of exiting indebtedness
as set forth in Section 7.1(e).
(g) Assignment and Assumption Agreement. On the Closing Date,
TechStar shall have executed and delivered to AUGI the assignment and assumption
agreement in respect of the AUGI Notes in the form of Exhibit D annexed hereto.
(h) Due Diligence. AUGI shall be satisfied in all respects
with the results of its due diligence investigation of IDF and its Subsidiaries,
including H-W.
(i) Merger Financing. Simultaneous with the Closing of the
Merger, IDF shall obtain proceeds of not less than $1.75 million and not more
than $2.25 million from the Merger Financing, prior to expenses related to such
Merger Financing as disclosed on Exhibit A; such expenses not to exceed $200,000
in the aggregate.
(j) Investment by TechStar Management. As part of the Merger
Financing referred to in Section 7.2(i) above, Messrs. Kandel, Moskona and
Luciani shall, in the aggregate, have invested not less than $250,000 in IDF on
the same terms and conditions as the other investors in the Merger Financing.
(k) Settlement of Certain IDF Obligations. As at Closing Date
of the Merger, in addition to the refinancing of the IDF and TechStar
indebtedness evidenced by the IDF Notes, IDF shall have utilized the net
proceeds of the Merger Financing to have effected settlements, in a manner
reasonably satisfactory to AUGI (involving lump sum payments or payment
agreements) of approximately $2.5 million of IDF indebtedness or other accrued
obligations to creditors which are specified on Schedule 7.2(k) annexed hereto
(the "IDF Obligations"); such IDF Obligations to include, without limitation:
(i) all IDF Obligations in respect of accrued and unpaid
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withholding, income and other federal or state taxes,
(ii) all IDF Obligations in respect of premiums and
unpaid contributions in respect of its defined contribution savings
and investment plan (estimated at approximately $175,000),
(iii) the disputed premiums in respect of H-W's health
insurance policy with Cigna, and
(iv) certain accrued and unpaid accounts payable in
respect of professional fees and disbursements outstanding for more
than 90 days from April 30, 1997.
(l) Operation of IDF Business. At all times prior to the
Closing Date of the Merger, the IDF Business will have been operated by IDF and
H-W in the normal course, with no material variations in historic payment or
collection practices or expense, with no incurrence of any material obligations
outside of the normal course of business, and with no material adverse change
from the results of operations reflected in the financial information previously
provided.
(m) Third Party Consents. IDF shall have caused to be obtained
and there shall be in full force and effect at the Closing Date, without burden
to the ongoing IDF Business, all material consents, waivers or other approvals
from any lessor, supplier, government agency, customer, or other party which may
be required in order for IDF and H-W to continue the normal course of the
operation of the IDF Business from and after the date of closing.
(n) Fairness Opinion. AUGI shall have obtained a written
opinion from an independent investment banking firm which shall be satisfactory
to the Board of Directors of AUGI, to the effect that the Merger is fair to the
stockholders of AUGI from a financial point of view.
(o) Conduct of Business; Payments of Compensation, Dividends
and Distributions. From and after June 16, 1997 (the date of execution of a
letter of intent among the parties hereto) through and including the Closing
Date and except as set forth in this Merger Agreement or on any Schedule to this
Agreement:
(i) other than as disclosed in writing to AUGI, no
assets of IDF or H-W shall have been paid as a dividend or distributed to
IDF or any IDF Affiliate prior to the Closing Date, except to the extent
necessary to pay taxes on income of H-W or other IDF Subsidiaries earned
through the Closing Date; and
(ii) neither of IDF nor H-W shall have engaged in any of
the following without, in each instance, the prior written consent of
AUGI:
(1) amended IDF's or H-W's Articles of
Incorporation or By-Laws;
(2) issued any shares of IDF or H-W's capital
stock, other than to AUGI as Merger Consideration or in
connection with the Merger Financing;
38
<PAGE>
(3) issued or created any warrants, obligations,
subscriptions, options, convertible securities or other
commitments under which any additional shares of IDF or H-W's
capital stock might be directly or indirectly issued;
(4) amended, canceled or modified any existing
Material Contract binding on IDF or H-W, except in the
ordinary course of the IDF Business;
(5) paid, granted or authorized any salary
increases or bonuses or enter into any employment, consulting
or management agreements by or on behalf of IDF or H-W, other
than raises or bonuses previously committed and in the
ordinary course of the IDF Business;
(6) except in the ordinary course of the IDF
Business, modified any agreement to which IDF or H-W is a
party or by which it may be bound, or modify any payment terms
with any creditor;
(7) made any material change in IDF or H-W's
management personnel;
(8) except pursuant to commitments in effect on
the date hereof (to the extent disclosed in this Agreement or
in any Schedule hereto), made any capital expenditure(s) or
commitment(s) on behalf of IDF or H-W, whether by means of
purchase, lease or otherwise, or any operating lease
commitment(s), in excess of $25,000 in the aggregate;
(9) sold, assigned or disposed of any capital
asset(s) of IDF or H-W with a net book value in excess of
$25,000 as to any one item;
(10) changed the method of IDF or H-W's collection
of accounts or notes receivable, accelerated or slowed its
payment of accounts payable, or prepaid any of its obligations
or liabilities, other than prepayments to take advantage of
trade discounts not otherwise inconsistent with or in excess
of historical prepayment practices;
(11) voluntarily subjected any of the assets or
properties of IDF or H-W to any further Liens or encumbrances;
(12) forgiven any liability or indebtedness owed
to IDF or H-W by any of their Affiliates; or
(13) agreed to do, or take any action in
furtherance of, any of the foregoing.
(p) Termination of Prior Employment Agreements. The Prior
Employment Agreements among TechStar (former BTS Acquisition Corp.) and each of
Messrs. Kandel, Luciani and Moskona shall have been terminated and superseded in
all respects by the
39
<PAGE>
TechStar Employment Agreements.
(q) Cancellation of AUGI Stock Options. The stock options to
purchase an aggregate of 900,000 shares of AUGI Common Stock, $.01 par value per
share (the "AUGI Options") which have been issued to Messrs. Kandel, Luciani,
Moskona and other officers and personnel of TechStar shall have been cancelled
by a written agreement from each of such Persons satisfactory to AUGI and its
legal counsel.
7.3 The Parties' Conditions Precedent. The respective obligations of
the parties to close the transactions contemplated by this Agreement are
conditioned upon the fulfillment, at or prior to Closing, of the following
conditions unless waived in writing by the person for whose benefit such
condition has been made:
(a) Resolutions; Incumbency; Certified Bylaws and Certificate
of Incorporation; Good Standing Certificate. On the Closing Date, each of the
corporate parties shall have delivered to each of the other parties hereto the
following: (i) copies of resolutions of such parties' Board of Directors and, to
the extent reasonably requested or required by Delaware law, stockholders of the
corporate entity, in form reasonably satisfactory to counsel for the other
parties to this Agreement, authorizing such corporate party's execution,
delivery and performance of this Agreement and the Merger, and all actions to be
taken by such corporate party hereunder, certified by the Secretary of such
corporate party as of the date hereof to be in accurate and complete and in full
force and effect; (ii) certificates evidencing the incumbency and signatures of
relevant officers of such corporate party, certified by the Secretary of such
corporate party as of the date of this Agreement to be complete and accurate;
(iii) a copy of the bylaws and of the certificate of incorporation of such
corporate party, certified by the Secretary of such corporate party to be
complete and accurate and in full force and effect as of the date hereof; and
(iv) certificates, dated as of a date not more than five (5) days prior to the
Closing Date, by the Secretary of State of the state of incorporation of such
corporate party, evidencing the good standing of such corporate party in such
state.
(b) Opinion of Counsel. Each party to this Agreement has
received the opinion of counsel to each other party to this Agreement, dated as
of the Closing Date substantially in the form of Exhibit F hereto .
(c) Grant of Additional IDF Stock Options. In addition to the
TechStar Options granted by IDF to Messrs. Kandel, Luciani and Moskona pursuant
to the terms of the TechStar Employment Agreements, on the Closing Date pursuant
to Exhibit G annexed hereto IDF shall issue, in lieu of options to purchase
120,000 shares of AUGI Common Stock held by other officers and personnel of
TechStar, options to purchase an aggregate of 131,777 additional shares of IDF
Common Stock, upon terms and conditions functionally identical to the TechStar
Options.
(d) Votes of AUGI. Subject to receipt of the Merger
Consideration, AUGI hereby covenants and agrees to vote all of the Stock of
TechStar owned by AUGI IN FAVOR of the Merger and all of the other transactions
contemplated by this Agreement and the AUGI Transaction Agreements.
40
<PAGE>
(e) Surviving Corporation a Subsidiary. Upon completion of the
Merger, the Surviving Corporation shall remain a wholly-owned subsidiary of IDF.
The Certificate of Incorporation of TechStar, as the Surviving Corporation,
shall be in form and substance annexed hereto as Exhibit H and made a part
hereof.
(f) Boards of Directors. At the effectiveness of the Merger,
the initial Boards of Directors of IDF and of all members of the IDF Group,
including each of TechStar and H-W shall consist of five persons: Robert M.
Rubin, Lawrence Kaplan, Sergio Luciani, Solon L. Kandel and Lembit Kald. In
addition, upon completion of any subsequent public offering of securities of
IDF, the Board of Directors of IDF shall be expanded to include two additional
directors who shall be unaffiliated with AUGI or IDF, if required by the
exchange on which IDF's securities shall be listed. In the event that any either
of Messrs. Kaplan or Kald is unable or unwilling to serve, a person designated
by H-W shall take the place of such unavailable director; provided, that if
either Luciani or Kandel is unable or unwilling to serve as a TechStar director,
such person's replacement shall be Moskona, if he shall then be employed by
TechStar. In the event that any of Messrs. Rubin, Luciani or Kandel are unable
or unwilling to serve, a person designated by AUGI shall take the place of such
unavailable director. For so long as any of Messrs. Luciani, Kandel and Kald are
employed by any of TechStar, AUGI shall vote its shares of IDF Common Stock in
favor of their continued nomination to the Boards of Directors of TechStar. AUGI
also agrees to vote its shares of IDF Common Stock to elect Messrs. Kaplan and
Kald or their replacements designated by H-W, as provided above, to the Board of
Directors of H-W.
(g) Management. At the effective time of the Merger, the
senior executive officers of each of IDF, TechStar and H-W shall be as follows:
IDF:
Name Title
---- -----
Robert M. Rubin Chairman of the Board of Directors
Solon L. Kandel President and Chief Executive Officer
Sergio Luciani Senior Vice President, Chief Financial Officer
and Secretary
Toby Moskona Executive Vice President
Lembit Kald Executive Vice President
TechStar:
Name Title
---- -----
Sergio Luciani President and Chief Executive Officer
Donald Shipley Chief Financial Officer
Toby Moskona Executive Vice President
41
<PAGE>
H-W:
Name Title
---- -----
Lembit Kald President and Chief Executive Officer
Donald Shipley Chief Financial Officer
Sergio Luciani Executive Vice President
(h) Expenses. Each party (including Messrs. Kandel, Luciani
and Moskona) shall be responsible for the payment of its own costs and expenses
(including professional fees, of its attorneys, accountants and other advisors)
in connection with the transactions contemplated hereby. In connection therewith
(a) IDF shall be responsible for the costs of auditing its own consolidated
financial statements as at June 30, 1997 and for the fiscal year then ended, and
(b) AUGI shall be responsible for the costs of auditing TechStar financial
statements as at June 30, 1997 and for the fiscal period then ended.
(i) Confidentiality; Publicity. Except as and to the extent
otherwise required by law or upon advise of legal counsel, each of the parties
hereto shall maintain strict confidentiality with respect to this transaction
and all confidential information delivered to such party pursuant hereto, and
with respect to the negotiations relating to the transactions contemplated
hereby. In addition, none of the parties shall issue any press release or make
any other public announcement regarding the transactions contemplated hereby
without the prior consent and approval of the other parties in each instance,
which approval shall not be unreasonably withheld or delayed.
(j) Kald Employment Agreement. On the Closing Date, IDF and
Lembit Kald shall have executed an employment agreement in substantially the
form of Exhibit I annexed hereto and made a part hereof (the "Kald Employment
Agreement").
(k) Rubin Consulting Agreement. On the Closing Date, IDF and
Robert M. Rubin shall have executed a consulting agreement in substantially the
form of Exhibit J annexed hereto and made a part hereof (the "Rubin Consulting
Agreement").
7.4 Additional Post-Closing Agreements. The parties hereto shall use
their best efforts to cause the following events to occur as soon as practicable
following the Closing Date; provided, that the occurrence of the following shall
not be a condition precedent to consummate the transactions contemplated by this
Agreement:
(a) Bank Financing. Each of AUGI and IDF do hereby agree to
use their collective best efforts to obtain a secured line of credit of
approximately $4.0 million for the IDF Group from any recognized lending
institution, on such terms and conditions as the Board of Directors of AUGI and
IDF shall mutually determine.
(b) Authorization of Preferred Stock. IDF shall, at its next
annual shareholders meeting, to occur on or about October 31, 1997, propose (i)
to amend the Certificate of Incorporation of IDF to authorize a series of
preferred stock into which the IDF indebtedness evidencing the Merger Financing
shall automatically convert, such amendment to be
42
<PAGE>
in the form to be annexed to the documents relating to the Merger Financing, and
(ii) to amend the Certificate of Incorporation to change the name of IDF to such
name as shall be proposed by the Board of Directors of IDF. By its execution of
this Agreement, AUGI hereby covenants and agrees to vote IN FAVOR of the
foregoing amendments to the Certificate of Incorporation of IDF.
(c) Redemption of IDF 8% Debentures. Subject to the right of
the holders to convert the IDF 8% Debentures into shares of IDF Common Stock,
prior to the Closing Date, IDF shall offer to redeem and repurchase for cash at
the face amount plus accrued interest thereon, all outstanding IDF 8%
Debentures, and shall use a portion of the net proceeds of the Merger Financing
for such purposes; provided, however, that neither the failure of IDF to so
redeem and repurchase outstanding IDF 8% Debentures, nor the conversion of all
or any portion of such IDF 8% Debentures into IDF Common Stock by the holders
thereof, shall constitute a condition to the obligations of any party hereto to
consummate the Merger upon the terms and conditions set forth herein.
8. AMENDMENTS AND MODIFICATIONS.
8.1 Amendments and Modifications. No amendment or modification of
this Agreement or any Exhibit or Schedule hereto shall be valid unless made in
writing and signed by the party to be charged therewith.
9. NON-ASSIGNABILITY; BINDING EFFECT.
9.1 Non-Assignability; Binding Effect. Neither this Agreement, nor
any of the rights or obligations of the parties hereunder, shall be assignable
by any party hereto without the prior written consent of all other parties
hereto. Otherwise, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, successors and permitted assigns.
10. CLOSING.
10.1 Place and Date of Closing. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Messrs. Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, counsel to
TechStar and AUGI, located at 153 East 53rd Street - 35th floor, New York, New
York 10022, at 10:30 A.M. local time on a date (the "Closing Date") which shall
be not later than August 31, 1997 (unless such Closing Date shall be extended by
mutual agreement of IDF and AUGI); provided, that parties may participate in the
closing by telephonic conference call if they so desire. The effectiveness of
the Merger shall occur on the Closing Date simultaneous with the Closing.
10.2 Filing of Merger Certificate. On the Closing Date, Mergerco and
TechStar shall file or cause to be filed the Certificate of Merger with the
Secretary of State of Delaware.
10.3 Delivery and Exchange of Certificates, Agreements and
Instruments. On the Closing Date, AUGI shall deliver to IDF certificates
evidencing all of the Stock and IDF shall deliver to AUGI certificates
evidencing the Merger Consideration and deliver to Kandel, Luciani
43
<PAGE>
and Moskona the TechStar Stock Options. In addition, the appropriate parties
shall duly execute and deliver all agreements annexed hereto as Exhibits and all
related certificates and instruments required to be delivered on the Closing
Date.
11. GOVERNING LAW; JURISDICTION.
This Agreement shall be construed and interpreted and the rights
granted herein governed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed wholly within such State.
Except as otherwise provided in Section 12.2(c) below, any claim, dispute or
controversy arising under or in connection with this Agreement or any actual or
alleged breach hereof shall be settled exclusively by arbitration to be held
before one or more arbitrators in New York, New York, or in any other locale or
venue as legal jurisdiction may otherwise be had over the party against whom the
proceeding is commenced, in accordance with the commercial arbitration
procedures of Jams/End-Dispute resolution or such other as shall be mutually
agreeable. The parties hereto hereby agree to submit to the jurisdiction of such
arbitrators in New York, New York for such purpose, and waive all objections to
venue, forum non conveniens, and related objections in connection therewith. As
part of his or her award, the arbitrators shall make a fair allocation of the
fees of Jams/End-Dispute or such other as shall be mutually agreeable, the cost
of any transcript, and the parties' reasonable attorneys' fees, taking into
account the merits and good faith of the parties' claims and defenses. Judgment
may be entered on the award of such arbitrator(s) so rendered in any court of
competent jurisdiction. Any process or other papers hereunder may be served by
registered or certified mail, return receipt requested, or by personal service,
provided that a reasonable time for appearance or response is allowed.
12. INDEMNIFICATION.
12.1 General.
(a) By the IDF Group. Without prejudice to any rights of
contribution as between IDF, TechStar or any other Subsidiary of IDF, from and
after the Closing Date, and each member of the IDF Group shall jointly and
severally defend, indemnify and hold harmless AUGI and its officers, directors,
agents, representatives, and controlling persons (all of the foregoing, the
"AUGI Group") from, against and in respect of any and all claims, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees (collectively,
"Losses") that the AUGI Group may incur, sustain or suffer as a result of any
breach of, or failure by IDF or Mergerco to perform, any of the material
representations, warranties, covenants or agreements of IDF or Mergerco
contained in this Agreement or in any Exhibit or any Schedule(s) furnished by or
on behalf of IDF or Mergerco under this Agreement.
(b) By AUGI. From and after the Closing Date, AUGI shall
indemnify, defend and hold harmless the IDF Group, and each of them, from,
against and in respect of any and all Losses that such IDF or any other member
of the IDF Group may incur, sustain or suffer as a result of any breach of, or
failure by AUGI or TechStar to perform, any of the representations, warranties,
covenants or agreements of AUGI contained in this Agreement or in any Exhibit or
any Schedule(s) furnished by or on behalf of AUGI under this Agreement.
44
<PAGE>
12.2 Limitations on Certain Indemnities.
(a) The Basket. Notwithstanding any other provision of this
Agreement to the contrary, neither the IDF Group, on one hand, nor AUGI, on the
other hand, shall be liable for indemnification hereunder with respect to
Losses, unless and until the aggregate amount of all Losses incurred by the
party or parties entitled to indemnification in the aggregate shall exceed the
sum of $100,000 (the "Basket"). The indemnifying party or parties shall
thereafter be liable, jointly and severally, for performance of its or their
indemnification obligations under this Agreement in respect of all Losses in
excess of the Basket, provided that the maximum aggregate liability set forth in
Section 12.2(b) below.
(b) Damages and Equitable Relief. Notwithstanding the
provisions of Section 12.2(b) above, nothing contained in this Agreement shall
be deemed to limit or restrict the right of any party hereto from seeking such
monetary damages and/or equitable remedies (including injunctive relief) as may
be available from any court of competent jurisdiction in the event of a breach
by any other party or parties of any material covenant on its or their part
contained in the AUGI Notes, or any other document or instrument in connection
with the transaction contemplated hereby, the Non-Competition and Non-Disclosure
Agreement and/or the Employment Agreements.
(c) Time Limitation on Indemnity for Breach of
Representations, Warranties, Agreements, and Covenants. AUGI shall be entitled
to indemnification by the IDF Group, and the IDF Group shall be entitled to
indemnification by AUGI, pursuant to this Agreement for Losses relating to: (i)
breach of any representation or warranty or agreement or covenant hereunder only
in respect of claims for which notice of claim shall have been given to the
indemnifying party on or before June 30, 2000, or (ii) with respect to Losses
relating to a breach of any representations or warranties in respect of tax or
environmental matters, the expiration of the final statute of limitations
applicable to such matters.
(d) Prejudice of Rights to Defend. No party shall be entitled
to indemnification pursuant to this Agreement in the event that the subject
claim for indemnification relates to a third-party claim and the party seeking
such indemnification knowingly delayed giving notice thereof to the party from
whom it seeks such indemnification to such an extent as to cause material
prejudice to the defense of such third-party claim.
(f) Insurance Coverage. Notwithstanding any other term or
provision of this Section 12.2, absent only a finding by a court of competent
jurisdiction from which no appeal can or shall be taken that an indemnifying
party shall have committed statutory or common law fraud, no indemnifying party
shall be required to indemnify any indemnified party hereunder for Losses to the
extent that such Losses shall have been reimbursed by insurance proceeds, but
shall be required to provide such indemnity until the Loss has, in fact, been
reimbursed. In the event that insurance does not cover the full amount of such
Losses, the indemnifying party shall remain liable for the full amount of the
difference between the insurance payment as described above and the amount of
the Losses, subject to the limitations set forth above.
12.3 Claims for Indemnity. Whenever a claim shall arise for which
any party shall be entitled to indemnification hereunder, the indemnified party
shall notify the indemnifying party in writing within sixty (60) days of the
indemnified party's first receipt of notice of, or the
45
<PAGE>
indemnified party's obtaining actual knowledge of, such claim, and in any event
within such shorter period as may be necessary for the indemnifying party or
parties to take appropriate action to resist such claim. Such notice shall
specify all facts known to the indemnified party giving rise to such indemnity
rights and shall estimate (to the extent reasonably possible) the amount of
potential liability arising therefrom. If the indemnifying party shall be duly
notified of such dispute, the parties shall attempt to settle and compromise the
same or may agree to submit the same to arbitration or, if unable or unwilling
to do any of the foregoing, such dispute shall be settled by appropriate
litigation, and any rights of indemnification established by reason of such
settlement, compromise, arbitration or litigation shall promptly thereafter be
paid and satisfied by those indemnifying parties obligated to make
indemnification hereunder.
12.4 Right to Defend. If the facts giving rise to any claim for
indemnification shall involve any actual or threatened action or demand by any
third party against an indemnified party or any of its Affiliates, the
indemnifying party or parties shall be entitled (without prejudice to the
indemnified party's right to participate at its own expense through counsel of
its own choosing), at their expense and through a single counsel of their own
choosing, to defend or prosecute such claim in the name of the indemnifying
party or parties, or any of them, or if necessary, in the name of the
indemnified party. In any event, the indemnified party shall give the
indemnifying party advance written notice of any proposed compromise or
settlement of any such claim. If the remedy sought in any such action or demand
is solely money damages, the indemnifying party shall have fifteen (15) days
after receipt of such notice of settlement to object to the proposed compromise
or settlement, and if it does so object, the indemnifying party shall be
required to undertake, conduct and control, through counsel of its own choosing
and at its sole expense, the settlement or defense thereof, and the indemnified
party shall cooperate with the indemnifying party in connection therewith.
13. COSTS.
13.1 Finder's or Broker's Fees. Each of TechStar and AUGI (on the
one hand) and IDF and Mergerco (on the other hand) represents and warrants that
neither they nor any of their respective Affiliates have dealt with any broker
or finder in connection with any of the transactions contemplated by this
Agreement, and no broker or other person is entitled to any commission or
finder's fee in connection with any of these transactions.
14. FORM OF AGREEMENT.
14.1 Effect of Headings. The Section headings used in this Agreement
and the titles of the Schedules hereto are included for purposes of convenience
only, and shall not affect the construction or interpretation of any of the
provisions hereof or of the information set forth in such Schedules.
14.2 Entire Agreement; Waivers. This Agreement constitutes the
entire agreement between the parties pertaining to the subject matter hereof,
and supersedes all prior agreements or understandings as to such subject matter,
including without limitation, the letter of intent among the parties dated June
16, 1997. No party hereto has made any representation or warranty or given any
covenant to the other except as set forth in this Agreement and the other
Transaction Agreements and the Schedules and Exhibits hereto. No waiver of any
of the provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver. No
46
<PAGE>
waiver shall be binding unless executed in writing by the party making the
waiver.
14.3 Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
14.4 Severability. In any provision of this Agreement is held
invalid or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render the same valid or not applicable
to given circumstances, or excised from this Agreement, as the situation may
require, and this Agreement shall be construed and enforced as if such provision
had been included as so modified in scope or application, or had not been
included herein, as the case may be.
15. PARTIES.
15.1 Parties in Interest. Nothing in this Agreement, whether
expressed or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligations or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over or against any party to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on and as of
the date first set forth above.
TECHSTAR COMMUNICATIONS, INC. AMERICAN UNITED GLOBAL, INC.
By:___________________________ By:_____________________________
Solon L. Kandel, President Robert M. Rubin, President
IDF INTERNATIONAL, INC. TECHSTAR ACQUISITION CORP.
By:_____________________________ By:_____________________________
Lembit Kald, President Lembit Kald, President
47
<PAGE>
Exhibits
A - Certificate of Merger of TechStar into Mergerco
B-1 - Form of Employment Agreement of
Solon L. Kandel
B-2 - Form of Employment Agreement of
Sergio Luciani
B-3 - Form of Employment Agreement of
Simantov Moskona
B-4 - Form of Employment Agreement of
Lembit Kald
C - Form of IDF Notes
D - Form of Assumption Agreement
E - Form of Non-Competition Agreement
F - Form of Opinions of Legal Counsel
G - Side Letter Agreement regarding certain IDF Options
H - Form of Certificate of Incorporation of the Surviving
Corporation
I _ Form of Kald Employment Agreement
J _ Form of Rubin Consulting Agreement
48
Exhibit 22
Subsidiaries.
(1) Western Power & Equipment Corp.
(a Delaware Corporation)
(2) ConnectSoft Holding Corp.
(a Washington Corporation)
(3) Interglobe Networks,Inc.
(a Washington Corporation)
(4) eXodus Technologies, Inc.
(a Washington Corporation)
(5) Seattle OnLine Acquisition Corp.
(a Washington Corporation)
(6) IDF International, Inc.
(a Delaware corporation)
(as of August 1, 1997)
(7) Connectsoft Communications Corporation
(a Delaware corporation)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of American United Global, Inc.
Our audit of the consolidated financial statements referred to in our
report dated November 10, 1997 appearing on page F-2 of this Annual Report on
Form 10-K also included audits of the information included in the Financial
Statement Schedule listed in Item 14(a) of this Form 10-K for the three years
ended July 31, 1997. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information for the three years ended July
31, 1997 set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
Seattle, Washington
November 10, 1997
F-58
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-1 (No. 333-21891) of American United Global, Inc. of our
report dated November 10, 1997 appearing on page F-2 of the Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule, which appears on page S-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Seattle, Washington
November 10, 1997
F-59
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
UNITED GLOBAL, INC. YEAR ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS' ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 9,530,000
<OTHER-PROPERTY-AND-INVEST> 8,582,000
<TOTAL-CURRENT-ASSETS> 124,179,000
<TOTAL-DEFERRED-CHARGES> 2,432,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 144,723,000
<COMMON> 104,000
<CAPITAL-SURPLUS-PAID-IN> 48,782,000
<RETAINED-EARNINGS> (24,600,000)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 24,101,000
0
11,000
<LONG-TERM-DEBT-NET> 3,456,000
<SHORT-TERM-NOTES> 67,241,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 4,026,000
<LEASES-CURRENT> 412,000
<OTHER-ITEMS-CAPITAL-AND-LIAB> 45,487,000
<TOT-CAPITALIZATION-AND-LIAB> 143,547,000
<GROSS-OPERATING-REVENUE> 154,545,000
<INCOME-TAX-EXPENSE> (1,669,000)
<OTHER-OPERATING-EXPENSES> 12,510,000
<TOTAL-OPERATING-EXPENSES> 165,533,000
<OPERATING-INCOME-LOSS> (23,077,000)
<OTHER-INCOME-NET> (421,000)
<INCOME-BEFORE-INTEREST-EXPEN> (23,077,000)
<TOTAL-INTEREST-EXPENSE> 3,025,000
<NET-INCOME> (26,102,000)
2,403,000
<EARNINGS-AVAILABLE-FOR-COMM> (27,257,000)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> (15,173,000)
<EPS-PRIMARY> (2.75)
<EPS-DILUTED> (2.75)
<FN>
<F1> TAG 41 REPRESENTS MINORITY INTEREST.
</FN>
</TABLE>
