<PAGE>
AMERICAN UNITED GLOBAL, INC.
11130 NE 33RD PLACE, SUITE 250
BELLEVUE, WASHINGTON 98004
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 24, 1998
------------------------
To the Shareholders of
AMERICAN UNITED GLOBAL, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Annual Meeting") of
Shareholders of American United Global, Inc. (the "Company" or the
"Corporation") will be held at The Woodmark Hotel located at 1200 Carillon Point
Kirkland, Washington 98033, on Tuesday, February 24, 1998, at 10:00 a.m. local
time for the following purposes:
i. To elect seven (7) directors to hold office until the next Annual
Meeting;
ii. To ratify the selection of Price Waterhouse as auditors of the Company
for the Fiscal Years ended July 31, 1996 and 1997 and for the Fiscal Year ending
July 31, 1998;
iii. To ratify the sale of all of the assets of the Company's Manufacturing
Business to subsidiaries of Hutchinson Corporation (the "Hutchinson
Transaction"), effective January 19, 1996; and
iv. To ratify the issuance of 976,539 shares of the Company's Series B-1
Convertible Preferred Stock issued in connection with the acquisition of all the
capital stock of ConnectSoft, Inc., a Washington corporation ("Old
Connectsoft"), effective July 31, 1996;
v. To ratify the issuance of 400,000 shares of the Company's Series B-2
Convertible Preferred Stock issued in connection with a $10,000,000 private
placement completed in January 1997;
vi. To authorize an amendment to the Company's Certificate of Incorporation
to increase the Company's authorized capital by (i) increasing to 40,000,000
shares the Company's authorized voting Common Stock which will be continue to be
designated as Class A Voting Common Stock; and (ii) creating a new class of
Non-Voting Class B Common Stock, of which 25,000,000 shares of Non-Voting Class
B Common Stock will be authorized;
vii. To authorize and ratify the Company's 1996 Employee Stock Option Plan,
as amended (the "Stock Option Plan"), which Stock Option Plan contains 2,500,000
shares of Common Stock, $.01 par value (the "Common Stock") underlying and
available for the granting of options under such plan;
viii. To authorize and ratify an amendment to the Company's Articles of
Incorporation to include provisions which permit stockholders to act by not less
than unanimous written consent and to authorize and ratify an amendment to the
Company's By-Laws that deletes provisions which permit stockholders to act by
less than unanimous written consent;
ix. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws to classify the Board of Directors into three classes,
as nearly equal in number as possible, each of which, after an interim
arrangement, will serve for three years, with one class being elected each year;
x. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws which provide that directors may be removed only with
cause and the approval of the holders of at least 66.66% of the voting power of
each class or series of outstanding stock of the Company entitled to vote
generally in the election of directors;
xi. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that provide that special meetings of stockholders may
not be called by stockholders holding less than 66.66% of the voting power of
each class or series of outstanding stock entitled to vote on the matter(s) to
be considered at the special meeting;
<PAGE>
xii. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that increase the stockholder vote required to alter,
amend or repeal the amendments to the Company's Articles of Incorporation and
By-Laws identified in Proposals viii, ix, x and xi referred to above and in this
Proposal xii, to at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote thereon; and
xiii. To ratify the terms of an Amended and Restated Employment Agreement by
and between the Company and Mr. Robert M. Rubin, the President, Chief Executive
Officer, Chairman of the Board and a principal stockholder of the Company; and
xiv. To transact such business as may properly come before the meeting or
any adjournment or adjournments thereof.
The Board of Directors has fixed January 26, 1998 as the record date for the
determination of shareholders entitled to notice of and to vote at the meeting
or any adjournment thereof. The stock transfer books of the Company will not be
closed, but only shareholders of record at the close of business on January 26,
1998 will be entitled to vote at the meeting or any adjournment or adjournments
thereof. The approximate mailing date for proxy materials will be January 27,
1998.
By Order of the Board of Directors
Robert M. Rubin
CHAIRMAN OF THE BOARD
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE, SIGN AND RETURN YOUR
PROXY CARD PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE PROVIDED FOR YOUR USE.
2
<PAGE>
AMERICAN UNITED GLOBAL, INC.
11130 NE 33RD PLACE, SUITE 250
BELLEVUE, WASHINGTON, DC 98004
GENERAL INFORMATION CONCERNING SOLICITATION
This proxy statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of American United Global,
Inc. (hereinafter referred to as the "Company" or the "Corporation"), for its
Annual Meeting of Shareholders (the "Meeting") to be held at 10:00 A.M. on
Tuesday, February 24, 1998, or any adjournments thereof, at The Woodmark Hotel
located at 1200 Carillon Point Kirkland, Washington 98033. Shares cannot be
voted at the meeting unless their owner is present in person or represented by
proxy. Copies of this proxy statement and the accompanying form of proxy shall
be mailed to the shareholders of the Company on or about January 27, 1998,
accompanied by a copy of the Annual Report of the Company containing financial
statements as of and for the Fiscal Years ended July 31, 1997, 1996, and 1995,
together with other information respecting the Company.
If a proxy is properly executed and returned, the shares represented thereby
will be voted in accordance with the specifications made, or if no specification
is made the shares will be voted to approve each proposition and to elect each
nominee for director identified on the proxy. Any shareholder giving a proxy has
the power to revoke it at any time before it is voted by filing with the
Secretary of the Company a notice in writing revoking it. A proxy may also be
revoked by any shareholder present at the Meeting who expresses a desire in
writing to revoke a previously delivered proxy and to vote his or her shares in
person. The mere presence at the Meeting of the person appointing a proxy does
not revoke the appointment. In order to revoke a properly executed and returned
proxy, the Company must receive a duly executed written revocation of that proxy
before it is voted. A proxy received after a vote is taken at the Meeting will
not revoke a proxy received prior to the Meeting; and a subsequently dated proxy
received prior to the vote will revoke a previously dated proxy.
All expenses in connection with the solicitation of proxies, including the
cost of preparing, handling, printing and mailing the Notice of Annual Meeting,
Proxies and Proxy Statements will be borne by the Company. Directors, officers
and regular employees of the Company, who will receive no additional
compensation therefor, may solicit proxies by telephone or personal call, the
cost of which will be nominal and will be borne by the Company. In addition, the
Company will reimburse brokerage houses and other institutions and fiduciaries
for their expenses in forwarding proxies and proxy soliciting material to their
principals.
As of December 22, 1997, the following shareholders holding 1,527,101 of the
votes represented by shares of the voting stock of the Company, in the aggregate
constituting approximately 13.4% of the total votes represented by shares
entitled to vote at the Meeting, have indicated their intention to vote in favor
of all nominees for director and all other matters to be submitted for
consideration at the Meeting. Such persons are Robert M. Rubin--1,015,798
shares; C. Dean McLain--200,000 shares; Simontov Moskona-- 277,971 shares and
David M. Barnes--33,332 shares.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-19404)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended July
31, 1997;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1997; and
3. Other reports filed by the Company pursuant to Section 13(a) or 15(d) of
the Exchange Act since July 31, 1997, consisting of the Company's Current
Reports on Form 8-K filed on August 15, 1997 and October 1, 1997.
(The remainder of this page has been intentionally left blank)
4
<PAGE>
BUSINESS
GENERAL
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, is engaged in two distinct businesses; a
technology and engineering business and a distribution business.
TECHNOLOGY AND ENGINEERING BUSINESS
The Company's technology and engineering 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:
- through the Company's 63% 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.
- 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-TM-."
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.
- 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 Windows NT-TM- operating
system on users' existing Unix-TM- workstations,
5
<PAGE>
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 Windows NT-TM- in 3.51
version and which expired on 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
WindowsT.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 Windows NT-TM-, 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. Exodus is also
leveraging its remoting technology to develop remote server capability and
remote monitoring products for possible release during the third or fourth
quarter of fiscal 1998. See "Significant Recent Developments."
- 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. The Company is attempting 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 and engineering 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 fiscal 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
6
<PAGE>
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.
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.
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").
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 $20.0
million of its capital resources in acquiring and providing ongoing working
capital for these businesses.
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.
7
<PAGE>
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.
There is no existing or, to the Company's knowledge threatened, claim for
indemnification made by Hutchinson Corporation or its affiliates against the
Company under the terms of the agreements related to the Hutchinson Transaction.
Neither is there litigation, or threatened litigation known to the Company, that
is otherwise related to consummation of the Hutchinson Transaction, including
any suits or proceedings brought by Company stockholders which allege the
unfairness of the Hutchinson Transaction to the Company. There also is no
litigation, or threatened litigation known to the Company, that is in any way
related to the acquisition of Old ConnectSoft, other than an action commenced in
the United States District Court for the Western District of Washington by
Prudential Securities Incorporated ("Prudential") seeking an investment banking
fee of approximately $550,000 in connection with the Old ConnectSoft
acquisition. The Company believes that, although Prudential had 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
prior to the Company's involvement with Old ConnectSoft. Accordingly, the
Company does not believe that Prudential is entitled to any fee and is
vigorously defending the Prudential litigation and asserting what it believes to
be meritorious counterclaims on behalf of Old ConnectSoft.
STRATEGIC GOALS
The Company's entrance into the computer software and telecommunications
industries has been difficult. 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 technology and engineering 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 and engineering 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 one of
the Company's competitors 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, an engineering and construction consulting
firm based in New York City. Under the terms of the acquisition, the
Company transferred, through a merger with an IDF acquisition subsidiary,
100% of the capital stock of
8
<PAGE>
TechStar to IDF in exchange for approximately 6.1 million IDF shares,
representing approximately 63% 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 and engineering 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.
- 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, $3,090,000 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
9
<PAGE>
Fullerton, California and from the Company's existing facility in Sacramento,
California. The purchase price for the GCS assets was $1,655,000.
In January 1997, Western acquired the operating assets of Sahlberg
Equipment, Inc., a four-store Pacific Northwest distributor of construction
equipment, for $5,289,616. The purchase price consisted of $3,844,152 in
equipment inventory, $796,914 in parts inventory, $625,326 in fixed assets, and
$23,224 in work-in-process. The majority of the purchase price was financed by
the proceeds of two term loans from Case Credit Corporation.
Western operates the Sahlberg business from four locations, 2 in Washington
state, one in Oregon and one in Alaska, with all operations conducted from
facilities leased from third parties.
In 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, which proceeds were received on January 20, 1998. The
Hutchinson notes, which have been discounted for financial statement
presentation by $172,000 at July 31, 1997, are guaranteed by Total, the New York
Stock Exchange listed parent of Hutchinson..
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. The current exchange ratio is one
share of Preferred Stock for one share of Common Stock.
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.
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
10
<PAGE>
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 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.
11
<PAGE>
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 the remaining 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 was paid on November 20, 1997. In addition, the
Company issued 150,000 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.
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 write-offs 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. On December 11, 1997,
Brigadoon informed the Company that it had not, as yet, been able to arrange
financing for the purchase InterGlobe and the NOC assets. Brigadoon and the
Company are currently considering various alternatives, including pursuing other
financing sources or restructuring the proposed transaction.
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 698,182 performance options issuable under certain circumstances. In
consideration, the Company and InterGlobe agreed to pay Mr. Baganov an aggregate
of $300,000 in full settlement of obligations under his employment agreement and
released such stockholder from his non-competition agreement with InterGlobe,
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. A definitive
written agreement with Mr. Baganov has not, as yet been entered into and,
inasmuch as the Company's desire to effect such arrangement was motivated in
part by the prospect of consummating a sale to Brigadoon, there is no assurance
that the Company or Mr. Baganov 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 canceled.
TRANSACTION WITH TECHSTAR
In August 1997, the Company merged TechStar into 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 63% of the 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
12
<PAGE>
connection with the transaction (i) all options granted by the Company under
their employment agreements entitling Messrs. Kandel, Luciani and Moskona to
purchase an aggregate of 780,000 shares of Company Common Stock (subject to
achievement of certain financial performance targets), and all related 120,000
performance options held by other TechStar employees, were canceled, (ii) each
of Messrs. Luciani and Kandel tendered their resignations as directors of the
Company, and (iii) Messrs. Luciani, Moskona and Kandel utilized $600,000 of the
net proceeds from the sale of their Company shares to invest in convertible
securities of IDF.
Messrs. Kandel, Luciani and Moskona are currently the senior executive
officers of IDF and have each entered into employment agreements with IDF
expiring November 30, 2000. Pursuant to such agreements, Messrs. Kandel, Luciani
and Moskona are entitled to receive, in addition to their base salaries and
annual bonuses, IDF Options which vest based upon IDF and its consolidated
subsidiaries, including TechStar and Hayden Wegman, achieving all or certain
pro-rated portions of annual pre-tax income targets in each of fiscal years
ending July 31, 1998, 1999 and 2000. In the event that any or all of such IDF
Options do not vest, the number of shares of IDF common stock that would have
been issued upon the exercise of such unvested IDF 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 Windows NT-TM-
in 3.51 version and which expired on 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 $7.0 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 Windows NT, 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
13
<PAGE>
six months, the Company will probably cease such efforts and sustain a total
loss of its investment in the NTERPRISE-TM- products and system. Exodus is also
leveraging its remoting technology to develop remote server capability and
remote monitoring products for possible release during the third or fourth
quarter of fiscal 1998.
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 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.
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.
14
<PAGE>
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 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.
MARKET FOR COMMON STOCK
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:
<TABLE>
<CAPTION>
COMMON STOCK PUBLIC WARRANTS
-------------------- ---------------------
<S> <C> <C> <C> <C>
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 4.87 3.87
Third Quarter.................................................... 8.1875 3.44 4.50 3.75
Fourth Quarter................................................... 6.000 4.3875 4.00 3.25
FISCAL YEAR 1998
First Quarter.................................................... 7.8125 1.9375 5.25 2.25
Second Quarter to January 20, 1998............................... 2.344 1.68 2.625 1.50
</TABLE>
On January 20, 1998 the last sale price of the Common Stock was $1.84; and
the last sale price of the Public Warrants was $1.75 as reported on the NASDAQ
National Market System on January 9, 1998. The Company estimates that it had
over 1,000 beneficial holders of its Common Stock and 6 record holders of its
Public Warrants on January 20, 1998.
15
<PAGE>
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.
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.
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996(3) 1995 1994 1993(1)
---------- ---------- --------- --------- ---------
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
BALANCE SHEET DATA:
<CAPTION>
JULY 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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.
16
<PAGE>
MANAGEMENT
DIRECTORS, NOMINEES FOR DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information with respect to directors,
nominees for directors, executive officers and key employees of the Company as
of December 22, 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
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..................................... 55 Vice President of Finance, Chief Financial Officer
and Director
Howard Katz......................................... 55 Chief Operating Officer, Executive Vice President
and Director
Wesley Charles Fredericks, Jr....................... 49 Nominee for Director (1)
Glenn A. Norem...................................... 45 Nominee for Director (1)
</TABLE>
- ------------------------
(1) Nominee for election as a Director at the Company's 1998 Annual Meeting
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 63% 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
17
<PAGE>
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 management
company for hospital emergency rooms and out-patient facilities.
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 seeking 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 and was appointed Chief Operating Officer of the Company
and a Director on November 8, 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.
WESLEY CHARLES FREDERICKS, JR. A graduate of Columbia University School of
Law in 1973, Mr. Fredericks has been engaged in business and the practice of law
since 1973. He was associated in senior executive capacities from 1983 though
1987 with Lotus performance Cars, L.P. and Group Lotus PLC, distributors and
manufacturers of Lotus automobiles, respectively, and from 1990 through 1994
with Manufacturers Products Co. In 1994, he joined Gersten Savage Kaplowitz &
Fredericks LLC, a law firm located in New York as counsel, and has been a
partner of such firm since 1995. Gersten Savage Kaplowitz & Fredericks has
rendered legal services to other businesses in which Robert M. Rubin holds
positions as a principal stockholder and executive officer.
18
<PAGE>
GLENN A. NOREM. has been Chief Executive Officer and a director of
Multimedia Access Corporation since 1994, and is also Chairman and Chief
Executive Officer of Catalyst Financial Corporation, an investment and business
advisory firm to development stage companies in the computer and communications
industries, since 1990. Mr. Norem received a B.S. degree in Electrical
Engineering/Systems Engineering from Southern Illinois University and an M.B.A.
(Finance and Marketing) from the University of Chicago.
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>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- -------------------------------------------
PAYOUTS OTHER RESTRICTED
- ------------------------------------------- ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL YEAR SALARY BONUS COMPENSATION AWARDS SARS(#) PAYOUTS
- -------------------------------- --------- --------- --------- ------------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert M. Rubin................. 1997 $ 325,000 $ -0- $ 0 $ 0 (3) $ 0
Chairman, President, 1996 300,000 50,000 $0 $0 450,000 $0
and Chief Executive 1995 168,750 69,600 $0 $0 80,000 $0
Officer
Howard Katz..................... 1997 $ 131,968 $ 0 $ 0 200,000 $ 0
Executive Vice- 1996 -- $0 $0 150,000 $0
President and Director 1995 -- $0 $0 -- $0
David M. Barnes................. 1997 $ 129,807 $ 0 $ 0 100,000 $ 0
Chief Financial Officer 1996 -- $0 $0 100,000 $0
and Director 1995 -- $0 $0 -- $0
C. Dean McLain(2)............... 1997 $ 268,587 $ 18,658 $ 0 $ 0 (3) $ 0
Executive Vice 1996 250,000 84,868 $0 $0 150,000 $0
President and Director; 1995 170,709 75,000 $0 $0 195,000 $0
President of Western
<CAPTION>
PAYOUTS
- -------------------------------- ALL OTHER
NAME AND PRINCIPAL COMPENSATION
- -------------------------------- -------------
<S> <C>
Robert M. Rubin................. $0
Chairman, President, $0
and Chief Executive $0
Officer
Howard Katz..................... $0
Executive Vice- $0
President and Director $0
David M. Barnes................. $0
Chief Financial Officer $0
and Director $0
C. Dean McLain(2)............... $(4)
Executive Vice $0
President and Director; $29,250
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 $97,500.
19
<PAGE>
STOCK OPTION PLANS
OPTION GRANTS IN FISCAL YEAR 1997
The following table identifies individual grants of stock options made
during the last completed fiscal year to the executive officers named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF
------------------------ STOCK PRICE APPRECIATION
(C) FOR OPTION TERM
% OF TOTAL ---------------------------------------
(B) OPTIONS (D)
OPTIONS GRANTED TO EXERCISE OF (E)
(A) GRANTED EMPLOYEES IN BASE PRICE EXPIRATION (F) (G)
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10%($)
- -------------------------------- --------- ------------- -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Rubin.................... 156,550 21.5% $ 5.125 5/21/99- $ 842,435 $ 882,500
5/21/02
Howard Katz..................... 200,000 27.5% 4.375-5.125 10/4/01- 1,010,625 1,058,750
5/21/02
David M. Barnes................. 100,000 13.8% 4.375-5.125 10/4/01 498,750 522,500
5/21/02
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>
(C) (D) (E)
(B) VALUE NUMBER OF VALUE OF UNEXERCISED IN-
(A) SHARES ACQUIRED REALIZED UNEXERCISED OPTIONS AT THE-MONEY OPTIONS
NAME ON EXERCISE (#) ($) FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
- -------------------------------- --------------- ----------- ----------------------- --------------------------
<S> <C> <C> <C> <C>
Robert Rubin.................... -0- -0- 560,000 (exercisable) $ 1,322,509 (exercisable)
Howard Katz..................... -0- -0- 200,000 (exercisable) $ 613,393 (exercisable)
David Barnes.................... -0- -0- 91,666 (exercisable) $ 203,384 (exercisable)
C. Dean McLain.................. 112,000 718,500 233,000 (exercisable) $ 871,875 (exercisable)
</TABLE>
20
<PAGE>
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG AMERICAN UNITED GLOBAL, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
[LOGO]
ASSUMES $100 INVESTED ON AUGUST 1, 1992
ASSUMES DIVIDENDS REINVESTED, IF ANY
EMPLOYMENT, INCENTIVE COMPENSATION AND TERMINATION AGREEMENTS
In November 1994, Robert M. Rubin entered into a three-year employment and
bonus compensation agreement with the Company, retroactive to August 1, 1994.
Under the terms of that agreement, Mr. Rubin serves as Chairman of the Board of
the Company and its subsidiaries through and including July 31, 1997. Mr. Rubin
receives an annual base salary of $150,000 per annum. Such base salary shall be
increased by $10,000 for the fiscal year ending July 31, 1996 and by $15,000 for
the fiscal year ending July 31, 1997. In addition, Mr. Rubin was entitled to a
guaranteed bonus of $50,000 plus an additional annual incentive bonus payment
equal to (i) $5,000 for each $.01 increase in net earnings per share above $.55
per share for the fiscal year ending July 31, 1995, (ii) $5,000 for each $.01
increase in net earnings per share above $.60 per share for the fiscal year
ending July 31, 1996 and (iii) $5,000 for each $.01 increase in net earnings per
share above $.65 per share for the fiscal year ending July 31, 1997.
Upon completion of Western's initial public offering, Mr. Rubin's employment
agreement with the Company was amended to (i) eliminate his guaranteed annual
bonus, and (ii) limit his annual incentive bonus to $50,000 per annum for each
of fiscal years ended July 31, 1996 and 1997, and made it payable only in the
event that the consolidated net income of the Company, excluding the net income
of Western, shall exceed $1,500,000 in each of such fiscal years.
Following the amendment of his employment agreement with the Company,
Western entered into a separate employment agreement with Mr. Rubin, effective
June 14, 1995 and expiring July 31, 1998.
21
<PAGE>
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.
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
22
<PAGE>
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 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.
23
<PAGE>
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.
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
24
<PAGE>
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 a special or annual meeting of Company stockholders.
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
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
25
<PAGE>
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 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 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
26
<PAGE>
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 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
27
<PAGE>
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.
28
<PAGE>
ACTION TO BE TAKEN UNDER THE PROXY
Unless otherwise directed by the grantor of the proxy, the persons acting
under the accompanying proxy will vote the shares represented thereby: (a) for
the election of the persons named in the next succeeding table as nominees for
directors of the Company; (b) for the proposal to ratify the appointment of
Price Waterhouse as the Company's auditors for the 1996, 1997 and 1998 Fiscal
Years; (c) for the proposal to ratify the sale of all of the assets of the
Company's Manufacturing Business to Hutchinson Corporation; (d) for the proposal
to ratify the issuance of shares of the Company's B-1 Convertible Preferred
Stock issued in connection with the acquisition of the capital stock of Old
ConnectSoft, effective July 31, 1996; (e) for the proposal to ratify the
issuance of 400,000 shares of the Company's Series B-2 Convertible Preferred
Stock issued in connection with a $10,000,000 private placement completed in
January 1997; (f) for the proposal to authorize an amendment to the Company's
Certificate of Incorporation to increase the Company's authorized capital by
increasing the number of Voting Common Stock shares and by creating a new class
of Non-Voting Common Stock shares; (g) for the proposal to authorize and approve
the Company's 1996 Employee Stock Option Plan; (h) for the proposal to authorize
and ratify an amendment to the Company's Articles of Incorporation to include
provisions which permit stockholders to act by not less than unanimous written
consent and to authorize and ratify an amendment to the Company's By-Laws that
deletes provisions which permit stockholders to act by less than unanimous
written consent; (i) for the proposal to authorize and ratify amendments to the
Company's Articles of Incorporation and By-Laws to classify the Board of
Directors into three classes, as nearly equal in number as possible, each of
which, after an interim arrangement, will serve for three years, with one class
being elected each year; (j) for the proposal to authorize and ratify amendments
to the Company's Articles of Incorporation and By-Laws which provide that
directors may be removed only with cause and the approval of the holders of at
least 66.66% of the voting power of each class or series of outstanding stock of
the Company entitled to vote generally in the election of directors; (k) for the
proposal to authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that provide that special meetings of stockholders may
not be called by stockholders holding less than 66.66% of the voting power of
each class or series of outstanding stock entitled to vote on the matter(s) to
be considered at the special meeting; (l) for the proposal to authorize and
ratify amendments to the Company's Articles of Incorporation and By-Laws that
increase the stockholder vote required to alter, amend or repeal the amendments
to the Company's Articles of Incorporation and By-Laws identified in (h), (i),
(j) and (k) referred to above and in this proposal (l), to at least 66.66% of
the voting power of each class or series of outstanding stock of the Company
entitled to vote thereon; (m) for the proposal to ratify the terms of an Amended
and Restated Employment Agreement by and between the Company and Mr. Robert M.
Rubin, the President, Chief Executive Officer, Chairman of the Board and a
principal stockholder of the Company; and (n) in connection with the transaction
of such other business that may be brought before the Meeting, in accordance
with the judgment of the person or persons voting the proxy.
I. ELECTION OF DIRECTORS
NOMINEES
At the Meeting seven directors are to be elected, each to hold office until
the next Annual Meeting of Shareholders or until his successor shall be elected
and shall qualify. The names of the nominees for election as directors, all of
whom other than Messrs. Fredericks and Norem are now serving as directors of the
Company, and certain information furnished to the Company by such nominees with
respect to them, as of January 1, 1998, are set forth below. Unless authority to
vote for one or more nominees is withheld, it is intended that shares
represented by proxies in the accompanying form will be voted for the election
of the following nominees. With respect to any such nominee who may become
unable or unwilling to accept nomination or election, it is intended that the
proxies will be voted for the election in his stead of such
29
<PAGE>
person as the Board of Directors may recommend, but the Board does not know of
any reason why any nominee will be unable or unwilling to serve if elected.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AGE DIRECTOR SINCE DURING LAST FIVE YEARS
- --------------------------------------------------------------------- --- ------------------- ---------------------------
<S> <C> <C> <C>
Robert M. Rubin...................................................... 57 * *
Lawrence Kaplan...................................................... 54 * *
C. Dean McLain....................................................... 42 * *
David M. Barnes...................................................... 54 * *
Howard Katz.......................................................... 55 * *
Wesley Charles Fredericks, Jr........................................ 49 -- *
Glenn A. Norem....................................................... 45 -- *
</TABLE>
- ------------------------
* See "Directors, Nominees for Director and Executive Officers of the Company"
on pages 21 to 23.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF ALL THE NOMINEES FOR DIRECTOR.
COMMITTEES AND MEETINGS OF THE BOARD
At present the Board of Directors has two committees, the Compensation
Committee and the Audit Committee, both of which consist of three directors. The
function of the Compensation Committee includes responsibility for reviewing the
compensation for all of the Corporation's employees and the granting of stock
options under all of the Company's employee stock option plans that may exist
and be in effect from time to time. The function of the Audit Committee includes
the review of the Company's financing arrangements and a review of its internal
financial controls. During the Fiscal Years ended July 31, 1996 and 1997, the
Board of Directors met 11 times and 13 times, respectively, including actions
taken by unanimous written consent of the directors. The Compensation Committee
met jointly with the full Board of Directors 1 time during the fiscal year ended
July 31, 1996 and 1 time during the fiscal year ended July 31, 1997. The Audit
Committee did not meet during the Fiscal Years ended July 31, 1996 or July 31,
1997. All of the nominated directors who served as directors during the Fiscal
Years ended July 31, 1996 and July 31, 1997 attended 100% and 100% of the
meetings of the Board held during periods of their tenure during such fiscal
years, respectively. No director of the Company receives any directors fees for
attendance at Board meetings, although they do receive reimbursement for actual
expenses related to such attendance.
II RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS FOR THE FISCAL YEARS
ENDED JULY 31, 1996 AND 1997 AND FOR THE FISCAL YEAR ENDING JULY 31, 1998.
At the Meeting a vote will be taken on a proposal to ratify the appointment
by the Board of Directors of Price Waterhouse, independent certified public
accountants, as the independent auditors of the Company for the Fiscal Years
ended July 31, 1996 and 1997, and for the Fiscal Year ending July 31, 1998.
Price Waterhouse has no interest in or any relationship with the Company except
as its auditors.
MANAGEMENT BELIEVES THE APPOINTMENT TO BE IN THE BEST INTEREST OF THE
COMPANY AND RECOMMENDS THAT IT BE RATIFIED.
A representative of Price Waterhouse will be present at the Annual Meeting
of Shareholders of the Company and will be given an opportunity to make a
statement to the shareholders if he so desires. The representative will be
available to respond to questions from shareholders.
30
<PAGE>
III. RATIFICATION OF THE SALE OF ALL OF ASSETS OF THE COMPANY'S MANUFACTURING
BUSINESS TO HUTCHINSON CORPORATION.
At the Meeting a vote will be taken on a proposal to ratify the sale of all
of the assets of the Company's Manufacturing Business to Hutchinson Corporation.
The terms of such sale are discussed below.
Pursuant to the terms of an Asset Purchase Agreement, dated as of November
22, 1995 (the "Sale Agreement"), by and among Hutchinson Corporation, a Delaware
corporation ("Hutchinson"), as Buyer, and the Company and each of its
AUG-California, Inc., American United Products, Inc. ("National O-Ring") and
American United Seal, Inc. ("Stillman Seal") subsidiaries, 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 newly-formed for the purpose of acquiring the
Manufacturing Business (the "Hutchinson Transaction"). Hutchinson's principal
place of business is located at 160 Fuller Avenue, N.E., Grand Rapids, MI 49501;
telephone number (616) 459-4541. Hutchinson produces a variety of rubber related
products for three market sectors: automotive, consumer and industrial use.
Under the terms of the Sale Agreement, the Company agreed that as soon as
reasonably practicable following the closing of the Hutchinson Transaction (the
"Closing"), but NOT as a condition to consummation of the Hutchinson
Transaction, the Company would call a meeting of its stockholders to request
that Company stockholders ratify the Sale Agreement, the Exhibits thereto
(including the Non-Competition Agreement and the Consulting Agreement, as herein
after described) and the transactions contemplated thereby. FAILURE OF COMPANY
STOCKHOLDERS TO RATIFY SUCH AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREIN
WILL NOT AFFECT THE EFFECTIVENESS OF ANY OF THE HUTCHINSON TRANSACTION OR THE
TRANSACTIONS CONTEMPLATED THEREBY, ALL OF WHICH HAVE BEEN CONSUMMATED. The sole
purpose for stockholder ratification of the Hutchinson Transaction, the Sale
Agreement and the Exhibits thereto, and the transactions contemplated thereby,
is that under the terms of the Sale Agreement failing such ratification by a
majority of the outstanding shares of Company Common Stock entitled to vote at a
scheduled meeting of stockholders the Company shall indemnify Hutchinson and its
affiliates (including their respective officers, directors, employees and
agents) for a period of up to eighteen months following the Closing, from and
against any claims, judgements, liabilities, costs and expenses which any of
them may incur as a result of any suits or proceedings brought by or on behalf
of any Company stockholder alleging that the transactions contemplated by the
Sale Agreement and the Exhibits thereto are unfair to Company stockholders.
There is no existing or, to the Company's knowledge threatened, claim for
indemnification made by Hutchinson or its affiliates against the Company under
the terms of the Sale Agreement. Neither is there litigation, or threatened
litigation known to the Company, that is otherwise related to consummation of
the Hutchinson Transaction, including any suits or proceedings brought by
Company stockholders which allege the unfairness of the Hutchinson Transaction
to the Company.
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 (the
"Notes") made by the Hutchinson subsidiaries that purchased the Manufacturing
Business. The Notes are guaranteed by Total America, Inc., the parent
corporation of Hutchinson and a subsidiary of TOTAL, a French corporation whose
securities are listed on the New York Stock Exchange.
At the Closing, 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 under the
31
<PAGE>
terms of a 7-year Consulting Agreement 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.
The Company did not seek the report or opinion of any outside party to help
in establishing or negotiating the amount of consideration to be received by the
Company for sale of the Manufacturing Business in the Hutchinson Transaction. As
a condition to consummation of its purchase, however, Hutchinson required the
Company to obtain an independent opinion to confirm that the previously
established and negotiated purchase price was fair to the Company and its
stockholders. The Company's management does not believe that such independent
opinion materially related to the transaction insofar as it merely confirmed the
fairness of the previously established sales price for the Manufacturing
Business and was not used to establish the price for the Manufacturing Business.
The independent opinion was provided by Montauk Consulting, Inc.
("Montauk"). Montauk is a recently formed company with a single employee who is
its Managing Director. Although Montauk itself has limited experience in
providing valuations of the fairness of transactions, the Managing Director of
Montauk who provided the independent opinion is a certified public accountant
who has been engaged in the investment banking industry for over 30 years. He
has provided asset valuations and fairness reviews on numerous occasions, as
well as court testimony in more than 70 securities litigation cases in state and
federal court in support of such valuations and reviews for a number of Fortune
500 companies. Montauk was selected by the Company based upon the reputation of
such Managing Director for providing similar valuations which have withstood
challenge. In the past, the Chairman of the Company and such Managing Director
have invested together in public and private companies and other ventures, and
they have served together on the boards of directors of certain of those
entities. In providing its fairness opinion, Montauk (i) reviewed the terms of
the Hutchinson Transaction, (ii) analyzed published financial reports,
historical earnings and stock price performance and business prospects of the
Company and its affiliates, including its periodic filings under the federal
securities laws, (iii) considered the various characteristics of the
Manufacturing Business,, and the relative position of the Manufacturing Business
in its industry and the future prospects of the Manufacturing Business (with
attention paid to the impact of technological developments and the potential for
additional capital requirements to support modernization and expansion), (iv)
had contacts and discussions with members of the Company's Board of Directors
regarding the Manufacturing Business and its future, (v) studied other companies
engaged in the automotive parts and equipment business and aerospace/defense
business including competitors of the Manufacturing Business, (vi) examined the
record of trading in the Company's Common Stock and (vii) analyzed the Company's
balance sheet and income statement ratios and compared them to the ratios of
other like companies. Based on the above investigation, and after applying the
Montauk Managing Director's experience in financial and business affairs,
Montauk concluded that the terms of the Hutchinson transaction are fair from a
financial point of view to the stockholders of the Company. There were no
limitations placed upon Montauk or its employee in rendering the fairness
opinion, including with respect to the scope of the investigation made. There
were no special or limiting instructions delivered to Montauk by the Company or
its affiliates with respect to its engagement; Montauk was simply engaged to
render an opinion as to whether or not the Hutchinson Transaction, as
contemplated by the Sale Agreement (including all exhibits thereto), is fair and
reasonable to the stockholders of the Company.
THE COMPANY'S MANAGEMENT BELIEVES THAT THE CONSIDERATION RECEIVED IN THE
HUTCHINSON TRANSACTION WAS FAIR TO THE COMPANY AND ITS STOCKHOLDERS FOR SEVERAL
REASONS.
First, without regard to income tax considerations, the cash portion of the
Purchase Price alone exceeded by approximately $890,000 the market value on the
date of Closing, as reported on the Nasdaq National Market ("Nasdaq"), for all
the outstanding Company Common Stock. On January 19, 1996, the date of Closing,
the last reported sale price for a share of Company Common Stock was $3.75, for
an
32
<PAGE>
aggregate market value for all outstanding Company Common Stock as reported on
Nasdaq of approximately $21,369,000 on that date. Second, the Manufacturing
Business operated in mature industries, and it was believed that without
significantly increasing its future capital expenditures the Company would find
it difficult to improve upon its operating performance. Third, the Manufacturing
Business derived a significant amount of revenues from defense contracts, and
the future impact of federal budget constraints upon governmental programs was
uncertain to predict. Fourth, Hutchinson was a strategic purchaser of the
Manufacturing Business, a purchaser that the Company believed was intent upon
entering the businesses in which the Company operated either by purchasing
existing operations or by developing competing operations of its own. Hutchinson
is larger and better financed than the Company, principally through its
subsidiary relationship with TOTAL, one of the largest petro-chemical companies
in the world. The Company believed that should Hutchinson enter the
Manufacturing Businesses's markets independently and not through purchase of the
Manufacturing Business itself, Hutchinson would constitute a formidable
competitor in the industry to the detriment of the Company's future operations.
Fifth, and lastly, insofar as Hutchinson was a strategic purchaser of the
Manufacturing Business, the Company believed that in the event that the Company
later decided to sell the Manufacturing Business it would not be able to obtain
as favorable of a price for that business should a strategic purchaser not be
subsequently available.
At the time that it negotiated the Purchase Price for the Hutchinson
Transaction, although the Company was not actively soliciting the sale of the
Manufacturing Business, the Company was not aware of any other potential
purchasers of the Manufacturing Business. Due to the fact that the Purchase
Price offered by Hutchinson was believed to be quite favorable to the Company
and its stockholders, the Company did not actively solicit additional potential
purchasers for the Manufacturing Business at that time.
The Company entered into and consummated the Hutchinson Transaction
principally as a way to create additional value for its stockholders by
obtaining an attractive price, 85% in cash, upon sale of the Manufacturing
Business. Indeed, the net book value of the assets of the Manufacturing Business
that were sold in the Hutchinson Transaction represented only approximately 87%
of the net cash proceeds received alone.
Following execution of the definitive sale agreement in connection with the
Hutchinson Transaction, the Company's management sought to redirect the
Company's business focus to the computer technology and telecommunications
industries. See, "BUSINESS--History and Recent Acquisitions," above, for
descriptions of the Company's acquisitions of ConnectSoft and Exodus,
InterGlobe, Seattle OnLine and TechStar and Arcadia.
Although the Company intends to acquire, or invest in, businesses other than
ConnectSoft, Exodus, Interglobe, Seattle OnLine, TechStar and Arcadia in the
future with the proceeds of the Hutchinson Transaction or other funds, at this
time the Company has no other specific business or businesses which it intends,
or is obligated, to purchase. In addition to the funding extended to all of its
recently acquired businesses, the Company made a $450,000 principal four-month
secured loan to a public company affiliated with Mr. Rubin which has been
repaid, has invested $250,000 in a private placement of convertible indebtedness
issued by an entity unaffiliated with Mr. Rubin and is currently considering
other similar size investments in companies that are not affiliated with Mr.
Rubin. None of ConnectSoft, Exodus, Interglobe, Seattle OnLine, TechStar or
Arcadia was affiliated with Mr. Rubin prior to their acquisition by the Company.
Management believes that receipt of the proceeds from sale of the
Manufacturing Business increased stockholder value because the significant
amount of cash made available to the Company for its acquisition program has
permitted the acquisition of businesses which, over the long-term, are expected
to generate higher levels of net income than that historically generated by the
Manufacturing Business. In addition, the amount of cash resources now available
to the Company should enable the Company to obtain favorable pricing for any
future businesses that it decides to acquire. Finally, the Company intends to
acquire businesses that operate in industries whose equity interests trade at
higher multiples of net income per
33
<PAGE>
share in the public securities market than the Company's securities traded
historically prior to the Hutchinson Transaction.
As a result of all of the factors recited above with respect to the fairness
of the terms of the Hutchinson Transaction to the Company and its stockholders,
as well as the potential for increased stockholder value as a result of the
application of proceeds from the Hutchinson Transaction, Management of the
Company believes the Hutchinson Transaction to be in the best interests of the
Company and its stockholders.
The sale of the assets comprising the Manufacturing Business has been
accounted for as discontinued operations.
The Company is not in arrears with respect to the declaration and payment of
dividends on its securities.
As required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
the Company made all necessary filings with the Federal Trade Commission and
received notification of early termination of the applicable waiting period by
letter dated December 21, 1995. On December 8, 1995, the Company supplied a
voluntary notice ("Exon Florio Notice") of the Hutchinson Transaction to the
Department of the Treasury pursuant to Section 721 of Title VII of the Defense
Production Act of 1950. By letter dated January 11, 1996, the Company received
notice that there exist no issues of national security sufficient to warrant
investigation of the Hutchinson Transaction and that all actions under the
statute were favorably concluded.
The Company's Common Stock is traded on Nasdaq under the trading symbol
"AUGI". On November 24, 1995, the trading date immediately preceding public
announcement of execution of the Sale Agreement, the high and low sale prices of
the Company's Common Stock as reported on Nasdaq were $3.50 and $3.38,
respectively.
In connection with this transaction the Company did not, nor will it,
transfer any of the 2,000,000 shares of common stock of its Western Power &
Equipment Corp. subsidiary that it holds.
The failure by Company stockholders to ratify the Hutchinson Transaction
will neither cause the Hutchinson Transaction to be rescinded nor affect the
effectiveness of the Hutchinson Transaction in any way. The Board of Directors
has no plans for its future conduct, or for any effect on its consummation of
the Hutchinson Transaction, should Company stockholders fail to ratify the
Hutchinson Transaction.
MANAGEMENT BELIEVES THE SALE OF THE COMPANY'S MANUFACTURING BUSINESS TO
HUTCHINSON CORPORATION WAS IN THE BEST INTEREST OF THE COMPANY AND RECOMMENDS
THAT IT BE RATIFIED.
IV. TO RATIFY THE ISSUANCE OF SHARES OF THE COMPANY'S SERIES B-1 CONVERTIBLE
PREFERRED STOCK ISSUED IN CONNECTION WITH THE ACQUISITION OF OLD
CONNECTSOFT, EFFECTIVE AS OF JULY 31, 1996.
At the Meeting a vote will be taken on a proposal to ratify the issuance of
976,539 shares of the Company's Series B-1 Convertible Preferred Stock issued in
connection with the acquisition of Old ConnectSoft, effective as of July 31,
1996. The terms of such issuance are discussed below.
OLD CONNECTSOFT BUSINESS
Prior to its acquisition by the Company, Old ConnectSoft was a provider of
communications software applications and services in the Internet industry.
Serving both businesses and consumers, the Old ConnectSoft provided an
integrated array of commercial software development services, easy-to-use retail
Internet software applications, and Internet access services to facilitate the
use of the Internet and on-line services for communication and commerce.
34
<PAGE>
Founded in 1988, Old ConnectSoft provided Microsoft Windows-based,
enterprise-wide, connectivity software development to some of the largest
corporations in the U.S., including MCI Communications Corporation ("MCI"),
United Parcel Service of America, Inc. ("UPS"), Microsoft Corporation
("Microsoft"), International Business Machines, Inc. ("IBM"), and Adobe Systems,
Inc. ("Adobe"). In connection with such projects, Old ConnectSoft had developed
a core expertise in communications and commerce software engineering that it had
incorporated into a line of Internet software products. E-Mail Connection, which
had been Old ConnectSoft's best-selling retail product, had its technology
incorporated into proprietary products for MCI, America Online, Prodigy, and
CompuServe.
In May 1996, at the time that the Company and Old ConnectSoft executed a
letter of intent with respect to the acquisition of Old ConnectSoft by the
Company, Old ConnectSoft was in significant financial distress. As part of the
proposed terms of acquisition, the Company agreed to support the Old ConnectSoft
with up to $5 Million of post-acquisition working capital financing, and to
support Old ConnectSoft prior to acquisition with an immediate working capital
infusion in the form of a $1 Million line of credit. At the time of consummation
of the acquisition, drawings by Old ConnectSoft under that line of credit stood
at approximately $3.4 Million.
ACQUISITION TERMS
Effective July 31, 1996, the Company acquired, through a merger with an
acquisition subsidiary of the Company (the "Merger"), all of the outstanding
capital stock of Old ConnectSoft, Old ConnectSoft shareholders received, on a
pro rata basis, an aggregate of approximately 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 the Company's common stock, $.01 par value (the "Company
Common Stock"), and votes together with the Company Common Stock as a single
class on the basis of one vote for one share. Each share of Preferred Stock is
convertible into shares of Company Common Stock at the holder's option into a
minimum of 976,539 shares of Company Common Stock and a maximum of 2,929,617
shares of Company Common Stock, based upon certain criteria. The Preferred Stock
may be converted into shares of Company Common Stock as follows:
(i) Each share of Preferred Stock may be converted, at any time, into
one (1) share of Company Common Stock (a minimum of 976,539 shares of such
Common Stock if all such shares of Preferred Stock are so converted);
(ii) In the event that the "Combined Pre-Tax Income" (as defined) of
any or all of the "Subject Entities" (as defined) in ANY ONE of the three
fiscal years ending July 31, 1997, July 31, 1998, or July 31, 1999 (each a
"Measuring Fiscal Year" and collectively, the "Measuring Fiscal Years"):
(a) shall equal or exceed $3,000,000, each share of Preferred Stock
may be converted into two shares of Company Common Stock (a maximum of
1,953,078 shares of such Common Stock if all such shares of Preferred
Stock are so converted); or
(b) shall equal or exceed $5,000,000, each share of Preferred Stock
may be converted into three shares of Company Common Stock (a maximum of
2,929,617 shares of such Common Stock if all such shares of Preferred
Stock are so converted).
The "Subject Entities" include Old ConnectSoft and its consolidated
subsidiaries (if any) and eXodus Technologies, Inc., as a direct majority-owned
subsidiary of the Company, which has developed certain remote access computer
software originated by Old ConnectSoft. The conversion ratio of the Preferred
Stock shall be adjusted, such that each share of Preferred Stock may be
converted into three shares of Company Common Stock, notwithstanding the levels
of Combined Pre-Tax Income achieved, in the event that (i) the Company sells the
assets or securities of any of the Subject Entities for consideration
aggregating $5,000,000 or more, (ii) the Company consummates an initial public
offering of the securities of any of the Subject Entities (an "IPO") resulting
in gross proceeds in excess of $10,000,000, or in a market valuation for 100% of
the issuer's common stock equaling or exceeding $50,000,000, or (iii) a
35
<PAGE>
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. Following consummation of the Merger, the Company
increased its aggregate funding commitments to ConnectSoft and its related
companies to a minimum of $5.0 million.
FAILURE OF COMPANY STOCKHOLDERS TO RATIFY THE ISSUANCE OF COMPANY SERIES B-1
PREFERRED STOCK TO OLD CONNECTSOFT SHAREHOLDERS IN CONNECTION WITH THE MERGER
COULD RESULT IN THE DELISTING OF THE COMPANY'S COMMON STOCK FROM THE NASDAQ
NATIONAL MARKET SYSTEM, OR FROM ANY NASDAQ TRADING SYSTEM, WITH THE RESULT BEING
A DECREASE IN THE LIQUIDITY OF STOCKHOLDER INVESTMENTS IN THE COMPANY'S COMMON
STOCK. THE SOLE PURPOSE FOR STOCKHOLDER RATIFICATION OF THE ISSUANCE OF SERIES
B-1 PREFERRED STOCK TO OLD CONNECTSOFT SHAREHOLDERS IS TO AVOID DELISTING OF THE
COMPANY'S COMMON STOCK FROM NASDAQ TRADING AS A RESULT OF THE INITIAL ISSUANCE
BY NASDAQ OF A RULING, NOW UNDER APPEAL TO SO DELIST THE COMPANY'S COMMON STOCK
AS A RESULT OF THE COMPANY'S ALLEGED FAILURE TO COMPLY WITH NASD MARKETPLACE
RULES 4460(G) AND 4460(I). THOSE RULES REQUIRE THE COMPANY TO MAKE ANNUAL
SOLICITATIONS OF PROXIES FOR VOTING AT ANNUAL SHAREHOLDER MEETINGS, AND TO SEEK
SHAREHOLDER APPROVAL OF COMPANY ISSUANCES IN ANY SINGLE TRANSACTION OF VOTING
SECURITIES WHICH ENTITLE THE HOLDERS THEREOF TO CAST TWENTY PERCENT OR MORE OF
THE VOTES AT A MEETING OF SHAREHOLDERS. SHOULD STOCKHOLDERS FAIL TO RATIFY THE
ISSUANCE OF SERIES B-1 PREFERRED STOCK TO OLD CONNECTSOFT STOCKHOLDERS AND THE
COMPANY'S SECURITIES ARE DELISTED FROM NASDAQ TRADING, THERE IS NO GUARANTEE
THAT THE COMPANY'S SECURITIES WILL BE INCLUDED FOR TRADING ON ANY OTHER
SECURITIES EXCHANGE. SHOULD THE COMPANY'S COMMON STOCK NOT BE INCLUDED FOR
TRADING ON NASDAQ OR ANY OTHER SECURITIES EXCHANGE, TRADING IN THE COMPANY'S
COMMON STOCK WOULD BE SUBJECT TO THE "PENNY STOCK" TRADING RULES. AMONG OTHER
THINGS, THE PENNY STOCK RULES MAKE IT MORE DIFFICULT TO COMPLETE SOLICITED
TRANSACTIONS IN AN AFFECTED SECURITY, WITH THE RESULT BEING A FAR LESS LIQUID
MARKET FOR COVERED SECURITIES. SHOULD THE COMPANY'S SECURITIES BECOME SUBJECT TO
THE PENNY STOCK RULES, IT IS MOST LIKELY THAT MARKET PRICES FOR THE COMPANY'S
SECURITIES WILL BE DEPRESSED, RESULTING IN A LOSS OF STOCKHOLDER VALUE TO
COMPANY STOCKHOLDERS.
THE COMPANY'S MANAGEMENT BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS THAT STOCKHOLDERS RATIFY THE ISSUANCE OF SERIES B-1
PREFERRED STOCK TO OLD CONNECTSOFT SHAREHOLDERS.
The failure by Company stockholders to ratify the issuance of Series B-1
Preferred Stock to Old ConnectSoft stockholders will neither cause the Old
ConnectSoft Merger to be rescinded nor affect the effectiveness of the Old
ConnectSoft Merger in any way. The Board of Directors has no plans to affect
consummation of the Old ConnectSoft Merger should Company stockholders fail to
ratify the issuance of Series B-1 Preferred Stock to Old ConnectSoft
shareholders.
There is no existing litigation, or threatened litigation known to the
Company, that is in any way related to consummation of the Old ConnectSoft
Merger, other than an action commenced in the United States District Court for
the Western District of Washington by Prudential Securities Incorporated
("Prudential") seeking an investment banking fee of approximately $550,000 in
connection with the Old ConnectSoft Merger. The Company believes that Prudential
is not entitled to any fee and is vigorously defending the Prudential litigation
and asserting what it believes to be meritorious counterclaims on behalf of Old
ConnectSoft.
36
<PAGE>
FINANCIAL INFORMATION CONCERNING OLD CONNECTSOFT ACQUISITION
CONNECTSOFT, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF DECEMBER 31, 1995
AND 1994 AND FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 1995
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
ConnectSoft, Inc.
We have audited the accompanying balance sheets of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the related statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 12 to the financial statements, in 1996 the Company was
acquired by American United Global, Inc.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
October 19, 1996
38
<PAGE>
CONNECTSOFT, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash.................................................................................. $ 68,623 $ --
Restricted cash....................................................................... -- 105,683
Accounts receivable, net of allowance for doubtful accounts of $134,279 and $4,000,
respectively........................................................................ 303,281 1,796,633
Inventories, net...................................................................... 135,325 210,757
Prepaid expenses...................................................................... 34,246 35,056
------------ ------------
Total current assets.......................................................... 541,475 2,148,129
Property and equipment, net........................................................... 2,340,550 881,805
Restricted cash....................................................................... -- 430,812
Capitalized software costs, net of accumulated amortization of $979,221 and $213,180,
respectively........................................................................ 926,690 1,390,173
Operating lease deposits.............................................................. 153,793 132,459
Other assets.......................................................................... 514,277 30,367
------------ ------------
Total assets.................................................................. 4,476,785 5,013,745
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................................... 2,413,665 1,699,490
Billings in excess of revenues earned................................................. 412,288 588,810
Accrued liabilities................................................................... 485,967 278,748
Current portion, capital lease obligations............................................ 825,844 196,960
Current portion, long-term debt....................................................... -- 108,052
Line of credit........................................................................ 4,109,122 --
------------ ------------
Total current liabilities..................................................... 8,246,886 2,872,060
------------ ------------
Long-term debt, less current portion.................................................. -- 400,000
Capital lease obligations, less current portion....................................... 1,279,033 352,586
------------ ------------
------------ ------------
Total long-term obligations................................................... 1,279,033 752,586
------------ ------------
Total liabilities............................................................. 9,525,919 3,624,646
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Convertible preferred stock:
Series A, $0.001 par value; 1,796,873 shares authorized, issued and outstanding....... 1,797 1,797
Series B, $0.001 par value; 600,000 shares authorized; no shares issued or -
outstanding......................................................................... -- --
Series C, $0.001 par value; 2,412,625 shares authorized; 1,832,632 shares issued and
outstanding......................................................................... 1,832 1,832
Series D, $0.001 par value; 5,667,368 shares authorized; no shares issued or
outstanding......................................................................... -- --
Common stock, no par value; 30,000,000 shares authorized; 6,119,773 and 5,772,895
issued and outstanding at December 31, 1995 and 1994, respectively.................. 474,075 453,580
Additional paid-in capital............................................................ 2,057,960 2,057,960
Accumulated deficit................................................................... (7,584,798) (1,126,070)
------------ ------------
Total shareholders' equity (deficit).................................................. (5,049,134) 1,389,099
------------ ------------
Total liabilities and shareholders' equity (deficit).................................. 4,476,785 5,013,745
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
CONNECTSOFT, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
Revenues:
Contract services..................................................... $ 3,201,437 $ 4,418,859 $ 1,967,830
Retail products....................................................... 8,429,564 3,307,016 201,187
Total revenues........................................................ 11,631,001 7,725,875 2,169,017
------------- ------------ -------------
Cost of sales:
Contract services..................................................... 3,848,269 2,726,879 1,577,167
Retail products....................................................... 1,296,470 340,650 81,269
------------- ------------ -------------
Total cost of sales................................................... 5,144,739 3,067,529 1,658,436
------------- ------------ -------------
Gross profit.......................................................... 6,486,262 4,658,346 510,581
------------- ------------ -------------
Operating expenses:
Product development................................................... 4,834,843 479,148 464,137
Sales and marketing................................................... 3,158,010 1,606,162 406,369
General and administrative............................................ 3,211,772 1,904,238 857,847
------------- ------------ -------------
Total operating expenses.............................................. 11,204,625 3,989,548 1,728,353
------------- ------------ -------------
Operating income (loss)............................................... (4,718,363) 668,798 (1,217,772)
------------- ------------ -------------
Other income (expense):
Interest expense...................................................... (628,045) (121,519) (103,241)
Loss on factored receivables.......................................... (190,117) (94,566) (26,826)
Other................................................................. (922,203) 4,686
------------- ------------ -------------
Total other expense................................................... (1,740,365) (216,085) (125,381)
------------- ------------ -------------
Net income (loss)..................................................... $ (6,458,728) $ 452,713 $ (1,343,153)
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
CONNECTSOFT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CLASS A PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK COMMON STOCK
----------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993...................... 50,000 $ 100,000 -- $ -- 231,367 $ 83,860
Dividends paid to Class A Preferred
shareholders................................... -- -- -- -- -- --
Conversion of Class A
Preferred Stock to Common Stock.................. (50,000) (100,000) -- -- 50,000 100,000
Exercise of Common Stock options................. -- -- -- -- 43,113 425
Common Stock issued to independent contractors... -- -- -- -- 2,804 11,200
Conversion of promissory notes to Common Stock... -- -- -- -- 18,500 39,000
Conversion of employee deferred wages notes
payable to Common Stock........................ -- -- -- -- 13,787 55,149
Sale of Common Stock............................. -- -- -- -- 13,525 129,945
Increase in the number of common shares
outstanding resulting from 15 for 1 stock
split.......................................... -- -- -- -- 5,223,352 --
Sale of Series A Convertible Preferred Stock, net
of $61,420 issuance costs...................... -- -- 1,347,655 1,348 -- --
Net loss......................................... -- -- -- -- -- --
---------- ----------- ------------ --------- ---------- ----------
Balance at December 31, 1993..................... -- -- 1,347,655 1,348 5,596,448 419,579
Exercise of Common Stock options................. -- -- -- -- 176,447 34,001
Sale of Series A Convertible Preferred Stock, net
of $7,293 issuance costs....................... -- -- 449,218 449 -- --
Sale of Series C Convertible Preferred Stock, net
of $91,513 issuance costs...................... -- -- 1,832,632 1,832 -- --
Dividends paid to Series A Preferred
Shareholders................................... -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
---------- ----------- ------------ --------- ---------- ----------
Balances at December 31, 1994.................... -- -- 3,629,505 3,629 5,772,895 453,580
Exercise of Common Stock options................. -- -- -- -- 346,878 20,495
Net loss......................................... -- -- -- -- -- --
---------- ----------- ------------ --------- ---------- ----------
Balances at December 31, 1995.................... $ 3,629,505 $ 3,629 6,119,773 $ 474,075
---------- ----------- ------------ --------- ---------- ----------
---------- ----------- ------------ --------- ---------- ----------
</TABLE>
41
<PAGE>
CONNECTSOFT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL SHAREHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
----------------- ------------------ ------------------------
<S> <C> <C> <C>
Balances at January 1, 1993..................... $ -- $ (218,806) $ (34,946)
Dividends paid to Class A Preferred
shareholders.................................. -- (5,184) (5,184)
Conversion of Class A Preferred Stock to Common
Stock......................................... -- -- --
Exercise of Common Stock options................ -- -- 425
Common Stock issued to independent
contractors................................... -- -- 11,200
Conversion of promissory notes to Common
Stock......................................... -- -- 39,000
Conversion of employee deferred wages notes
payable to Common Stock....................... -- -- 55,149
Sale of Common Stock............................ -- -- 129,945
Increase in the number of common shares
outstanding resulting from 15 for 1 stock
split......................................... -- -- --
Sale of Series A Convertible Preferred Stock,
net of $61,420 issuance costs................. 687,232 -- 688,580
Net loss........................................ -- (1,343,153) (1,343,153)
----------------- ------------------ -----------
Balance at December 31, 1993.................... 687,232 (1,567,143) (458,984)
Exercise of Common Stock options................ -- -- 34,001
Sale of Series A Convertible Preferred Stock,
net of $7,293 issuance costs.................. 242,258 -- 242,707
Sale of Series C Convertible Preferred Stock,
net of $91,513 issuance costs................. 1,128,470 -- 1,130,302
Dividends paid to Series A Preferred
Shareholders.................................. -- (11,640) (11,640)
Net income...................................... -- 452,713 452,713
----------------- ------------------ -----------
Balances at December 31, 1994................... 2,057,960 (1,126,070) 1,389,099
Exercise of Common Stock options................ -- -- 20,495
Net loss........................................ -- (6,458,728) (6,458,728)
----------------- ------------------ -----------
Balances at December 31, 1995................... $ 2,057,960 $ (7,584,798) $ (5,049,134)
----------------- ------------------ -----------
----------------- ------------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
CONNECTSOFT, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................................. $ (6,458,728) $ 452,713 $ (1,343,153)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision for doubtful accounts.................................... 130,279 (22,950) 26,950
Depreciation and amortization........................................ 1,902,006 336,862 95,555
Inventory allowance.................................................. 89,956 -- --
Changes in:
Accounts receivable................................................ 1,221,682 (2,079,090) 84,131
Inventories........................................................ (14,524) (187,413) (10,916)
Prepaid expenses................................................... 811 (13,540) 34,631
Operating lease deposits........................................... (21,334) (110,849) (8,232)
Other assets....................................................... (220,000) (10,000) 31,079
Accounts payable................................................... 375,675 1,392,438 240,007
Accrued liabilities................................................ 207,219 87,664 395,441
Billings in excess of revenue earned............................... (176,522) 588,810 --
------------- ------------- -------------
Net cash provided by (used in) operating activities................ (2,963,480) 434,645 (454,507)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment................................. (118,095) (346,749) (48,213)
Capitalized software development costs............................. (733,708) (1,164,440) (361,694)
------------- ------------- -------------
Net cash used in investing activities............................ (851,803) (1,511,189) (409,907)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from line of credit....................................... 4,109,122 200,000 185,911
Payment of line of credit.......................................... -- (420,000) --
Proceeds from shareholder note payable............................. -- 545,000 40,032
Payment of notes payable to shareholders........................... -- (585,032) (193,082)
Proceeds from long-term debt....................................... -- 800,000 --
Payment of long-term debt.......................................... (500,000) (666,532) --
(Increase) decrease in restricted cash............................. 536,495 (536,495) --
Bank overdrafts.................................................... -- 10,335 --
Payment of capital lease obligations............................... (415,545) (86,089) (26,398)
Payments of notes payable to employees............................. (8,052) -- --
Issuance of convertible preferred stock, net of issuance costs..... -- 1,373,009 688,580
Issuance of common stock........................................... 20,495 34,001 141,570
Payment of dividends............................................... -- (11,640) (5,184)
Net proceeds from factored receivables........................... 141,391 399,937 --
------------- ------------- -------------
Net cash provided by financing activities........................ 3,883,906 1,056,494 831,429
Net increase in cash................................................. 68,623 (20,050) (32,985)
Cash, beginning of year.............................................. -- 20,050 53,035
------------- ------------- -------------
Cash, end of year.................................................... $ 68,623 -- $ 20,050
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
43
<PAGE>
CONNECTSOFT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest......................................................... $ 398,512 $ 240,011 $ 94,466
------------- ------------- -------------
------------- ------------- -------------
Noncash investing and financing activities:
Property and equipment acquired with capital lease obligations..... $ 1,970,876 $ 571,806 $ 44,200
------------- ------------- -------------
------------- ------------- -------------
Unpaid employee compensation converted to promissory notes......... -- $ 5,625 --
------------- ------------- -------------
------------- ------------- -------------
Accounts and notes payable exchanged for common stock.............. -- -- $ 94,149
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Connectsoft, Inc., previously Adonis Corporation (the "Company") was founded
in 1988. The Company has been engaged in two primary business activities as
follows:
CONTRACT SERVICES: The contract services business was founded in 1988 and
the Company grew to be one of the premier providers of MicroSoft Windows-based
contract programming services. These services were marketed directly to the PC
industry, peripheral manufacturers and corporate information services
departments. In 1996, the Company discontinued this business.
RETAIL PRODUCTS: In 1990, the Company expanded the scope of its business
with the publication of Company developed application software. Through retail
products divisions, the Company markets a family of Windows-based
telecommunication programs for accessing on-line information services. Included
in the Company's line of products are E-mail connection software and children's
E-mail and Internet connection products.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives ranging from 3 to 5 years.
Tenant improvements are depreciated over the term of the facility lease or
useful life, whichever is shorter. Expenditures for additions and improvements
are capitalized; expenditures for maintenance and repairs are expensed as
incurred. Gains and losses on assets, retired or otherwise disposed of, are
reflected in operations.
INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market and consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Materials............................................................. $ 211,124 $ 164,914
Finished goods........................................................ 14,157 45,843
Obsolescence allowance................................................ (89,956) --
---------- ----------
$ 135,325 $ 210,757
---------- ----------
---------- ----------
</TABLE>
RESTRICTED CASH
At December 31, 1994 the Company had a certificate of deposit in the amount
of $500,000 plus accrued interest which was pledged as collateral on long-term
debt. The CD had an interest rate of 4.75% and it matured on April 10, 1995. At
December 31, 1994 the Company also had a certificate of deposit in the amount of
$30,812 plus accrued interest which was pledged as collateral on a capital
lease. The CD had an interest rate of 3.50% for the first three months and was
adjusted every three months thereafter and matured on June 10, 1995. All of the
Company's restricted cash was held at one financial institution.
45
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in conjunction with product development
are charged to product development expense until technological feasibility is
established. Thereafter, all software product development costs are capitalized
and reported at the lower of unamortized cost or net realizable value of each
product. The establishment of technological feasibility and the on-going
assessment of the recoverability of costs require considerable judgment by the
Company with respect to certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic life and changes
in software and hardware technology. After consideration of the above factors,
the Company amortizes capitalized software costs for each software product using
the straight-line method over the estimated economic life of the software.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax bases of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and accounts receivable approximate fair value
due to their short-term maturities. The carrying value of the Company's line of
credit balance approximates its estimated fair value because the rate of
interest on the line of credit approximates current interest rates for similar
obligations with like maturities.
REVENUE RECOGNITION
CONTRACT SERVICES: During the years ended December 31, 1995, 1994 and 1993,
the Company entered into both "Time and Materials" and "Fixed Bid" contracts
with customers. Revenue on these contracts is recognized using the
percentage-of-completion contract accounting method, or on a completed contract
basis, in accordance with the American Institute of Certified Public
Accountant's statement of position SOP 91-1, Software Revenue Recognition ("SOP
91-1").
RETAIL PRODUCTS: Revenue from sales of software products to end-users and
distributors is recognized upon product shipment, net of an allowance for
returns. The Company permits customers to return products within certain
specified periods. The Company also licenses products to original equipment
manufacturers ("OEM") and recognizes royalties in accordance with SOP 91-1.
CONCENTRATION OF CREDIT RISK
The Company provides contract services to PC users and manufacturers, and
corporate information services departments who are located primarily in the
United States. Concentrations of credit risk with respect to trade receivables
are limited to the Company's diverse customer base. The Company closely monitors
extensions of credit and has never experienced significant credit losses.
46
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRIVATE PLACEMENT AND ACQUISITION COSTS
During 1995 the Company incurred $441,623 associated with certain abandoned
equity offering and financing transactions. Such costs have been charged to
operations. Also, during 1995 the Company incurred $487,726 associated with an
abandoned acquisition transaction. Such costs have been charged to operations.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic life of the Company's products
used to calculate amortization of software development costs may be reduced
significantly in the near term. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.
RECLASSIFICATIONS
Certain balances in the 1994 financial statements have been reclassified to
conform to the 1995 presentation. These reclassifications had no effect on the
net income (loss) or shareholder's equity (deficit) as previously reported.
2. ACCOUNTS RECEIVABLE:
At December 31, accounts receivable consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ------------
<S> <C> <C>
Receivables assigned to factor...................................... $ 182,833 $ 769,200
Less advances from factor........................................... (141,391) (399,938)
Funds in excess of reserve requirements............................. 3,125 24,595
---------- ------------
Due from factor................................................. 44,567 393,857
Accounts receivable................................................. 392,993 1,406,776
Allowance doubtful accounts......................................... (134,279) (4,000)
---------- ------------
$ 303,281 $ 1,796,633
---------- ------------
---------- ------------
</TABLE>
In May 1993, the Company entered into an agreement with an investment
company to secure short-term financing by factoring accounts receivable. Under
this agreement, the Company is permitted to receive up to 80% of pre-approved
receivables and 65% of retail product receivables assigned on a recourse basis.
The remaining balances are retained by the investment company as a reserve
against losses and are refunded to the Company following receipt of Company's
payment. Receivables sold are collateralized by all owned assets of the Company
and are personally guaranteed by an officer of the
47
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTS RECEIVABLE: (CONTINUED)
Company. Approximately $2,775,000 and $2,015,000 of accounts receivable were
sold during 1995 and 1994, respectively.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Computer equipment................................................. $ 219,820 $ 126,184
Computer and other equipment under capital leases.................. 2,586,882 646,930
Furniture and fixtures............................................. 204,253 184,657
Tenant improvements................................................ 144,993 140,128
------------ ----------
3,155,948 1,097,899
Less accumulated depreciation and amortization (includes
accumulated amortization of capital leases of $565,153 and
$115,212 for 1995 and 1994, respectively)........................ (815,398) (216,094)
------------ ----------
$ 2,340,550 $ 881,805
------------ ----------
------------ ----------
</TABLE>
4. OTHER ASSETS:
During 1995 the Company entered into software license agreements with two
software development companies to use their software in products the Company
develops. The license fees under the agreements were $510,000 and are amortized
on a straight-line method over the estimated economic life of the software
products. The Company is also required to pay certain other license and
maintenance fees under the agreements which are expensed when incurred.
5. LINE OF CREDIT:
On September 20, 1995, the Company entered into a $3,000,000 line of credit
agreement with a major customer, with interest at 17% and principal and accrued
interest due on December 31, 1995. At December 31, 1995, the Company had
borrowed $3,000,000 under this loan agreement.
On November 1, 1995, the Company entered into another loan agreement with
the major customer for additional borrowings up to a maximum of $3,000,000 with
interest at 17% and principal and accrued interest due January 1996. The note
was personally guaranteed by the President and majority shareholder of the
Company and collateralized by a first lien on all of the capital stock of the
Company owned by the President and majority stockholder. At December 31, 1995,
the Company had borrowed $1,109,122 under this loan agreement.
In connection with the acquisition of the Company discussed in Note 12, the
line of credit debt was settled for $2,000,000 which resulted in debt and
interests forgiveness of $2,558,246.
48
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
At December 31, 1994 long-term debt was as follows:
<TABLE>
<S> <C>
Term loan payable to bank, monthly interest only payments bearing
interest at the CD rate plus 2% (6.75% at December 31, 1994).... $ 500,000
Notes payable to employees, bi-weekly principal and interest
payments, bearing interest at 18%, due in June 1995............. 8,052
---------
508,052
Less current portion.............................................. (108,052)
---------
$ 400,000
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
LEASE OBLIGATIONS
At December 31, 1995, the Company was obligated under capital leases for
computer hardware and other capital equipment and furniture utilized in its
operations. The Company also is obligated under operating leases for its office
space. Subsequent to December 31, 1995, the Company entered into new operating
lease agreements and modified the terms on other operating leases. Future
minimum lease payments under capital and operating leases, including the new and
revised leases, are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996........................................................ $ 1,068,865 $ 668,289
1997........................................................ 971,018 661,720
1998........................................................ 454,279 525,198
1999........................................................ 15,204 394,564
2000........................................................ -- 400,143
Thereafter.................................................. -- 349,492
------------- ----------------
Total minimum lease payments................................ $ 2,509,366 $ 2,999,406
----------------
----------------
Lease amount representing interest.......................... (404,489)
-------------
Present value of net minimum lease payment.................. $ 2,104,877
-------------
-------------
</TABLE>
Rent expense for 1995, 1994 and 1993 was $615,143, $299,537 and $139,820,
respectively.
CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business. Although the outcome of these matters is not determinable at
this time, management believes that the ultimate outcomes will not have a
material adverse effect on the Company's financial position or results of
operations.
8. INCOME TAXES:
Due to net taxable losses incurred, the Company did not record any Federal
income tax expense or benefit for 1995, 1994 or 1993. Deferred income taxes
reflect the net tax effects of temporary differences
49
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
<S> <C> <C>
1995 1994
------------ ----------
Deferred income tax assets:
Tax loss carry forwards........................................... $ 2,177,727 $ 754,988
Capitalized software costs........................................ 276,045 --
Accrued liabilities............................................... 47,413 36,818
Allowance for doubtful accounts receivable........................ 45,655 --
Inventory......................................................... 42,779 46,880
Other............................................................. 8,290 5,938
------------ ----------
Deferred income tax assets.......................................... 2,597,909 844,624
------------ ----------
------------ ----------
Deferred income tax liability:
Depreciation...................................................... (48,332) (5,400)
Capitalized software costs........................................ -- (454,859)
------------ ----------
Deferred income tax liability..................................... (48,332) (460,259)
------------ ----------
Valuation allowance............................................... (2,549,577) (384,365)
------------ ----------
Net deferred income tax assets...................................... $ -- $ --
------------ ----------
------------ ----------
</TABLE>
As a result of the acquisition of the Company by American United Global,
Inc. in 1996 (see Note 12), there is a limitation of use on the Company's tax
loss carryforwards. Because of the limitation and because of the Company's prior
operating results, full valuation allowances have been recorded at December 31,
1995 and 1994. The net deferred tax asset will be realized when future taxable
income is earned.
The Company has net operating loss carryforwards of approximately $6,406,000
with expiration dates through fiscal year 2010.
9. CAPITAL STOCK:
RECAPITALIZATION: Effective September 23, 1993, the shareholders approved a
recapitalization of the Company's capital structure and increased authorized
shares of common stock to 30,000,000 shares. In addition, a 15-for-1 stock split
was authorized for all outstanding securities. The recapitalization resulted in
the conversion of 50,000 shares of Class A preferred stock into common stock on
a one-for-one basis and authorized payment of dividends totaling $11,640 to the
preferred shareholders.
PREFERRED STOCK: On November 12, 1993, the shareholder's authorized
1,796,873 shares of Series A Convertible Preferred Stock and 600,000 shares of
Series B Convertible Preferred Stock. A shareholder has an option to purchase
the 600,000 shares of Series B Convertible Preferred Stock at approximately
$0.83 per share for a total investment of $500,000.
On December 14, 1993, the Company issued 1,347,655 shares of Series A
Convertible Preferred Stock to a corporate investor at approximately $0.55 per
share.
50
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK: (CONTINUED)
On August 9, 1994, the shareholders authorized 2,412,625 shares of Series C
Convertible Preferred Stock and 5,667,368 shares of Series D Convertible
Preferred Stock. On August 9, 1994, a corporate investor purchased 1,832,632
shares of Series C Convertible Preferred Stock at approximately $0.67 per share.
In connection with the Series C Convertible Preferred Stock financing, the
Company issued 579,993 options to acquire Series C Preferred Stock at $.67 per
share to an existing shareholder, and extended the expiration date of the
600,000 Series B options from June 30, 1994 to 60 days after the delivery of the
1994 financial statements. The Series C options expire 60 days after the
delivery of the 1995 financial statements. The Board of Directors has the
authority to issue Series D stock without the consent of Series A and B
stockholders. The Series D stock must be issued for consideration of not less
than $0.8333 per share, and is convertible into not more than 5,667,368 shares
of common stock as determined by the Board of Directors.
The Preferred Series A, B and C Shares are convertible at the holders'
option any time up to December 31, 1999 into common stock of the Company on a
1-to-1 basis. The conversion ratio will be adjusted under certain circumstances,
as defined by the agreements. Terms of the Preferred Stock Purchase Agreement
limit dividend payments, provide anti-dilution protection, provide right of
first negotiation on proposed equity and debt financing and prohibit
authorization of any senior class of equity instrument without approval. Series
A and B have the right, voting as a class separate from the holders of common
stock, to elect a director. The holders of Series C, voting as a class, have the
right to elect a director. Series A, B and C have equal rights and rights ahead
of Series D Preferred Stock with respect to liquidation. In the event of
liquidation, Series A, B and C preferred shareholders will be entitled to
receive an amount equal to the purchase price for each share owned, dividends
declared but unpaid, and a premium amount equal to 12%, compounded annually,
from date of issuance on the purchase price of the preferred shares. Any assets
remaining after payment of the preferred liquidation preference, if any, will be
distributed to the holders of the preferred and common stock in proportion to
the number of common shares held after conversion adjustments.
On January 13, 1994, the same corporate investor purchased an additional
449,218 shares of Series A Convertible Preferred Stock at approximately $0.55
per share.
EMPLOYEE STOCK OPTION PLAN
The Company has stock option plans which provide for nonqualified and
incentive stock options for officers, employees, directors and consultants.
Shares of common stock reserved for the plan total 5,750,000. Options granted
under the plan generally become exercisable, at a rate of 33% per year from the
date of grant, are dependent on the optionee's continuous employment, and expire
10 years from the date of grant or three months subsequent to termination. Stock
options are issued at prices equal to the estimated fair market value at the
date of grant. Proceeds received upon the exercise of stock options are credited
to the common stock account.
51
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK: (CONTINUED)
Stock option activity and option price information for the years ended
December 31, 1995, 1994 and 1993, is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------
<S> <C> <C>
NUMBER OF OPTION PRICE
SHARES RANGE
---------- -------------
Balance, January 1, 1993.................................................... 2,449,875 $0.01-0.18
Granted................................................................... 710,125 $0.20-0.67
Exercised................................................................. (646,695) $0.01-0.20
Canceled.................................................................. (265,500) $0.13-0.27
----------
Balance, December 31, 1993.................................................. 2,247,805 $0.01-0.67
Granted................................................................... 195,000 $0.67-0.83
Exercised................................................................. (176,447) $0.13-0.67
Canceled.................................................................. (152,708) $0.13-0.67
----------
Balance, December 31, 1994.................................................. 2,113,650 $0.01-0.83
Granted................................................................... 563,350 $2.80
Exercised................................................................. (346,878) $0.01-0.83
Canceled.................................................................. (364,652) $0.20-2.80
----------
Balance, December 31, 1995.................................................. 1,965,470 $0.01-2.80
----------
----------
</TABLE>
At December 31, 1995 and 1994, 1,860,097 and 58,795 shares are available for
future grant. Total shares exercisable at December 31, 1995 and 1994 are
1,796,062 and 1,815,395, respectively.
10. 401(K) PROFIT SHARING PLAN:
Effective May 1, 1994, the Company adopted a 401(k) Retirement and Profit
Sharing Plan (the "Plan"). The Plan covers all full time employees who have
completed three consecutive months of service and are at least 18 years of age.
Under the terms of the Plan, participants may contribute up to 15% of gross
wages up to the statutory limits. The Company made no contributions to the Plan
during 1995 and 1994.
11. MAJOR CUSTOMERS:
The Company's largest contract services customer accounted for approximately
23% and 55% of total revenues in 1995 and 1994, respectively. The Company's
largest retail products customer accounted for approximately 63% and 29% of
total revenues during 1995 and 1994, respectively. Revenues from three principal
customers from contract services in 1993 accounted for 16.1%, 17.2%, and 20% of
total revenues.
12. SUBSEQUENT EVENTS:
In April 1996, the Company entered into a letter of intent agreement and
plan of merger with American United Global, Inc., a Delaware corporation
("AUGI"). The merger was completed with a final merger agreement dated June 28,
1996 and approved by the Company's shareholders on July 31, 1996. Under the
merger agreement, the record owners of all outstanding fully diluted equity of
the Company will receive a proportional amount of 1,000,000 shares of Series B
Convertible Preferred stock of AUGI. The record owners of all outstanding fully
diluted equity of the Company prior to the merger will be all
52
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS: (CONTINUED)
stockholders of the Company after giving effect to the conversion and exercises
of warrants and vested stock options. The AUGI preferred shares have a par value
of $.01, do not pay a dividend, are not subject to redemption, have a
liquidation preference over AUGI's common stock of $3.50 per share, vote
together with AUGI common stock and are convertible into AUGI common stock at a
variable conversion rate depending upon future income earned by AUGI from
business operations engaged in by the Company at the time of acquisition. The
conversion rate can vary from one-to-one to one-to-three.
In connection with the acquisition, AUGI paid certain debt of the Company
and agreed to make advances to the Company totaling $5 million including amounts
advanced at the time of the acquisition.
53
<PAGE>
AMERICAN UNITED GLOBAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The Unaudited Pro Forma Combined Statement of Operations of American United
Global, Inc. for the year ended July 31, 1996 gives effect to the acquisition by
the Company of the business of ConnectSoft, Inc. as if such business were
acquired on August 1, 1995. The Unaudited Pro Forma Combined Statement of
Operations does not give effect to any changes in the operations of ConnectSoft,
Inc. following such acquisition.
The Unaudited Pro Forma Combined Statement of Operations is presented for
informational purposes only and does not purport to represent what the Company's
results of operations for the year ended July 31, 1996 would actually have been
had the applicable acquisition, in fact, occurred on August 1, 1995, or the
Company's results of operations for any future period.
54
<PAGE>
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
AUGI CONNECTSOFT ADJUSTMENTS COMBINED
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales........................................... $ 106,555,000 $ 6,723,000 $ 113,278,000
Cost of goods sold.................................. 93,906,000 2,492,000 96,398,000
-------------- ------------- ----------- --------------
Gross profit........................................ 12,649,000 4,231,000 16,880,000
Selling, general and administrative................. 7,864,000 6,007,000 146,000 14,017,000
Stock option compensation........................... 1,671,000 1,671,000
Research and development............................ 10,295,000 3,914,000 657,000 14,866,000
-------------- ------------- ----------- --------------
Operating (loss).................................... (7,181,000) (5,690,000) (803,000) (13,674,000)
Interest expense, net............................... 1,137,000 1,277,000 2,414,000
-------------- ------------- ----------- --------------
(Loss) from continuing operations before income
taxes and minority interest....................... (8,318,000) (6,967,000) (803,000) (16,088,000)
Provision for income taxes.......................... 890,000 890,000
-------------- ------------- ----------- --------------
(9,208,000) (6,967,000) (803,000) 16,978,000
Minority interest in earnings of consolidated
subsidiaries...................................... 402,000 402,000
(Loss) from continuing operations................... (9,610,000) (6,967,000) (803,000) (17,380,000)
-------------- ------------- ----------- --------------
Discontinued operations, net of taxes
Income from operations, net of tax................ 315,000 315,000
Gain on disposal (net of tax of $5,042,000)......... 7,460,000 7,460,000
-------------- ------------- ----------- --------------
7,775,000 7,775,000
-------------- ------------- ----------- --------------
Net (loss).......................................... $ (1,835,000) $ (6,967,000) $(803,000) $ (9,605,000)
-------------- ------------- ----------- --------------
-------------- ------------- ----------- --------------
(Loss) earnings per common and common equivalent
share:
(Loss) from continuing operations................... $(1.66) $(2.99)
Discontinued operations............................. 1.34 1.34
-------------- --------------
$(0.32) $(1.65)
-------------- --------------
-------------- --------------
Pro forma weighted average number of shares
outstanding....................................... 5,810,526 5,810,526
</TABLE>
55
<PAGE>
NOTES TO UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
(1) BASIS OF PRESENTATION
The pro forma statement of operations gives effect to the acquisition of
ConnectSoft, Inc. which aggregate the results of operations of American United
Global, Inc. (the Company) and ConnectSoft for the year ended July 31, 1996 as
if ConnectSoft had been acquired as of August 1, 1995. ConnectSoft's results of
operations for the day ended July 31, 1996 have been included in the
consolidated results of operations of the Company for the year ended July 31,
1996. Accordingly, the ConnectSoft results of operations included in the pro
forma statement of operations reflect the results of operations of ConnectSoft
for the period August 1, 1995 to July 30, 1996 prior to the acquisition. A
nonrecurring expense of approximately $1,200,000 related to the repricing of
certain ConnectSoft warrants and options in connection with the acquisition by
the Company has not been included in the results of operations of ConnectSoft.
The pro forma financial statements are presented for illustrative purposes
only and should not be construed to be indicative of the actual combined results
of operations as may exist in the future. The pro form adjustments are based on
the consideration exchanged, including the fair value of the assets acquired,
liabilities assumed and preferred stock issued.
The Company accounted for the acquisition of ConnectSoft using the purchase
method of accounting, wherein the purchase price was allocated to the assets
acquired and liabilities assumed based upon their relative fair values.
(2) PRO FORMA ADJUSTMENT
The pro forma adjustment of $803,000 represents the amortization of the
non-compete agreement, goodwill and capitalized software costs acquired for the
period August 1, 1995 to July 30, 1996. The purchased research and development
costs of $10,033,000 was charged to research and development expense in the July
31, 1996 statement of operations of the Company.
56
<PAGE>
V. TO RATIFY THE ISSUANCE OF 400,000 SHARES OF THE COMPANY'S SERIES B-2
CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION WITH A $10,000,000 PRIVATE
PLACEMENT COMPLETED IN JANUARY 1997.
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 consummated a private placement of 400,000
shares of Series B-2 Preferred Stock to 11 unaffiliated purchasers. The Company
realized net proceeds of approximately $9,200,000 from the sale of the Series
B-2 Preferred Stock.
Shares of the Series B-2 Preferred Stock were initially convertible by the
holders into an aggregate of 1,165,501 shares of Company 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
Series B-2 Preferred Stock 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 Series B-2 Preferred Stock, the anniversary
of such sale, or the conversion date, as the case may be. At the Company's
option, dividends on the Series B-2 Preferred Stock could be paid in cash or in
additional shares of Series B-2 Preferred Stock. The Company declared and paid
dividends on the Series B-2 Preferred Stock by distributing 12,221 additional
shares of Series B-2 Preferred Stock to holders of the Series B-2 Preferred
Stock.
In addition to the Series B-2 Preferred Stock, 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.
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
Series B-2 Preferred Stock to be issued upon conversion of the Series B-2
Preferred Stock. 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 Series B-2 Preferred Stock issued in the 1997 Private Placement , as well
as the additional shares issued and distributed as dividends, were converted
into an aggregate of 2,631,125 shares of Common Stock.
57
<PAGE>
FAILURE OF COMPANY STOCKHOLDERS TO RATIFY THE ISSUANCE OF COMPANY SERIES B-2
PREFERRED STOCK IN CONNECTION WITH THE 1997 PRIVATE PLACEMENT COULD RESULT IN
THE DELISTING OF THE COMPANY'S COMMON STOCK FROM THE NASDAQ NATIONAL MARKET
SYSTEM, OR FROM ANY NASDAQ TRADING SYSTEM, WITH THE RESULT BEING A DECREASE IN
THE LIQUIDITY OF STOCKHOLDER INVESTMENTS IN THE COMPANY'S COMMON STOCK. THE SOLE
PURPOSE FOR STOCKHOLDER RATIFICATION OF THE ISSUANCE OF SERIES B-2 PREFERRED
STOCK IN CONNECTION WITH THE 1997 PRIVATE PLACEMENT IS TO AVOID DELISTING OF THE
COMPANY'S COMMON STOCK FROM NASDAQ TRADING AS A RESULT OF THE INITIAL ISSUANCE
BY NASDAQ OF A RULING, NOW UNDER APPEAL TO SO DELIST THE COMPANY'S COMMON STOCK
AS A RESULT OF THE COMPANY'S ALLEGED FAILURE TO COMPLY WITH NASD MARKETPLACE
RULES 4460(G) AND 4460(I). THOSE RULES REQUIRE THE COMPANY TO MAKE ANNUAL
SOLICITATIONS OF PROXIES FOR VOTING AT ANNUAL SHAREHOLDER MEETINGS, AND TO SEEK
SHAREHOLDER APPROVAL OF COMPANY ISSUANCES IN ANY SINGLE TRANSACTION OF VOTING
SECURITIES WHICH ENTITLE THE HOLDERS THEREOF TO CAST TWENTY PERCENT OR MORE OF
THE VOTES AT A MEETING OF SHAREHOLDERS. SHOULD STOCKHOLDERS FAIL TO RATIFY THE
ISSUANCE OF SERIES B-2 PREFERRED STOCK IN CONNECTION WITH THE 1997 PRIVATE
PLACEMENT AND THE COMPANY'S SECURITIES ARE DELISTED FROM NASDAQ TRADING, THERE
IS NO GUARANTEE THAT THE COMPANY'S SECURITIES WILL BE INCLUDED FOR TRADING ON
ANY OTHER SECURITIES EXCHANGE. SHOULD THE COMPANY'S COMMON STOCK NOT BE INCLUDED
FOR TRADING ON NASDAQ OR ANY OTHER SECURITIES EXCHANGE, TRADING IN THE COMPANY'S
COMMON STOCK WOULD BE SUBJECT TO THE "PENNY STOCK" TRADING RULES. AMONG OTHER
THINGS, THE PENNY STOCK RULES MAKE IT MORE DIFFICULT TO COMPLETE SOLICITED
TRANSACTIONS IN AN AFFECTED SECURITY, WITH THE RESULT BEING A FAR LESS LIQUID
MARKET FOR COVERED SECURITIES. SHOULD THE COMPANY'S SECURITIES BECOME SUBJECT TO
THE PENNY STOCK RULES, IT IS MOST LIKELY THAT MARKET PRICES FOR THE COMPANY'S
SECURITIES WILL BE DEPRESSED, RESULTING IN A LOSS OF STOCKHOLDER VALUE TO
COMPANY STOCKHOLDERS.
THE COMPANY'S MANAGEMENT BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS THAT STOCKHOLDERS RATIFY THE ISSUANCE OF SERIES B-2
PREFERRED STOCK IN CONNECTION WITH THE 1997 PRIVATE PLACEMENT.
The failure by Company stockholders to ratify the issuance of Series B-2
Preferred Stock in connection with the 1997 Private Placement will neither cause
the 1997 Private Placement to be rescinded nor affect the effectiveness of the
1997 Private Placement in any way. The Board of Directors has no plans to affect
consummation of the 1997 Private Placement should Company stockholders fail to
ratify the issuance of Series B-2 Preferred Stock to participants in the 1997
private Placement.
VI. TO AMEND THE CORPORATION'S CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF THE CORPORATION'S AUTHORIZED SHARES BY INCREASING THE AUTHORIZED
NUMBER OF SHARES OF VOTING COMMON STOCK AND AUTHORIZING SHARES OF NEW CLASS
B NON-VOTING COMMON STOCK
At the Annual Meeting a vote will be taken on a proposal to authorize the
amendment of the Company's Certificate of Incorporation to increase the number
of shares authorized for issuance thereunder by creating a new class of
Non-Voting Common Stock. A COPY OF THE PROPOSED CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION OF THE COMPANY IS ANNEXED HERETO AS EXHIBIT A. In
reflecting upon the Company's present capital structure, management of the
Company believes that the current authorized number of common and preferred
shares is inadequate for the Company's purposes. Management believes that the
Company needs more flexibility in its capital structure in order to raise
additional working capital funds and to support its ability to consummate
potential future acquisitions. The purpose of the proposal to amend the
Company's
58
<PAGE>
Certificate of Incorporation, which will (i) increase to 40,000,000 shares from
the currently authorized 20,000,000 shares the number of shares of voting Common
Stock, which 25,000,000 shares of voting Common Stock will be redesignated as
Class A Voting Common Stock; and (ii) create a new class of non-voting common
shares (a total of 40,000,000 shares of Class B Non-Voting Common Stock) is to
enhance the Company's flexibility in the issuance of different classes and types
of securities for capital formation and for meeting the needs of an active
acquisition program.
Such an acquisitions program, and capital formation activities to fund
newly-acquired businesses following acquisition, comprise the Company's foremost
activities as a result of the sale of all of its operating assets in connection
with the Hutchinson Transaction described above. The Company already has two
authorized classes of Preferred Stock: 1,200,000 shares of Series A 12.5%
cumulative voting preferred stock; and 1,500,000 shares of Series B "blank
check" preferred stock, the terms, conditions and privileges of which Series B
preferred stock can be determined by action of the Board of Directors without
further action by the Company's stockholders. There are no outstanding shares of
Series A Preferred Stock; however, 973,757 shares of Series B Preferred Stock
are currently issued and outstanding. Notwithstanding the availability of such
authorized Preferred Stock, Management sees the need for the proposed increase
in its capital structure at this time despite the absence of current or
immediately foreseeable plans for issuance of such shares in the public market
to raise additional working capital funds. Management also believes that,
insofar as the Company is seeking stockholder approval at this time for the
other proposals identified in this solicitation material, it is more cost
effective for the Company concurrently to approach stockholders for approval of
such increase in its authorized capital.
An unintended effect of the increase in the Company's authorized stock will
be to strengthen the Board's ability to fight off hostile takeovers. The Company
is not aware of any existing hostile takeover proposals nor is it the intention
of the Company's management to shore up the Company's defenses against a
potential hostile takeover. Stockholders must be aware that in the event that
all or a substantial number of the additional shares are issued, existing
stockholders may suffer immediate and substantial dilution of their interests in
the Company and a potential decrease in the valuation of their stock.
The terms of the Class B Non-Voting Common Stock to be authorized by the
amended Certificate of Incorporation of the Company shall be identical to the
terms of the Company's existing Common Stock (to be redesignated as Class A
Common Stock), other than the fact that such Class B Non-Voting Common Stock
will not have voting rights (other than as required by Delaware law) and will
not be entitled to vote for the election of Company directors. No shares of
Class B Non-Voting Common Stock have ever been issued, and shares of the new
Class B Non-Voting Common Stock may be issued without further authorization by
the Company's stockholders.
MANAGEMENT BELIEVES APPROVAL OF THE AMENDMENT OF THE COMPANY'S CERTIFICATE
OF INCORPORATION IS IN THE BEST INTEREST OF THE COMPANY AND RECOMMENDS THAT IT
BE AUTHORIZED AND RATIFIED.
VII. TO AUTHORIZE AND APPROVE THE CORPORATION'S 1996 EMPLOYEE STOCK OPTION PLAN,
WHICH PLAN WILL INCLUDE 2,500,000 SHARES OF COMPANY COMMON STOCK AVAILABLE
FOR THE GRANTING OF OPTIONS.
At the Annual Meeting a vote will be taken on a proposal to approve the
creation of the Company's 1996 Employee Stock Option Plan (the "1996 Plan"),
which Plan contains 2,500,000 shares of Common Stock underlying stock options
available for grant thereunder. The 1996 Plan was adopted by the Board of
Directors on April 25, 1996, and has been amended on July 10, 1996. A COPY OF
THE 1996 PLAN IS ANNEXED HERETO AS EXHIBIT B. As of January 1, 1998, stock
options to purchase 1,374,150 shares of Common Stock have been granted to the
Company's employees, directors and outside consultants under the 1996 Plan.
Under the terms of the 1996 Plan, stockholder approval is not required for
authorization of the 1996 Plan.
59
<PAGE>
The 1996 Plan was authorized and adopted by the Board of Directors of the
Company in April 1996. The purpose of the 1996 Plan is to provide additional
incentive to the directors, officers, employees and consultants of the Company
who are primarily responsible for the management and growth of the Company. Each
option granted pursuant to the 1996 Plan shall be designated at the time of
grant as either an "incentive stock option" or as a "non-qualified stock
option."
The Company currently has two other employee stock option plans, under which
plans as of January 1, 1998, no options to acquire shares of Common Stock were
available for grant. See "Stock Option Plans", pages 25 and 26 for information
with respect to options granted under such plans to the Company's current
directors, nominees for director and current executive officers. The Company
previously amended both such plans to accommodate its former employees prior to
consummation of the Hutchinson Transaction, by extending the exercise periods of
outstanding options granted under the Plans. As a result, the Company does not
intend to grant options under either such employee stock option plans until all
currently outstanding options granted to its former Manufacturing Business
employees have either been exercised or have terminated. Therefore, Management
of the Company deemed it necessary to authorize the 1996 Plan in order to create
incentives for management and employees of the Company who are responsible for
the Company's future growth and business performance.
Management of the Company believes that it is in the best interests of the
Company to obtain stockholder approval of the 1996 Plan at this time (i) in
order to provide recipients of plan options with certain benefits available
under Securities and Exchange Commission regulations (e.g., option grants are
not considered purchases of securities for purposes of determining the existence
of 16(b) "short swing" profits which must be returned to the Company by
corporate insiders and (ii) in order to provide employees with the beneficial
tax treatment accorded "incentive" stock options, which can only be granted
under the 1996 Plan if it is approved by Company stockholders. Although other
factors, principally regarding plan administration, need to present in order for
holders of options granted under the 1996 Plan to enjoy such benefits (e.g.,
Securities Exchange Act Section 16(b) restrictions on certain purchases and
sales of securities by management personnel are loosened), having a stockholder
authorized stock option plan is the first requirement which must be met. For
information concerning the beneficial tax treatment accorded incentive stock
options, see "Tax Treatment of Options," below.
ADMINISTRATION OF THE PLAN. The 1996 Plan is administered by the full Board
of Directors or by the Compensation Committee, which determines whom among those
eligible will be granted options, the time or times at which options will be
granted, the number of shares to be subject to options, the durations of
options, any conditions to the exercise of options and the manner in and price
at which options may be exercised. The Compensation Committee is authorized to
amend, suspend or terminate the 1996 Plan, except that it is not authorized
without stockholder approval (except with regard to adjustments resulting from
changes in capitalization) to (i) increase the maximum number of shares that may
be issued pursuant to the exercise of options granted under the 1996 Plan; (ii)
permit the grant of a stock option under the 1996 Plan with an option exercise
price less than 85% of the fair market value of the shares at the time such
option is granted; (iii) change the eligibility requirements for participation
in the 1996 Plan; (iv) extend the term of any option or the period during which
any option may be granted under the 1996 Plan; or (v) decrease an option
exercise price (although an option may be canceled and a new option granted at a
lower exercise price).
SHARES SUBJECT TO THE PLAN. The 1996 Plan currently provides that options
may be granted with respect to a total of 2,500,000 shares of Common Stock,
subject to adjustment upon certain changes in capitalization without receipt of
consideration by the Company. In addition, if the Company is involved in a
merger, consolidation, dissolution or liquidation, the options granted under the
1996 Plan will be adjusted or, under certain conditions, will terminate, subject
to the right of the option holder to exercise his option or a comparable option
substituted at the discretion of the Company prior to such event. If any option
expires or terminates for any reason, without having been exercised in full, the
unpurchased shares subject to such option will be available again for the
purposes of the 1996 Plan.
60
<PAGE>
PARTICIPATION. Any employee, director, consultant, or representative of the
Company is eligible to receive incentive stock options or non-qualified stock
options granted under the 1996 Plan. Non-employee directors, consultants or
representatives may only receive non-qualified stock options.
OPTION PRICE. The exercise price of each option shall be determined by the
full Board of Directors or by the Compensation Committee. However, the exercise
price of each option on the date the option is granted may not be less than (i)
100% of the fair market value of the shares of Common Stock covered by an
incentive stock option, or (ii) 85% of the fair market value of the shares of
Common Stock covered by a non-qualified stock option. If an incentive stock
option is to be granted to an employee who owns over 10% of the total combined
voting power of all classes of the Company's stock, then the exercise price may
not be less than 110% of the fair market value of the Common Stock covered by
the option on the date the option is granted.
TERMS OF OPTIONS. The full Board of Directors or the Compensation Committee
shall, in its discretion, fix the term of each option, provided that the maximum
term of each option shall be 10 years. Incentive options granted to an employee
who owns over 10% of the total combined voting power of all classes of stock of
the Company shall expire not more than five years after the date of grant. The
1996 Plan will provide for the earlier expiration of options of a participant in
the event of certain terminations of employment.
RESTRICTIONS ON GRANT AND EXERCISE. An Option may not be transferred other
than by will or the laws of descent and distribution and, during the lifetime of
the option holder, may be exercised solely by him. The aggregate fair market
value (determined at the time the option is granted) of the shares as to which
an employee may first exercise incentive stock options in any one calendar year
may not exceed $100,000. The full Board of Directors or the Compensation
Committee may impose other conditions to exercise as it deems appropriate.
OPTION GRANTS. The Company has granted an aggregate of 1,374,150 Options
under the 1996 Plan.
TERMINATION. The 1996 Plan, unless sooner terminated by the Board of
Directors or the Compensation Committee, will terminate on April 25, 2006.
TAX TREATMENT OF OPTIONS. The Federal income tax treatment of non-qualified
stock options under the 1996 Plan is generally less favorable to employees than
the treatment accorded incentive stock options under the 1996 Plan. The option
grantee realizes taxable income, if any, upon his exercise of a non-qualified
stock option, not only upon sale of the shares acquired upon option exercise as
would be the case for incentive stock options granted under the 1996 Plan. The
tax treatment of non-qualified stock options is more favorable to the Company
than the treatment accorded to the Company with respect to incentive stock
options, because the Company is entitled to a tax deduction with respect to the
grant of a non-qualified stock option. With respect to granting a non-qualified
stock option, the Company would be entitled to a tax deduction and the optionee
would realize taxable income upon being granted a non-qualified stock option,
equal to the difference between the option exercise price and the fair market
value of the underlying stock on the date of grant.
The Company currently has no obligation to grant additional options under
the 1996 Plan to any person, including any members of the Company's management.
As of the close of business on December 26, 1997, the market value of the
shares of Common Stock underlying all options outstanding under the 1996 Plan
was approximately $2,748,300.
As of January 1, 1998, the directors and executive officers listed below
hold outstanding stock options granted under the 1996 Plan to acquire shares of
Common Stock, which options were granted on April 25, 1996 to Robert M. Rubin,
C. Dean McLain, Howard Katz, an employee and two unaffiliated consultants at an
exercise price of $3.78125 per share; were granted on May 15, 1996 to David M.
Barnes at an exercise
61
<PAGE>
price of $5.25 per share; were granted on October 4, 1996 to Messrs. Rubin, Katz
and Barnes at an exercise price of $5.125 per share; and were granted on May 21,
1997 to Messrs. Katz and Barnes at an exercise price of $4.375 per share; all of
which exercise prices represented the fair market value of the Common Stock on
the date of option grant, as follows:
<TABLE>
<CAPTION>
NAME NO. OF SHARES EXERCISE PRICE
- ------------------------------------------------------ ------------------ -----------------
<S> <C> <C>
Robert Rubin.......................................... 323,450 shares $ 3.78125
30,000 shares $ 5.125
C. Dean McLain........................................ 150,000 shares $ 3.78125
David M. Barnes....................................... 100,000 shares $ 5.25
50,000 shares $ 5.1255
50,000 shares $ 4.375
Howard Katz........................................... 150,000 shares $ 3.78125
100,000 shares $ 5.125
100,000 shares $ 4.375
All current executive officers and directors of the
Company as a group.................................. 1,052,950 shares
All directors and nominees for directors as a group... 1,052,950 shares
Outside Consultants................................... 50,000 shares
All employees who are not executive officers of the
Company, as a group................................. 271,200 shares
</TABLE>
The options granted to each of Messrs. Rubin ($3.78125 exercise price),
McLain and the outside consultants are immediately exercisable. The options
granted to Messrs. Barnes and Katz on October 4, 1996 ($5.125 exercise price)
are fully exercisable as to Mr. Katz and are exercisable as to 66 2/3% for Mr.
Barnes. The remaining 33 1/3% granted to Mr. Barnes shall be exercisable on
October 4, 1998.
The options granted to Messrs. Barnes and Katz on May 21, 1997 ($4.375
exercise price) are currently exercisable as to 33 1/3% of the respective grants
and the remaining 66 2/3% of each grant will be exercisable 50% on May 21, 1998
and 50% on May 21, 1999.
The options granted to Mr. Katz on April 25, 1996 ($3.78125 exercise price)
are currently exercisable as to 66 2/3% and the remaining 33 1/3% will be
exercisable on April 25, 1998. The options granted to Mr. Barnes on May 15, 1996
($5.25 exercise price) are currently exercisable as to 66 2/3% and the remaining
33 1/3% will be exercisable on May 15, 1998.
Based on the December 26, 1997 $2,748,300 market value of the shares of
Common Stock underlying options granted under the 1996 Plan, the aggregate value
of unexercised in-the-money options issued under the 1996 Plan (including
unexercisable options) would be $-0-.
Under the terms of the InterGlobe Merger Agreement, Artour Baganov, a former
director and executive officer of the Company, received options to acquire
698,182 shares of Common Stock at $5.50 per share. Those options were not
granted under the 1996 Plan and are exercisable only under certain conditions
specified in connection with the Interglobe merger.
MANAGEMENT BELIEVES AUTHORIZATION AND APPROVAL OF THE COMPANY'S 1996 STOCK
OPTION PLAN IS IN THE BEST INTEREST OF THE COMPANY AND RECOMMENDS THAT IT BE
AUTHORIZED AND RATIFIED.
62
<PAGE>
VIII-XII. AMENDMENTS TO THE CERTIFICATE OF INCORPORATION AND THE BY-LAWS
CONCERNING CLASSIFICATION OF THE BOARD OF DIRECTORS AND RELATED
ANTI-TAKEOVER MATTERS.
This group of proposed amendments to the By-laws of the Company (the
"By-Laws") and the Certificate of Incorporation of the Company (the "Articles")
would (1) classify the Board of Directors into three classes, as nearly equal in
number as possible, each of which, after an interim arrangement, will serve for
three years, with one class being elected each year; (2) provide that directors
may be removed by the stockholders only with cause and the approval of the
holders of at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote generally in the election of
directors; (3) provide that special meetings of stockholders may not be called
by stockholders unless pursuant to a written demand by the holders of at least
66.66% of the voting power of each class or series of outstanding stock of the
Company entitled to vote on the matter(s) to be considered at the special
meeting; (4) add provisions to the Articles which authorize stockholders to act
in lieu of holding a meeting only upon the unanimous written consent of the
holders of the stock of the Company entitled to vote thereon and delete
provisions from the By-Laws that permit stockholder action by less than the
unanimous written consent of stockholders; and (5) increase the stockholder vote
required to alter, amend or repeal the foregoing amendments from a majority to
66.66% of the voting power of each class or series of outstanding stock of the
Company. If the proposed amendments are adopted, the Board intends to amend
certain inconsistent By-Law provisions.
These proposed amendments are being presented to the stockholders of the
Company for their approval as separate proposals. As more fully discussed below,
the Board of Directors believes that the proposed amendments, taken together,
would, if adopted, enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors as against "creeping"
acquisitions of the Company's stock, while reducing the possibility that a third
party could effect a sudden or surprise change in majority control of the
Company's Board of Directors without the support of the incumbent Board.
Although adoption of the proposed amendments may have significant effects on the
ability of stockholders of the Company to change the composition of the
incumbent Board of Directors and to benefit from certain transactions which are
opposed by the incumbent Board, the amendments are not being recommended in
response to any effort of which the Company is aware to accumulate the Company's
stock or to obtain control of the Company. Stockholders are urged to read
carefully the following sections of this Proxy Statement, which describe the
amendments and their purposes and effects before voting on the proposed
amendments. EXHIBIT A HERETO SETS FORTH THE FULL TEXT OF THE PROPOSED AMENDMENTS
TO THE COMPANY'S ARTICLES OF INCORPORATION AND EXHIBIT C HERETO SETS FORTH THE
FULL TEXT OF THE PROPOSED AMENDMENTS TO THE COMPANY'S BY-LAWS.
63
<PAGE>
DESCRIPTION OF THE PROPOSED AMENDMENTS
ADDITION OF ARTICLE TWELFTH TO THE ARTICLES, AND DELETION OF ARTICLE II,
SECTION 11 OF THE BY-LAWS. Currently, under the provisions of Delaware law and
Article II, Section 11 of the By-Laws, the stockholders of the Company may act
by written consent signed by holders of less than all of the outstanding shares
of the Company entitled to vote so long as the number of shares represented by
such written consent would have been sufficient to pass the action contemplated
at a duly called and held meeting of stockholders. The Board proposes to amend
the Articles by adding Article Twelfth to the Articles and to amend the By-Laws
by deleting Article II, Section 11 of the By-laws to the effect that any action
by the stockholders of the Company taken by written consent must be signed by
holders of not less than all of the outstanding shares of the Company entitled
to vote on the matters being considered by the stockholders. Pursuant to Section
228 of the Delaware General Corporation Law (the "DGCL"), which permits the
Articles of Incorporation and By-laws of a Delaware corporation to provide that
stockholders can act by not less than the unanimous written consent of
stockholders entitled to act thereon, if the proposal is approved: (i) Article
Twelfth of the Articles will be added such that no action will be permitted to
be taken by the stockholders by written consent in lieu of holding a meeting and
voting on the action to be taken, unless all of the stockholders entitled to
vote on the action sign a written consent to such action; and (ii) Article II,
Section 11 of the By-Laws, which currently permits action by less than unanimous
written consent of the stockholders entitled to vote on a given action, will be
deleted in its entirety.
If the revisions are adopted, a majority stockholder would be unable to
avoid the call, notice and meeting requirements for stockholder meetings by
simply executing a written consent to the action the majority stockholder wishes
to take.
INCREASED STOCKHOLDER VOTE FOR ALTERATION, AMENDMENT OR REPEAL OF PROPOSED
AMENDMENTS. Under the DGCL, amendments to the Articles require the approval of
the holders of a majority of the outstanding stock entitled to vote thereon and
of a majority of the outstanding stock of each class entitled to vote thereon as
a class. The DGCL also permits provisions in the Articles or the By-laws which
require a greater vote than the vote otherwise required by law for any corporate
action. With respect to such super-majority provisions, the DGCL permits the
Articles and the By-Laws to require that any alteration, amendment or repeal
thereof be approved by an equally large stockholder vote. As permitted by these
provisions of Delaware law, the result of the proposed amendments of the
Articles by revising Article Sixth and Article Ninth of the Articles and by
amending Article IX of the By-Laws (which refer to the ability to amend or
revise the provisions of the Articles or the By-Laws to negate the effects of
the proposed amendments discussed herein) would be to require that any amendment
to or deletion of such provisions from the Articles or the By-Laws would have to
be approved by the holders of at least 66.66% of each class or series of
outstanding stock of the Company entitled to vote thereon.
The requirement of an increased stockholder vote is designed to prevent a
stockholder with a majority of the voting power of the Company from avoiding the
requirements of the proposed amendments by simply repealing them.
CLASSIFICATION OF THE BOARD OF DIRECTORS. The By-Laws now provide that all
directors are to be elected to the Company's Board of Directors annually for a
term of one year. On May 30, 1996, the Board voted to set the number of
directors at three effective at the annual meeting of the stockholders on July
19, 1996. The proposed Article Fourteenth of the Articles and the proposed
revision of Article III, Section 2 of the By-Laws contained in Exhibits A and C
hereto provide that the Board shall be divided into three classes of directors,
each class to be as nearly equal in number of directors as possible. If this
proposal is adopted, the Company's directors will be divided into three classes
and one director will be elected for a term expiring at the 1997 annual meeting
of stockholders, one director will be elected for a term expiring at the 1998
annual meeting of stockholders and the remaining one director will be elected
for a term expiring at the 1999 annual meeting of stockholders (in each case,
until their respective successors are duly elected and qualified). Starting with
the 1997 annual meeting of stockholders, one class of directors will be elected
each
64
<PAGE>
year for a three-year term. If the proposed amendments are not adopted, all
three directors will be elected to a term expiring at the 1997 annual meeting of
stockholders or until their successors are duly elected and qualified.
The classification of directors will have the effect of making it more
difficult to change the composition of the Board of Directors. At least two
stockholder meetings, instead of one, will be required to effect a change in the
control of the Board. The Board believes that the longer time required to elect
a majority of a classified Board will help to assure the continuity and
stability of the Company's management and policies in the future, since a
majority of the directors at any given time will have prior experience as
directors of the Company. It should also be noted that the classification
provision will apply to every election of directors, whether or not a change in
the Board would be beneficial to the Company and its stockholders and whether or
not a majority of the Company's stockholders believes that such a change would
be desirable.
REMOVAL OF DIRECTORS. The proposed revisions to Article Fifteenth of the
Articles and to Article III, Section 11 of the By-Laws provide that a director,
or the entire Board of Directors, may be removed only with cause and with the
affirmative votes of stockholders having no less than 66.66% voting power of
each class or series of outstanding stock entitled to vote generally in the
election of directors. Currently, directors may be removed with or without cause
by the stockholders holding majority voting power.
The provisions of the proposed amendments relating to the removal of
directors will preclude a third party from removing incumbent directors with
adverse views to those of the third party thereby reducing the number of
incumbent directors who could maintain such adverse position.
CALLING OF SPECIAL STOCKHOLDER MEETINGS. Currently, under Article II,
Section 3 of the By-Laws, holders of at least 10% of all of the votes entitled
to be cast on the matter to be considered at the special meeting could demand
that a special meeting of the Company be called. The DGCL permits By-Laws or the
Articles of Incorporation of a Delaware corporation to include provisions which
increase the percentage of outstanding shares necessary to demand a special
meeting of Stockholders. The proposed revision to Article II, Section 3 of the
By-Laws would permit a special meeting of stockholders to be called only by the
Board of Directors, or upon the written demand, specifying the purpose of the
meeting, of the holders of 66.66% of the stock of the Company entitled to vote
on the matter(s) to be considered at the special meeting. Accordingly, if the
revision is approved, even a majority of such stockholders would not be
permitted to call a special meeting of stockholders or to require that the Board
call a special meeting.
PURPOSE AND EFFECTS OF THE PROPOSED AMENDMENTS
The purpose of the proposed amendments to the Articles concerning
classification of the Board and the related matters discussed in this section of
the Proxy Statement is to discourage certain types of transactions, described
below, which involve an actual or threatened change of control of the Company.
They are designed to make it more difficult and time-consuming to change
majority control of the Board and thus to reduce the vulnerability of the
Company to an unsolicited proposal for the takeover of the Company that does not
contemplate the acquisition of all of the Company's outstanding shares, or an
unsolicited proposal for the restructuring or sale of all or part of the
Company. As more fully described below, the Board believes that, as a general
rule, such unsolicited proposals are not in the best interests of the Company
and its stockholders.
Takeovers or changes in management of the Company which are proposed and
effected without prior consultation and negotiation with the Company's
management are not necessarily detrimental to the Company and its stockholders.
As stated above, the Board of Directors has no knowledge of any present effort
to gain control of the Company or to organize a proxy fight. However,
particularly in view of the Company's currently proposed acquisition and capital
formation programs and the remarkable fluctuation in the market price of the
Company's Common Stock within a relatively limited period of time (from
approximately $3.50 per share in April 1996 to approximately $10.00 per share in
May 1996, and back
65
<PAGE>
down to approximately $2.00 per share in December 1997), the Board believes that
it is prudent and in the best interests of the Company's stockholders generally
to provide greater assurance of continuity of the Board's composition and
policies which would result from adoption of the proposed amendments. The Board
strongly believes that such advantages outweigh any disadvantage relating to
preserving incumbent management or possibly discouraging potential acquirers
from attempting to gain control of the Company. See "Security Ownership of
Management and Principal Shareholders" and "Existing Provisions" below.
There is an established pattern of third parties accumulating substantial
stock positions in public companies as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or other similar
extraordinary corporate action. Such actions are often undertaken by the third
party without advance notice to or consultation with management of the company.
In many cases, the purchaser seeks representation on the company's board of
directors in order to increase the likelihood that its proposal will be
implemented by the company. If the company resists the efforts of the purchaser
to obtain representation on the company's board, the purchaser may commence a
proxy contest to have its nominees elected to the board in place of certain
directors or the entire board. In some cases, the purchaser may not truly be
interested in taking over the company, but uses the threat of a proxy fight
and/or a bid to take over the company as a means of forcing the company to
repurchase its equity position at a substantial premium over market price.
The Board of Directors of the Company believes that the imminent threat of
removal of the Company's management in such situations would severely curtail
management's ability to negotiate effectively with such purchaser. Management
would be deprived of the time and information necessary to evaluate the takeover
proposal, to study alternative proposals and to help ensure that the best price
is obtained in any transaction involving the Company which may ultimately be
undertaken. If the real purpose of a takeover bid were to force the Company to
repurchase an accumulated stock interest at a premium price, management would
face the risk that if it did not repurchase the purchaser's stock interest, the
Company's business and management would be disrupted, perhaps irreparably.
The proposed amendments will make more difficult or discourage a proxy
contest or the assumption of control by a holder of a substantial block of the
Company's stock or the removal of the incumbent Board, increasing the likelihood
that incumbent directors will retain their positions. In addition since Section
203 of the DGCL discussed under the caption "Existing Provisions" is applicable
to the Company and specifically makes business combination with interested
stockholders more difficult to accomplish without approval of the incumbent
Board, the proposed amendments could give incumbent management the power to
prevent certain takeovers. For information concerning the beneficial ownership
of the Company's Common Stock by the executive officers and directors. See
"Directors, Nominees For Director and Executive Officers of the Company."
Section 203 of the DGCL may also, in conjunction with the amendments of the
Articles and the By-laws discussed herein, discourage attempts to effect a
"two-step" acquisition in which a third party purchases a controlling interest
in cash and acquires the balance of the Company's voting stock for lower
consideration. Under the proposed amendments, the third party would not
immediately obtain the ability to control the Board through its first-step
acquisition. Moreover, having made the first-step acquisition, the third party
could not if it wanted to effectuate a business combination with the Company by
acquiring less than an aggregate of 85% of the Company's voting stock without
triggering the requirement that the business combination be approved by the
continuing directors AND by a 2/3rds vote of the holders of shares entitled to
vote thereon.
The proposed amendments complement the provisions described under the
caption "Existing Provisions" and are intended to encourage persons seeking to
acquire control of the Company to initiate such an acquisition through
arm's-length negotiations with the Company's management and Board of Directors.
The amendments, if they are adopted, like certain of the Company's Existing
Provisions described below, however, could also have the effect of discouraging
a third party from making a tender offer or otherwise attempting to obtain
control of the Company even though such an attempt might be beneficial to the
66
<PAGE>
Company and its stockholders. In addition, since the amendments are designed to
discourage accumulations of large blocks of the Company's stock by purchasers
whose objective is to have such stock repurchased by the Company at a premium,
adoption of the amendments could tend to reduce the temporary fluctuations in
the market price of the Company's stock which are caused by accumulations of
large blocks of the Company's stock. Accordingly, stockholders could be deprived
of certain opportunities to sell their stock at a temporarily higher market
price.
The staggered election of members of the Board pursuant to the proposed
amendments will apply to every election of directors, whether or not a change in
control of the Company had occurred or the holders of a majority of the voting
power of the Company desired to change the Board. The Board has no present
intention of soliciting a stockholder vote on proposals other than those
described herein relating to a possible change in control of the Company or a
change in the stockholders' interest in the Company.
The proposed amendments are permitted under the DGCL and are consistent with
the rules of the Nasdaq Market System, the principal market upon which the
Common Stock is listed and traded.
EXISTING PROVISIONS
SECTION 203 OF THE DGCL. Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person, who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock.
PREFERRED STOCK. The Company has authorized 2,700,000 shares of Preferred
Stock contained in two classes of Preferred Stock: 1,200,000 shares of Series A
12.5% cumulative voting Preferred Stock; and 1,500,000 shares of Series B "blank
check" Preferred Stock, $.01 par value. No shares of Series A Preferred Stock
are issued and outstanding, and 973,759 shares of Series B Preferred Stock are
issued and outstanding, leaving only 526,241 shares available for issuance.
Under the Company's Articles, authority is vested in the Board of Directors,
without further action by the Company's stockholders, to provide for the
issuance of shares of either class of the Preferred Stock, and in connection
therewith to fix by resolution providing for the issue of the remaining Series B
Preferred Stock the number of shares to be included and such of the preferences
and relative participating, optional or other special rights and limitations of
such series, including, without limitation, voting rights, rights of redemption
or rights of conversion into Common Stock, to the fullest extent now or
hereafter permitted by the DGCL. The existence of such authorized shares, and
the ability of the Company's Board of Directors, acting alone, to create the
terms and conditions of the Series B Preferred Stock and to provide for the
issuance of shares of either class of the Preferred Stock, can act as a
deterrent to a hostile takeover of the Company.
XIII. RATIFICATION OF AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH ROBERT M.
RUBIN.
The Company has entered into an Amended and Restated Employment Agreement
with Mr. Rubin, dated as of June 3, 1996 (Exhibit D), 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 ended July 31, 1997, $200,000 for the fiscal year ended July
31, 1998, $225,000 for the fiscal year ended July 31, 1999, and a base salary
for the fiscal years ended July 31, 2000 and July 31,
67
<PAGE>
2001 (the "Final Years") 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 two Final Years 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.,
a Delaware corporation, and Western Power & Equipment Corp., an Oregon
corporation, 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).
Management recognizes that the Company's operations and its development are
dependent in part upon the efforts and talents of Robert M. Rubin. Loss of his
services could adversely affect the Company. Further, insofar as the Company is
currently engaged in an ongoing acquisitions and capital formation programs as
its foremost activities, Management believes it is in the best interests of the
Company to retain the services of Mr. Rubin as the Company's Chairman of the
Board and Chief Executive Officer for a period extending beyond the July 31,
1997 termination date of his current Employment Agreement. Therefore, in
Management's opinion, in order to induce and encourage Mr. Rubin to serve the
Company, and to maximize the value of the Company, Management has determined
after due consideration, and in light of the foregoing considerations, that the
Restated Agreement is not only reasonable, fair and prudent to the shareholders
of the Company, but is also necessary to promote and ensure the best interests
of the Company and its shareholders.
MANAGEMENT BELIEVES RATIFICATION OF THE AMENDED AND RESTATED EMPLOYMENT
AGREEMENT WITH ROBERT M. RUBIN IS IN THE BEST INTEREST OF THE COMPANY AND
RECOMMENDS THAT IT BE RATIFIED.
OTHER BUSINESS
While management of the Company does not know of any matters which may be
brought before the Meeting other than as set forth in the Notice of Meeting, the
proxy confers discretionary authority with respect to the transaction of any
other business. It is expected that the proxies will be voted in support of
management on any question which may properly be submitted to the meeting.
INCLUSION OF SHAREHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT
If any shareholder desires to put forth a proposal to be voted on at the
1998 Annual Meeting of Shareholders and wishes that proposal to be included in
the Company's Proxy Statement to be delivered to shareholders in connection with
such meeting, that shareholder must cause such proposal to be received by the
Company at its principal executive office no later than September 25, 1998. Any
request for such a proposal, should be accompanied by a written representation
that the person making the request is a record or beneficial owner of the lesser
of at least 1% of the outstanding shares of the Company's Common Stock or $1,000
in market value of the Company's common shares and has held such shares for a
least one year as required by the Proxy Rules of the Securities and Exchange
Commission.
68
<PAGE>
AVAILABILITY OF FORM 10-K
THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO ANY SHAREHOLDER, UPON WRITTEN
REQUEST OF SUCH SHAREHOLDER, A COPY OF THE ANNUAL REPORT ON FORM 10-K AND ON
FORM 10-K/A FOR THE FISCAL YEAR ENDED JULY 31, 1996 AND FORM 10-K FOR THE FISCAL
YEAR ENDED JULY 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Any request for a copy of the Form 10-K should include a representation that
the person making the request was the beneficial owner, as of the record date,
of securities entitled to vote at the Annual Meeting of Stockholders. Such
request should be addressed to: American United Global, Inc., 11130 NE 33rd
Place, Suite 250, Bellevue, Washington 98004; Attention: Secretary.
- --------------------------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED FOR
SUCH PURPOSE
- --------------------------------------------------------------------------------
69
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
AMERICAN UNITED GLOBAL, INC.
Pursuant to Section 242 of the Delaware
General Corporation Law
Original Certificate of Incorporation filed with
the Secretary of State on October 18, 1991.
American United Global, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The Board of Directors of the Corporation, by Unanimous Written
Consent dated as of May 21, 1996, adopted a resolution proposing and declaring
advisable an amendment (the "Amendment") to the Corporation's Certificate of
Incorporation, dated as of October 18, 1991 (the "Certificate of
Incorporation").
SECOND: That thereafter, at the Annual Meeting of the Stockholders of the
Corporation, the holders of a majority of the issued and outstanding shares of
the Corporation's capital stock voted in favor of the Amendment.
THIRD: That the Amendment was duly adopted in accordance with Section 242 of
the General Corporation Law of the State of Delaware.
FOURTH: That the capital of said Corporation will not be reduced under or by
reason of the Amendment.
FIFTH: That Article "FOURTH" of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
FOURTH: The aggregate number of shares which the Corporation shall have
authority to issue is 52,700,000 shares consisting of:
a) 40,000,000 shares of Class A Common Stock, $.01 par value per share
(the "Class A Common Stock");
b) 25,000,000 shares of Class B Common Stock, $.01 par value per share
(the "Class B Common Stock");
c) 1,200,000 shares of Series A Preferred Stock, $.01 par value per
share (the "Series A Preferred Stock"); and
d) 1,500,000 shares of Series B Preferred Stock, $.01 par value per
share (the "Series B Preferred Stock").
PART A
COMMON STOCK
1. GENERAL.
(a) Each share of Common Stock issued and outstanding shall be identical in
all respects one with the other, except as otherwise described in Section 2 of
this Part A below with respect to the voting rights of the Class B Common Stock.
No dividends shall be paid on any shares of Common Stock unless the same
dividend is paid on all shares of Common Stock outstanding at the time of such
payment.
A-1
<PAGE>
(b) Except for and subject to those rights expressly granted to the holders
of the Series A or Series B Preferred Stock (sometimes collectively referred to
as the "Preferred Stock"), or except as may be provided herein or by the
Delaware General Corporation Law, the holders of Common Stock shall have
exclusively all other rights of stockholders including, but not by way of
limitation, (i) the right to receive dividends, when, as and if declared by the
Board of Directors out of assets lawfully available therefor, and (ii) in the
event of any distribution of assets upon liquidation, dissolution or winding up
of the Corporation or otherwise, the right to receive ratably and equally all
the assets and funds of the Corporation remaining after payment to the holders
of the Preferred Stock of the Corporation of the specific amounts which they are
entitled to receive upon such liquidation, dissolution or winding up of the
Corporation as herein provided.
(c) In the event that the holder of any share of Common Stock shall receive
any payment of any dividend on, liquidation of, or other amounts payable with
respect to, any shares of Common Stock, which he is not then entitled to
receive, he will forthwith deliver the same to the holders of shares of the
Preferred Stock (as their respective interests may appear), as the case may be,
in the form received, and until it is so delivered will hold the same in trust
for such holders.
2. VOTING RIGHTS.
Each holder of shares of Class A Common Stock shall be entitled to one vote
for each share of such Class A Common Stock held by him, and voting power with
respect to all classes of securities of the Corporation shall be vested solely
in the Class A Common Stock, other than as specifically provided in the
Corporation's Certificate of Incorporation, as it may be amended, with respect
to the Series A and Series B Preferred Stock or otherwise. The Class B Common
Stock shall not be entitled to voting rights except as required by the Delaware
General Corporation Law or otherwise required by law.
PART B
SERIES A PREFERRED STOCK
3. DIVIDENDS.
In each year the holders of shares of the Series A Preferred Stock shall be
entitled to receive, before any dividends shall be declared and paid upon or set
aside for the Common Stock in such year, when and as declared by the Board of
Directors of the Corporation, out of funds legally available for that purpose,
dividends in cash at the rate of $.125 per annum per share, and no more, payable
monthly at the rate of $.0104166 per share (except that the first dividend
payment shall be an amount equal to accumulated dividends from the date of
initial issuance at the rate of 12.5% per annum), on the first day of each month
in each year, commencing on the first such date which occurs after the date of
the initial issuance of the Series A Preferred Stock (each of the periods
commencing on the first day of each such month, respectively including the
period commencing with the date of initial issuance, being hereinafter called a
"Dividend Period"). Dividends on the Series A Preferred Stock shall be
cumulative from the date on which payment is made on account of the initial
issue of such stock (whether or not there shall be surplus of the Corporation
legally available for the payment of such dividends), so that, if at any time
Full Cumulative Dividends (as defined in Section 5 of this Part B) upon the
Series A Preferred Stock to the end of the last completed Dividend Period shall
not have been paid or declared and a sum sufficient for payment thereof set
apart, the amount of the deficiency in such dividends shall be fully paid, but
without interest, or dividends in such amount shall be declared on the shares of
Series A Preferred Stock and a sum sufficient for the payment thereof shall be
set aside for such payment, before any sum or sums shall be set aside for or
applied to the purchase or redemption of the Common Stock or upon any shares of
any other class of stock ranking as to dividends or upon liquidation junior to
the Series A Preferred Stock and before any dividend shall be declared or paid
or any other distribution ordered or made upon any of the Common
A-2
<PAGE>
Stock or upon any shares of any other class of stock ranking as to dividends
junior to the Series A Preferred Stock.
4. RIGHTS ON LIQUIDATION, DISSOLUTION OR WINDING UP.
In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series A Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether from stated capital, capital surplus,
earned surplus or other amounts, before any payment shall be made to the holders
of any Common Stock, an amount equal to $1.00 per share plus an amount equal to
Accrued. Dividends (as defined in Section 5 of this Part B). If upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay to the holders of shares of Series A Preferred Stock the full amounts to
which they respectively shall be entitled, the holders of shares of Series A
Preferred Stock shall share ratably in any distribution of assets according to
the respective amounts which would be payable in respect to the shares held by
them upon such distribution if all amounts payable on or with respect to said
shares were paid in full. In the event of any liquidation, dissolution or
winding up of the Corporation after payment shall have been made to the holders
of shares of Series A Preferred Stock of the full amount to which they shall be
entitled as aforesaid, the holders of any shares of Common Stock shall be
entitled, to the exclusion of the holders of shares of Series A Preferred Stock,
to share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its stockholders.
5. VOTING RIGHTS.
(a) Except as otherwise provided herein for the election of directors or as
required by the Delaware General Corporation Law, the holders of shares of
Series A Preferred Stock stall have the right to vote, together with the holders
of all the outstanding shares of Common Stock and not by classes, on all matters
on which holders of Common Stock shall have the right to vote. The holders of
shares of Series A Preferred Stock shall have the right to cast one vote for
each share of Series A Preferred Stock, with any fractions (after aggregating
all shares of Series A Preferred Stock owned beneficially or of record by each
holder) rounded to the next full vote.
(b) Whenever holders of Series A Preferred Stock are required or permitted
to take any action by vote, such action may be taken without a meeting on
written consent, setting forth the action so taken and signed by the holders of
all outstanding Series A Preferred Stock entitled to vote thereon.
6. REDEMPTION.
(a) So long as any shares of Series A Preferred Stock are outstanding, the
Corporation may, at the option of the Board of Directors, at any time or from
time to time redeem the whole or any part of such Series A Preferred Stock
pursuant to the provisions hereof. The aggregate number of shares of Series A
Preferred Stock which may be redeemed at any one time shall be at least one
hundred thousand (100,000) or any integral multiple thereof. Any redemption
pursuant to this Section 4 shall be at a redemption price equal to $1.00 per
share (payable in cash or other consideration as the Corporation and the holders
of a majority of the Series A Preferred Stock may agree), plus an amount equal
to Accrued Dividends on the shares of Series A Preferred Stock being redeemed.
If less than all the shares of Series A Preferred Stock at any time outstanding
shall be called for redemption, the redemption shall be made pro rata with
respect to such shares and in such manner as may be prescribed by resolution of
the Board of Directors approved by such vote as aforesaid in this paragraph
4(a). The date of each such redemption is herein referred to as a "Redemption
Date."
(b) Notice of every redemption pursuant to this Section 4 shall be sent by
registered or certified mail, postage prepaid, to the holders of record of the
shares of Series A Preferred Stock so to be redeemed at
A-3
<PAGE>
their respective addresses as the same shall appear on the books of the
Corporation. Such notice shall be deposited in the United States mail not less
than ten (10) days in advance of the Redemption Date. The holders of the shares
of Series A Preferred Stock to be redeemed shall surrender to the Corporation
any certificates for the shares of Series A Preferred Stock so redeemed;
PROVIDED, that on and after the Redemption Date all rights of the holders of
shares of Series A Preferred Stock as stockholders of the Corporation with
respect to those shares of Series A Preferred Stock to be redeemed, except the
right to receive the redemption price, shall cease and terminate and the shares
designated for redemption shall no longer be outstanding whether or not the
certificates for the shares so redeemed have been received by the Corporation.
1. DEFINITIONS.
(a) The term "Accrued Dividends" with respect to the Series A Preferred
Stock shall mean Full Cumulative Dividends to the date as of which accrued
dividends are to be computed, less the amount of all dividends theretofore paid
upon the relevant shares of Series A Preferred Stock.
(b) The term "Full Cumulative Dividends" with respect to the Preferred Stock
shall mean (whether or not in any Dividend Period, or any part thereof, with
respect to which such term is used there shall have been stated capital, capital
surplus, or earned surplus of the Corporation legally available: for the payment
of such dividends) that amount which shall be equal to dividends at the full
rate fixed for the Series A Preferred Stock as provided herein for the period of
time elapsed from the date of issuance thereof to the date as of which Full
Cumulative Dividends is to be computed.
PART B
SERIES B PREFERRED STOCK
Authority is hereby vested in the Board of Directors of the Corporation to
provide for the issuance of Series B Preferred Stock and in connection therewith
to fix by resolution providing for the issue of such series, the number of
shares to be included and such of the preferences and relative participating,
optional or other special rights and limitations of such series, including,
without limitation, rights of redemption or conversion into Common Stock, to the
fullest extent now or hereafter permitted by the Delaware General Corporation
Law."
SIXTH: That Article "SIXTH" of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
"SIXTH: The Board of Directors is expressly authorized to adopt, amend or repeal
the By-Laws of the Corporation. Any provision of the By-Laws of the Corporation
which provides that certain provisions of the By-Laws of the Corporation may
only be amended or repealed, or new By-Laws adopted which have the effect of
amending or repealing such provisions, by the affirmative vote of the holders of
more than a majority of the voting power of each class or series of outstanding
stock of the Corporation entitled to vote thereon, may only be amended or
repealed, or new By-Laws adopted which have the effect of amending or repealing
such provision, by the affirmative vote of the holders of such super-majority of
the voting power of each class or series of outstanding stock of the Corporation
entitled to vote thereon as is specified in the subject provision of the
By-Laws."
SEVENTH: That Article "NINTH" of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
NINTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute or by this Certificate of Incorporation, and
all rights conferred upon shareholders herein are granted subject to this
reservation. The provisions of Article Sixth, Article Ninth, Article Twelfth,
Article Thirteenth, Article Fourteenth or Article Fifteenth of this Certificate
of Incorporation shall not be amended by the
A-4
<PAGE>
shareholders of the Corporation other than by a vote of no less than 66.66% of
the outstanding shares of the Corporation entitled to vote on such matters as
provided by the General Corporation Law of the State of Delaware."
EIGHTH: That the following Articles be added to the Certificate of
Incorporation:
TWELFTH: All actions taken by the shareholders of the Corporation by written
consent and not at a meeting of shareholders must be taken by no less than the
unanimous written consent of all shareholders entitled to act with respect to
such matter under the provisions of the General Corporation Law of the State of
Delaware.
THIRTEENTH: Special meetings of the shareholders of the Corporation may be
called by the Board of Directors, or by shareholders pursuant to a written
demand by the holders of at least 66.66% of the voting power of each class or
series of outstanding stock of the Corporation entitled to vote on the matter(s)
to be considered at the special meeting.
FOURTEENTH: The Board shall consist of three classes of directors, each
class to be as nearly equal in number of directors as possible. There shall be
Class A director(s), Class B director(s) and Class C director(s). Beginning with
the 1997 Annual Meeting of Stockholders, the Class A director(s) shall be
elected, to hold office until the third Annual Meeting of Stockholders to occur
subsequent to the Annual Meeting at which such director(s) was elected and until
his or their successors shall have been elected and qualified, or until his or
their deaths, or until he or they shall have resigned, or have been removed.
Beginning with the 1998 Annual Meeting of Stockholders, the Class B director(s)
shall be elected, to hold office until the third Annual Meeting of Stockholders
to occur subsequent to the Annual Meeting at which such director(s) was elected
and until his or their successors shall have been elected and qualified, or
until his or their deaths, or until he or they shall have resigned, or have been
removed. Beginning with the 1999 Annual Meeting of Stockholders, the Class C
director(s) shall be elected, to hold office until the third Annual Meeting of
Stockholders to occur subsequent to the Annual Meeting at which such director(s)
was elected and until his or their successors shall have been elected and
qualified, or until his or their deaths, or until he or they shall have
resigned, or have been removed. The Board of Directors can determine to change
the number of directors constituting the Board of Directors, which number shall
not be less than three (3) nor more than nine (9), provided that no decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director. Any decrease in the number of directors shall be effective
at the time of the next succeeding Annual Meeting of Stockholders at which the
election of the director whose position is being eliminated would have been
considered, unless there shall be vacancies in the Board of Directors, in which
case such decrease may become effective at any time prior to the next such
succeeding Annual Meeting of Stockholders to the extent of the number of such
vacancies. In the event of any increase or decrease in the number of directors,
the number of additional directors and the number of eliminated directors shall
be apportioned among the three classes of directors in a manner which results,
to the extent possible, in an equal number of directors being included in each
such class.
"FIFTEENTH: A director, or the entire Board of Directors, may be removed
only with cause and with the affirmative vote of the holders of at least 66.66%
of the voting power of each class or series of outstanding stock of the
Corporation entitled to vote generally in the election of directors."
IN WITNESS WHEREOF, the undersigned hereby execute his name and under the
penalties of perjury affirms that the statements made herein are true, this
day of June, 1996.
- --------------------------------------------------------------------------------
Robert M. Rubin, Chairman of the Board
of Directors and Chief Executive
Officer
A-5
<PAGE>
EXHIBIT B
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
B-1
<PAGE>
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
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
B-2
<PAGE>
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.
(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:
B-3
<PAGE>
(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.
(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
B-4
<PAGE>
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.
(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.
B-5
<PAGE>
EXHIBIT C
PROPOSED AMENDMENTS TO BY-LAWS
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time by the Board of Directors or, upon written demand, specifying
the purpose of the meeting, by the holders of at least 66.66% of the voting
power of each class or series of outstanding stock of the Corporation entitled
to vote on the matter(s) to be considered at the special meeting.
SECTION 11. ACTION BY CONSENT. [DELETED].
ARTICLE III
BOARD OF DIRECTORS
Delete Section 2 in its entirety and replace it with the following:
"SECTION 2. NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE. The number
of directors shall be three (3) until such time as the Board of Directors
changes the number of directors in accordance with the provisions of this
Section 2. The Board shall initially consist of three classes of directors.
There shall be one Class A director, one Class B director and one Class C
director. Beginning with the 1997 Annual Meeting of Stockholders, the Class A
director shall be elected, to hold office until the third Annual Meeting of
Stockholders to occur subsequent to the Annual Meeting at which such director
was elected and until his successor shall have been elected and qualified, or
until his death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-Laws. Beginning with the 1998 Annual Meeting of
Stockholders, the Class B director shall be elected, to hold office until the
third Annual Meeting of Stockholders to occur subsequent to the Annual Meeting
at which such director was elected and until his successor shall have been
elected and qualified, or until his death, or until he shall have resigned, or
have been removed, as hereinafter provided in these By-Laws. Beginning with the
1999 Annual Meeting of Stockholders, the Class C director shall be elected, to
hold office until the third Annual Meeting of Stockholders to occur subsequent
to the Annual Meeting at which such director was elected and until his successor
shall have been elected and qualified, or until his death, or until he shall
have resigned, or have been removed, as hereinafter provided in these By-Laws.
The Board of Directors can determine to change the number of directors
constituting the Board of Directors, which number shall not be less than three
(3) nor more than nine (9), provided that no decrease in the number of directors
shall have the effect of shortening the term of any incumbent director. Any
decrease in the number of directors shall be effective at the time of the next
succeeding Annual Meeting of Stockholders at which the election of the director
whose position is being eliminated would have been considered, unless there
shall be vacancies in the Board of Directors, in which case such decrease may
become effective at any time prior to the next such succeeding Annual Meeting of
Stockholders to the extent of the number of such vacancies. In the event of any
increase or decrease in the number of directors, the number of additional
directors and the number of eliminated directors shall be apportioned among the
three classes of directors in a manner which results, to the extent possible, in
an equal number of directors being included in each such class. At each meeting
of the stockholders for the election of directors at which a quorum is present,
the persons receiving a plurality of the votes cast at such election shall be
elected director. All the directors shall be at least eighteen years of age.
Directors need not be stockholders.
SECTION 11. REMOVAL OF DIRECTORS. Any director, or the entire Board of
Directors, may be removed, for cause, by the affirmative vote of the holders of
at least 66.66% of the voting power of each class or series of outstanding stock
of the Corporation entitled to vote generally in the election of directors.
C-1
<PAGE>
ARTICLE IX
AMENDMENTS
These By-Laws may be amended or repealed or new By-Laws may be adopted at an
annual or special meeting of stockholders at which a quorum is present or
represented, by the vote of the holders of shares entitled to vote thereon
provided that notice of the proposed amendment or repeal or adoption of new By-
Laws is contained in the notice of such meeting. These By-Laws may also be
amended or repealed or new By-Laws may be adopted by the Board at any regular or
special meeting of the Board of Directors; provided that Article II, Section 3
of these By-Laws, or Article III Section 2 of these By-Laws, or Article III,
Section 11 of these By-Laws, may only be amended or repealed, or new By-Laws
adopted which have the effect of amending or repealing Article II, Section 3 of
these By-Laws, or Article III, Section 2 of these By-Laws, or Article III,
Section 11 of these By-Laws, by the affirmative vote of the holders of at least
66.66% of the voting power of each class or series of outstanding stock of the
Corporation entitled to vote thereon. If any By-Law regulating an impending
election of directors is adopted, amended or repealed by the Board of Directors,
there shall be set forth in the notice of the next meeting of the stockholders
for the election of directors the By-Law so adopted, amended or repealed,
together with a concise statement of the changes made. By-Laws adopted by the
Board of Directors may be amended or repealed by the stockholders.
C-2
<PAGE>
EXHIBIT D
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
WITH ROBERT M. RUBIN
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"), made and
entered into as of the 3rd day of June, 1996, by and between AMERICAN UNITED
GLOBAL, INC., a Delaware corporation (the "Company"), having its principal
office at 25 Highland Boulevard, Dix Hills, New York 11746; and ROBERT M. RUBIN,
an individual (the "Employee"), residing at 6060 Kings Gate Circle, Delray
Beach, Florida 33484.
W I T N E S S E T H:
WHEREAS, the Employee has been elected by the Board of Directors to serve as
the Chairman of the Board of the Company and its subsidiaries, including,
without limitation, Western Power & Equipment Corp. ("Western"), a Delaware
corporation, AEI California, Inc. ("AEI"), a California corporation, AUG
California, Inc. ("AUG"), a California corporation, and the subsidiaries of AUG,
namely, American United Products, Inc. ("AUP"), a California corporation, as
well as the subsidiary of Western Power & Equipment Corp., an Oregon corporation
("WPE"), and American United Seal, Inc. ("AUS"), a California corporation; the
Company, Western, AEI, AUG, AUP, AUS all presently existing and hereinafter
created or acquired direct or indirect consolidated subsidiaries of the Company
are hereinafter collectively referred to as the "Corporations"; and
WHEREAS, insofar as the Company is engaged in a program of making
acquisitions of operating entities with the proceeds of the sale of its former
manufacturing business, and the Company desires to retain the services of the
Employee to serve as the Chairman of the Board of the Corporations during this
important transitional period for a period extending beyond the July 31, 1997
termination date of his current Employment Agreement; and
WHEREAS, the Employee is willing to serve as the Chairman of the Board of
the Corporations, all upon the terms and subject to the conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
herein contained, the parties hereby agree as follows:
PART A. EMPLOYMENT.
1. Throughout the term of this Agreement, the Company shall employ the
Employee and the Employee shall render services to the Corporations in the
capacity and with the title of Chairman of the Board of the Corporations. In
such capacity, the Employee, subject at all times to the direction of the Board
of Directors of the Company, shall be the Chief Executive Officer of the Company
and shall have the primary responsibility for the management and establishment
of general policies of and planning for the Company (including, without
limitation, financings, acquisitions and new product development), with such
general powers and duties in respect of the other Corporations as are usually
vested in the Chairman of the Board of a corporation.
2. Throughout the period of his employment hereunder, the Employee shall
devote such portion of his business time, attention, knowledge and skills as
shall be reasonably required to faithfully, diligently and to the best of his
abilities perform his duties hereunder; PROVIDED, that it is understood that the
Employee will continue to devote a substantial amount of his business time,
attention, knowledge and skills to other business activities, unrelated to the
activities of the Corporations.
3. Throughout the period of his employment hereunder, the Employee shall
have the right (but not the obligation), if elected by the requisite majority of
the stockholders of the relevant Corporation(s), to
D-1
<PAGE>
serve, without any further or additional compensation or remuneration (other
than as set forth herein), as a member of the Board of Directors of any or all
of the Corporations.
PART B. TERM OF EMPLOYMENT; TERMINATION OF AGREEMENT.
1. Subject to the earlier termination of this Agreement in accordance with
the provisions hereof, the term of this Agreement shall commence, effective as
of August 1, 1996 (the "Effective Date") and shall continue through and
including July 31, 2001 (the "Termination Date"). Notwithstanding the foregoing,
as of the Effective Date of this Agreement, the fiscal year end of the Company
is July 31st. In the event that the fiscal year of the Company (or any parent of
the Company, the results of operations of which are consolidated for financial
reporting purposes with the Company and its consolidated subsidiaries) shall end
on any date OTHER than July 31st (hereinafter, referred to as a "Fiscal Year"),
the Termination Date of this Agreement shall be ninety (90) days after the end
of the Fiscal Year ending in 2001.
2. Anything contained in Section 1 of this PART B to the contrary
notwithstanding, this Agreement may be terminated at the option of the Board of
Directors of the Company for "Cause" (as herein defined), effective upon the
giving of written notice of termination to the Employee. As herein used, the
term for "Cause" shall mean and be limited to:
(a) any act committed by the Employee against the Company, its parent or
subsidiaries or divisions constituting: (A) fraud, (B) non-disclosed
self-dealing, (C) embezzlement of funds, (D) felony conviction for conduct
involving moral turpitude or felony conviction for other criminal conduct
concerning activities involving the Company, its parents, subsidiaries or
divisions, or (E) the continued disregard by the Employee of the reasonable
directions of the Board of Directors of the Company or any of the other
Corporations; or
(b) the breach or default by the Employee in the performance of any material
provision of this Agreement; or
(c) chronic alcoholism or any other form of addiction which impairs the
Employee's ability to perform his duties hereunder.
3. Anything contained in Section 1 of this PART B to the contrary
notwithstanding, this Agreement may be terminated by the Company: (i) upon the
death of the Employee, or, (ii) on thirty (30) days' prior written notice to the
Employee, in the event that the Employee shall be physically or mentally
disabled or impaired so as to prevent him from continuing the normal and proper
performance of his duties and responsibilities hereunder for a period of six (6)
consecutive months. The initial determination as to whether the Employee is
disabled or impaired shall be made by the physician regularly treating the
condition causing the disability. The Company shall have the right to require
the Employee to be examined by a physician duly licensed to practice medicine in
the state in which the Employee has his primary residence to determine such
physician's opinion as to the Employee's disability. If such physician's opinion
differs from that of the physician treating the Employee, or a physician
thereafter retained by the Employee, they shall forthwith select a third
physician so licensed whose opinion, after examination and review of available
information, shall be conclusive and binding upon all parties hereto. All costs
of the physician regularly treating or thereafter retained by the Employee shall
be paid by the Employee. All costs of the physician retained by the Company
shall be paid by the Company. If a third physician is required, then the costs
of that physician shall be paid by the Company.
4. Upon any termination of this Agreement by the Company for Cause pursuant
to Section 2 of this PART B above, neither the Company nor any parent,
subsidiary or division thereof shall be liable for or shall pay or cause to be
paid to the Employee any further remuneration, compensation or other benefits
hereunder.
5. If the Company terminates Employee for any reason, OTHER than: (a) for
"Cause", as provided in PART B, Section 2, or (b) as a result of the Employee's
voluntary resignation of his employment with the
D-2
<PAGE>
Company (not constituting a constructive discharge), the Company shall be
obligated to pay or shall cause to be paid to Employee the "Base Salary" (as
hereinafter defined) and the Incentive Compensation (as hereinafter defined) in
respect of each Fiscal Year in question for the remaining employment term
specified in Section 1 of this PART B, as, if and when the same would have
otherwise become due and payable hereunder, but for such termination of
employment of the Employee. In the event of the Employee's death or disability
as provided in PART B, Section 3, the Company shall be not obligated to pay or
shall cause to be paid to Employee the "Base Salary" (as hereinafter defined) or
the Incentive Compensation (as hereinafter defined) in respect of any Fiscal
Year, or portion thereof, remaining in the employment term specified in Section
1 of this PART B.
PART C. COMPENSATION; EXPENSES; FRINGE BENEFITS.
1. BASE SALARY. As compensation for his services rendered and to be rendered
hereunder, the Company shall pay or cause the Corporations to pay to the
Employee throughout the term of this Agreement, a salary (the "Base Salary"), to
be payable in monthly installments, as follows: (i) from August 1, 1996 through
July 31, 1997, at the rate of One Hundred Seventy-Five Thousand Dollars
($175,000.00) per annum; to be payable monthly at the rate of Fourteen Thousand
Five Hundred Eighty-Three and 33/100 Dollars ($14,583.33) per month; (ii) from
August 1, 1997 through July 31, 1998, Two Hundred Thousand Dollars ($200,000.00)
per annum to be payable monthly at the rate of Sixteen Thousand Six Hundred
Sixty-Six and 66/100 Dollars ($16,666.66) per month; (iii) from August 1, 1998
through July 31, 1999, Two Hundred Twenty-Five Thousand Dollars ($225,000.00)
per annum, to be payable monthly at the rate of Eighteen Thousand Seven Hundred
Fifty Dollars ($18,750.00) per month; and (iv) for each of the fiscal years
ended July 31, 2000 and July 31, 2001, the Employee's Base Salary 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); PROVIDED, that the Employee's Base Salary in each of these
two fiscal years shall be NOT LESS than: (y) the annual Base Salary in effect in
the immediately preceding Fiscal Year; PLUS (z) 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 Corporations are hereby authorized to make all necessary payroll
deductions, including FICA, from such amount, as are customarily made with
respect to the salaries of other senior executive officers of the Company. Any
Base Salary accrued from the Effective Date of this Agreement shall be paid by
the Corporations to the Employee on or before December 31, 1994.
2. INCENTIVE COMPENSATION.
(a) As compensation for his services rendered and to be rendered hereunder,
the Company shall pay or cause the Corporations to pay to the Employee for the
period commencing as of the Effective Date and ending on July 31, 1999,
compensation (the "Incentive Compensation") based on the audited consolidated
pre-tax net income of the Corporations and any other direct or indirectly owned
companies or entities which are subsidiaries of the Company on or after the date
hereof and whose financial statements are consolidated with those of the Company
for financial reporting purposes under generally accepted accounting principles
("GAAP"), excluding Western and WPE (the "Incentive Group"), as determined by
the independent auditors of the Company in accordance with consistently applied
GAAP by such auditors (the "Incentive Group's Net Income"), as follows: (i) the
Company shall pay or cause the Corporations to pay to the Employee no later than
November 1, 1997, Seventy-Five Thousand Dollars ($75,000) if the Incentive
Group's Net Income for the fiscal year ending July 31, 1997 is greater than or
equal to Two Million Dollars ($2,000,000); (ii) the Company shall pay or cause
the Corporations to pay to the Employee no later than November 1, 1998, One
Hundred Thousand Dollars ($100,000) if the Incentive Group's Net Income for the
fiscal year ending July 31, 1998 is greater than or equal to Two Million Five
Hundred Thousand Dollars ($2,500,000); (iii) the Company shall pay or cause the
Corporations to pay to the Employee no later than November 1, 1999 One Hundred
Twenty-Five Thousand Dollars ($125,000) if the
D-3
<PAGE>
Incentive Group's Net Income for the fiscal year ending July 31, 1999 is greater
than or equal to Three Million Dollars ($3,000,000). For each of the fiscal
years ending on July 31, 2000 and July 31, 2001, the Incentive Compensation, if
any, and the formula to be used for calculating same, 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).
3. EXPENSES. In addition to the remuneration set forth above, throughout the
period of the Employee's employment hereunder, the Company shall also reimburse,
or cause to be reimbursed to the Employee, upon presentment by the Employee to
the Company, as applicable, of appropriate receipts and vouchers therefor, for
any reasonable business expenses, including air and other travel expenses,
incurred by the Employee in connection with the performance of his duties and
responsibilities hereunder.
4. FRINGE BENEFITS. The Company shall also make available, or cause to be
made available, to the Employee, throughout the period of his employment
hereunder, such benefits, including a monthly car allowance of $500.00, any
disability, hospitalization, medical benefit plan, pension plan or other
benefits or policy, as are put into effect by the Corporations for their other
executive employees; PROVIDED, that notwithstanding any other insurance policies
purchased for the benefit of Employee pursuant to this Section 4 of this PART C,
the Company shall purchase for the benefit of Employee life insurance policy in
the amount of $250,000, which benefits shall be payable to the beneficiary of
the Employee upon the death of the Employee.
PART D. CONFIDENTIALITY; NON-COMPETITION. As a material inducement to cause the
Company to enter into this Employment Agreement, the Employee hereby covenants
and agrees, as follows:
1. CONFIDENTIAL INFORMATION; PERSONAL RELATIONSHIPS. The Employee agrees
that for so long as he is employed by the Company (the "Restricted Period"), he
shall keep secret and retain in strictest confidence all confidential matters of
the Corporations, and the "know-how", trade secrets, confidential client lists,
details of client, subcontractor or consultant contracts, pricing policies,
operational methods, marketing plans or strategies, project development,
acquisition or bidding techniques or plans, business acquisition plans, new
personnel acquisition plans, technical processes, inventions and research
projects of the Corporations learned by the Employee heretofore and hereafter,
unless (i) such information is generally available to the public without
restriction, (ii) Employee obtains confidentiality agreements with respect to
such confidential information, (iii) Employee is requested by the Board of
Directors of the Company or a Committee thereof to disclose such confidential
information, (iv) such information is provided to a customer of the Corporations
pursuant to a request received from such customer in the ordinary course of
business, or (v) Employee is under compulsion of either a court order or a
governmental agency's or authority's inquiry, order or request to so disclose
such information.
2. PROPERTY OF THE CORPORATIONS.
(a) Except as otherwise provided herein, all lists, records and other
non-personal documents or papers (and all copies thereof), including such items
stored in computer memories, on microfiche or by any other means, made or
compiled by or on behalf of the Employee, or made available to the Employee
relating to the Corporations are and shall be the property of the Corporations,
shall be delivered to the Company, on the date of termination of this Agreement.
(b) All inventions, including any procedures, formulas, methods, processes,
uses, apparatuses, patterns, designs, drawings, devises or configurations of any
kind, any and all improvements to them which are developed, discovered, made, or
produced, trade secrets, or information used by any or all of the Corporations
shall be the exclusive property of the Corporations, and shall be delivered to
the Company as applicable, on the earlier of the expiration or the termination
of this Agreement.
3. EMPLOYEES OF THE CORPORATIONS. If the Company terminates Employee for any
reason: (i) provided in PART B, Section 2, (ii) provided in PART B, Section 3,
or (iii) as a result of the Employee's voluntary
D-4
<PAGE>
resignation of employment (not constituting a constructive discharge), the
Employee shall not, directly or indirectly, until the LATER to occur of: (A) the
course of his employment with the Corporations or (B) July 31, 1999, solicit any
employee of the Corporations other than Employee's personal secretary or
encourage any such employee to leave such employment without the prior written
approval of the Company as applicable.
4. NON-COMPETITION. For a period equal to the LATEST to occur of:
(a) such period as the Employee is employed by any of the Corporations
(whether under this Agreement or otherwise);
(b) one (1) year following the date of termination of the Agreement as a
result of the Employee's voluntary resignation of employment (not constituting a
constructive discharge), but under no circumstances later than ninety (90) days
after the end of the Fiscal Year of the Company and/or its Parent ending in
1999; or (c) one (1) year following the termination of this Agreement if the
Company terminates Employee for any reason provided in: (i) PART B, Section 2,
or (ii) PART B, Section 3 above; or
(d) such period with respect to which the Employee shall receive an amount
equal to Incentive Compensation under insurance policies purchased pursuant to
PART C, Section 4 above; or (e) such period as the Employee shall receive Base
Salary and Incentive Compensation from the Company or its assigns pursuant to
PART B, Section 6 above, the Employee shall not, directly or indirectly, whether
individually or as an employee, stockholder, partner, joint venturer, agent or
other representative of any other person firm or corporation, engage in any
business which is competitive with the businesses of the Corporations. As used
herein, the term "business which is competitive with the businesses of the
Corporations" shall only mean any person, firm or corporation located in the
Continental United States, ten (10%) or more of the net revenues of which are
derived from the manufacture, sale or distribution of seals and o-rings for
industrial, defense or commercial applications.
5. SEVERABILITY OF COVENANTS. The Employee acknowledges and agrees that the
provisions of this Article D (including Section 4 above) are reasonable and
valid in all respects. If any tribunal having jurisdiction determines that any
of the provisions of this Section 5 of this PART D or any part thereof, is
invalid or unenforceable because of the duration or geographic scope of such
provision, such tribunal shall have the power to reduce the duration or
geographic scope of such provision and in its reduced form, such provision shall
then be enforceable.
PART E. BINDING EFFECT.
All of the terms and conditions of this Agreement shall be binding upon and
inure to the benefit of the Employee and the Company and any
successor-in-interest to any of them.
PART F. NOTICES.
Except as herein provided, any notice, request, demand or other
communication required or permitted under this Agreement shall be in writing and
shall be deemed to have been given when delivered personally or when mailed by
certified mail, return receipt requested, addressed to a party at the address of
such party first set forth above, or at such other address as such party may
hereafter have designated by notice.
If to the Company at the address first above written with copies to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel
153 East 53rd Street
New York, New York 10022
Attn: Stephen A. Weiss, Esq.
D-5
<PAGE>
or to any other address as shall be designated from time to time by the Company.
If to Employee at the address first above written, with copies to any attorney
designated by the Employee.
PART G. MISCELLANEOUS.
1. Neither this Agreement nor any of the terms or conditions hereof may be
waived, amended or modified except by means of a written instrument duly
executed by the party to be charged therewith.
2. The captions and paragraph headings used in this Agreement are for
convenience of reference only, and shall not affect the construction or
interpretation of this Agreement or any of the provisions hereof.
3. This Agreement, and all matters or disputes relating to the validity,
construction, performance or enforcement hereof, shall be governed and construed
under the laws of the State of New York.
4. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original hereof, but all of which together shall
constitute one and the same instrument.
5. Any dispute involving the interpretation or application of this Agreement
shall be resolved by final
and binding arbitration before one or more arbitrators designated by the
American Arbitration Association in New York, New York, unless mutually agreed
to otherwise. The award of such arbitrator(s) may be enforced in any court of
competent jurisdiction in the State of New York.
6. This Agreement is intended for the sole and exclusive benefit of the
parties hereto and their respective heirs, executors, administrators, personal
representatives, successors and permitted assigns, and no other person or entity
shall have any right to rely on this Agreement or to claim or derive any benefit
herefrom absent the express written consent of the party to be charged with such
reliance or benefit.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the date first set forth above, to be effective as of August 1, 1996.
ATTEST: AMERICAN UNITED GLOBAL, INC.
<TABLE>
<S> <C>
By: /s/ C. Dean McLain
- -------------------------------------- --------------------------------------
C. Dean McLain
EXECUTIVE VICE PRESIDENT
</TABLE>
/s/ Robert M. Rubin
--------------------------------------
Robert M. Rubin, CHIEF EXECUTIVE OFFICER
COMPENSATION COMMITTEE
<TABLE>
<S> <C> <C>
Robert M. Rubin Lawrence E. Kaplan C. Dean McLain
CHAIRMAN & DIRECTOR DIRECTOR DIRECTOR
/s/ Robert M. Rubin /s/ Lawrence E. Kaplan /s/ C. Dean McLain
- ----------------------------- ----------------------------- -----------------------------
Signature Date Signature Date Signature Date
</TABLE>
D-6
<PAGE>
AMERICAN UNITED GLOBAL, INC.
PROXY-ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 24, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS IN CONNECTION WITH THE
ANNUAL MEETING OF SHAREHOLDERS OF AMERICAN UNITED GLOBAL, INC. TO BE HELD ON
FEBRUARY 24, 1998. THE SHAREHOLDER HAS THE RIGHT TO APPOINT AS HIS PROXY A
PERSON (WHO NEED NOT BE A SHAREHOLDER) OTHER THAN ANY PERSON DESIGNATED BELOW,
BY INSERTING THE NAME OF SUCH OTHER PERSON IN ANOTHER PROPER FORM OF PROXY.
The undersigned, a shareholder of American United Global, Inc. (the
"Corporation"), hereby revoking any proxy hereinbefore given, does hereby
appoint Robert M. Rubin and David M. Barnes, or either of them, as his proxy
with full power of substitution, for and in the name of the undersigned to
attend the Annual Meeting of the Shareholders to be held on February 24, 1998 at
The Woodmark Hotel located at 1200 Carillon Point Kirkland, Washington 98033 at
10:00 a.m., local time, and at any adjournments thereof, and to vote upon all
matters specified in the notice of said meeting, as set forth herein, and upon
such other business as may properly come before the meeting, all shares of stock
of said Corporation which the undersigned would be entitled to vote if
personally present at the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES
WILL BE VOTED FOR ALL NOMINEES FOR DIRECTOR IDENTIFIED BELOW AND FOR ALL
PROPOSALS.
1. The Election of Directors Election of the following proposed directors to
hold office until the next Annual Meeting of Shareholders or until their
successors shall be elected and shall qualify: Robert M. Rubin, C. Dean McLain,
Lawrence E. Kaplan, Howard Katz, David M. Barnes, Wesley C. Fredericks, Glenn A.
Norem.
<TABLE>
<S> <C>
FOR ALL NOMINEES
(EXCEPT AS MARKED TO THE CONTRARY)
( )
<CAPTION>
WITHHOLD ALL NOMINEES
( )
<CAPTION>
</TABLE>
AUTHORITY TO WITHHOLD A VOTE FOR ANY OF THE ABOVE NAMED INDIVIDUALS SHOULD BE
INDICATED BY LINING THROUGH OR OTHERWISE STRIKING OUT THE NAME OF THE NOMINEE.
2. Ratify the Appointment of Price Waterhouse, LLP as independent auditors for
the Corporation for the fiscal years ended July 31, 1996 and 1997 and for the
fiscal year ending July 31, 1998.
/ / FOR / / AGAINST / / ABSTAIN
3. Ratify the sale of all of the assets of the Company's Manufacturing Business
to subsidiaries of Hutchinson Corporation under the terms of the Sale Agreement,
and ratification of the terms of the Sale Agreement, all Exhibits thereto, and
the transactions contemplated thereby.
/ / FOR / / AGAINST / / ABSTAIN
4. To ratify the issuance of shares of the Company's Series B-1 Convertible
Preferred Stock issued in connection with the Acquisition of Old Connectsoft,
effective as of July 31, 1996.
/ / FOR / / AGAINST / / ABSTAIN
5. To ratify the issuance of 400,000 shares of the Company's Series B-2
Convertible Preferred stock issued in connection with a $10,000,000 Private
Placement in January 1997.
/ / FOR / / AGAINST / / ABSTAIN
6. To authorize an amendment to the Company's Certificate of Incorporation to
increase the Company's authorized capital by (i) increasing to 40,000,000 shares
its authorized shares of voting Common Stock (which shall be redesignated as
Class A Voting Common Stock); and (ii) creating a new class of Non-Voting Common
Stock, of which 25,000,000 shares of Non-Voting Common Stock will be authorized.
/ / FOR / / AGAINST / / ABSTAIN
7. To authorize and approve the Company's 1996 Employee Stock Option Plan, which
contains 2,500,000 shares of Common Stock available for the granting of options.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
8. To authorize and ratify amendments to the Company's Articles of Incorporation
and By-Laws to eliminate provisions which permit stockholders to act by less
than unanimous written consent;
/ / FOR / / AGAINST / / ABSTAIN
9. To authorize and ratify amendments to the Company's Articles of Incorporation
and By-Laws to classify the Board of Directors into three classes, as nearly
equal in number as possible, each of which, after an interim arrangement, will
serve for three years, with one class being elected each year;
/ / FOR / / AGAINST / / ABSTAIN
10. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws which provide that directors may be removed by the
stockholders only with cause and the approval of the holders of at least 66.66%
of the voting power of each class or series of outstanding stock of the Company
entitled to vote generally in the election of directors;
/ / FOR / / AGAINST / / ABSTAIN
11. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that require that special meetings of stockholders may
only be called by the Board of Directors or by stockholders holding not less
than 66.66% of the voting power of each class or series of outstanding stock
entitled to vote on the matter(s) to be considered at the special meeting;
/ / FOR / / AGAINST / / ABSTAIN
12. To authorize and ratify amendments to the Company's Articles of
Incorporation and By-Laws that increase the stockholder vote required to alter,
amend or repeal the amendments to the Company's Articles of Incorporation and
By-Laws identified in Proposals 8, 9, 10, and 11 referred to above and in this
Proposal 12 to at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote thereon; and
/ / FOR / / AGAINST / / ABSTAIN
13. To ratify the terms of an Amended and Restated Employment Agreement by and
between the Company and Mr. Robert M. Rubin, the President, Chief Executive
Officer, Chairman of the Board and a principal stockholder of the Company;
/ / FOR / / AGAINST / / ABSTAIN
14. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
/ / FOR / / AGAINST / / ABSTAIN
Dated: __________________________, 1998
_______________________________________
Signature Print Name
_______________________________________
Signature, if Jointly Held Print
Name
PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS HEREIN, if signing as attorney,
executor, administrator, trustee or
guardian, indicate such capacity. All
joint tenants must sign. If a
corporation, please sign in full
corporate name by the president or
other authorized officer. If a
partnership, please sign in partnership
name by an authorized person.
The Board of Directors requests
that you fill in the date and sign the
Proxy and return it in the enclosed
envelope.
IF THE PROXY IS NOT DATED IN THE
ABOVE SPACE, IT IS DEEMED TO BE DATED
ON THE DAY ON WHICH IT WAS MAILED BY
THE CORPORATION.
