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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 0-19404
AMERICAN UNITED GLOBAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4359228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
(Address of principal executive offices) (Zip Code)
(425) 803-5432 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Transitional Small Business Disclosure Format Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of November 4, 1999 was approximately $2,210,000.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
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Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, on November 12, 1999 was 11,921,528.50 shares.
Documents incorporated by reference: None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
American United Global, Inc., a Delaware corporation (the "Company"),
through its operating subsidiaries, was engaged primarily in the distribution,
rental and servicing of construction equipment (the "Distribution Business")
during the fiscal year ending July 31, 1999 ("Fiscal 1999"). The Company has
been engaged in site acquisition, zoning, architectural and engineering services
for the wireless communication and telecommunications industry and general
construction engineering services (the "Telecommunication and Construction
Businesses") through its minority-share ownership of IDF International, Inc.
("IDF") during Fiscal 1999. The Company disposed of the remaining assets
relating to its business of the design, development and marketing of computer
software and software related products and services (the "Technology Business")
during Fiscal 1999. The Company was engaged in active operations at July 31,
1999 in only the Distribution Business.
The Distribution Business
The Distribution Business operates through the Company's 60.6%-owned
subsidiary, Western Power & Equipment Corp., a Delaware corporation ("Western").
Western is engaged in the sale, rental, and servicing of light, medium-sized,
and heavy construction, agriculture, and industrial equipment, parts and related
products which are manufactured by Case Corporation ("Case") and certain other
manufacturers. The Company believes, based upon the number of locations owned
and operated, that Western is the largest independent dealer of Case
construction equipment in the United States. Products sold, rented, and serviced
by Western include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs.
Western operates out of 24 facilities located in Washington, Oregon,
Nevada, California, and Alaska. The equipment distributed by Western is
furnished to contractors, governmental agencies, and other customers primarily
for use in the construction of residential and commercial buildings, roads,
levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
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Western's strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In connection with this strategy, it may seek
to operate additional Case or other equipment retail distributorships, and sell,
lease and service additional lines of construction equipment and related
products not manufactured by Case. Western reduced its acquisition activity in
Fiscal 1999 due to market conditions affecting the industry in which Western
conducts its business.
Western sustained a net loss of approximately $1.8 million on net sales of
approximately $163.7 million in the fiscal year ended July 31, 1999, whereas it
earned net income of approximately $1.8 million on net sales of approximately
$163.5 million in the fiscal year ended July 31, 1998 and $1.0 million on net
sales of approximately $148.1 million in fiscal year ended July 31, 1997. The
Distribution Business has in Fiscal 1999, Fiscal 1998 and Fiscal 1997 accounted
for 100% of the Company's net sales due to the discontinuation of operations of
all entities engaging in the Technology Business. In all likelihood, any
material adverse effect upon the Distribution Business or Western will have a
material adverse effect upon the business, financial condition, results from
operations and prospects of the Company.
The Technology Business
During the year ending July 31, 1999 the Company did not engage in the
Technology Business. In April 1998, the Company approved a formal plan to
dispose of, or discontinue, the remaining operations of its subsidiaries
constituting the Technology Business. In June 1999, the sale by the Company of
such assets constituting its Technology Business, which had not theretofore been
discontinued, to eGlobe, Inc. was completed. In connection with such sale, the
Company received convertible preferred stock of eGlobe, Inc. ("eGlobe
Preferred"), valued at $2,000,000, and eGlobe assumed approximately $5,182,000
in liabilities and lease obligations of subsidiaries of the Company, of which
$2,900,000 of lease obligations have been guaranteed by the Company. Although
eGlobe will be responsible for payment of those assumed liabilities, the
assumption of such liabilities will not relieve the Company from its guarantees
until such liabilities have been paid. The eGlobe Preferred carries a 5%
cumulative dividend and is convertible at $1.56 per share of common stock of
eGlobe, or, in the aggregate, into 1,920,000 shares of eGlobe common stock. The
Company has realized a remaining net gain on the sale of eGlobe (gain on sale
less total costs, expenses and closure costs) of approximately $1,989,000, which
has been reflected as a net gain on the disposal of assets in the Company's
consolidated statement of operations for Fiscal 1999.
STRATEGIC GOALS
The Company continues to engage in the Distribution Business through its
subsidiary, Western, of which the Company owns approximately 60.6% of the
outstanding Common Stock. The Company is currently considering focusing its
strategy on acquisitions into other businesses, although it has not yet
identified any definitive acquisition candidate.
Western's growth strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. The Company reduced its acquisition activity in
Fiscal 1999 due to market conditions in the industry in which Western conducts
its business. When market conditions improve and as opportunities arise, Western
intends to make strategic acquisitions of other authorized Case construction
equipment retail dealers located in established or growing markets, as well as
dealers or distributors of construction, industrial, or agricultural equipment,
and related parts, manufactured by companies other than Case. In addition to
acquisitions, Western plans to open new retail outlets. Western's strategy has
been to test market areas by placing sales, parts, and service personnel in the
target market through the efforts of salespeople. If the results are deemed
favorable, Western may open a retail outlet with its own inventory of equipment.
Western believes this approach reduces both the business risk and the cost of
market development.
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The third prong of Western's growth strategy is to expand sales at its
existing locations, which it believes can be done in three ways. First, Western
will continue to broaden its product line by adding equipment and parts produced
by manufacturers other than Case. Western has already added products to its
inventories produced by such quality manufacturers as Dynapac, Champion,
Link-Belt, Takeuchi, Tymco, Vactor, Kawasaki, Kubota, Daewoo, and Stewart &
Stevenson. Second, Western will seek to increase sales of parts and service
fees, categories which have considerably higher margins than equipment sales.
The Company believes Western can accomplish this growth through the continued
diversification of its parts product lines and the servicing of equipment
produced by manufacturers other than Case. Third, Western plans to further
develop its fleet of rental equipment. As the cost of purchasing equipment
escalates, short and long-term rental is predicted to become increasingly
attractive to Western's customers. Western's management anticipates that rental
of equipment will make up an increasing share of revenues.
HISTORY AND RECENT ACQUISITIONS AND DIVESTITURES
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. 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.
Western
Western commenced business in November 1992 with the acquisition from Case
of seven retail distribution facilities located in Oregon and Washington.
Western became a subsidiary of the Company, simultaneously with such
acquisition. The Company holds 60.6 percent of the outstanding shares of Western
as of July 31, 1999.
In September 1994 and February 1996, in two different transactions, Western
acquired from Case four retail construction equipment stores located in
California and Nevada. In addition, in June 1996 and January 1997, Western made
two additional acquisitions of distributorships of predominantly non-competing
lines of equipment, with locations in California, Oregon, Washington and Alaska.
From Fiscal 1993 through Fiscal 1997, Western also opened nine new stores in the
states served by the acquired stores, ending Fiscal 1997 with 24 stores.
In Fiscal 1998, Western acquired four additional facilities through
acquisition, located in California and Alaska. The pre-existing Alaska facility
was discontinued as it was combined with the acquired Alaska facility. In
addition, in Fiscal 1998 Western opened one new store in Washington. On December
11, 1997, Western acquired substantially all of the operating assets used by
Case in connection with its business of servicing and distributing Case
agricultural equipment at a facility located in Yuba City, California.
Business Strategy
The Company's business strategy has focused on acquiring additional
existing distributorships and rental operations, opening new locations, and
increasing sales at its existing locations. The Company reduced its acquisition
activity in Fiscal 1999 due to market conditions.
When market conditions improve and opportunities arise, the Company intends
to make strategic acquisitions of other authorized Case construction equipment
retail dealers located in established or growing markets, as well as dealers or
distributors of construction, industrial, or agricultural equipment, and related
parts, manufactured by companies other than Case.
In addition to acquisitions, the Company plans to open new retail outlets.
The strategy in opening additional retail outlets has been to test market areas
by placing sales, parts, and service personnel in the target market. If the
results are favorable, a retail outlet is opened with its own inventory of
equipment. This approach reduces both the business risk and the cost of market
development.
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The third prong of the Company's business strategy is to expand sales at
its existing locations in three ways. First, the Company will continue to
broaden its product line by adding equipment and parts produced by manufacturers
other than Case. The Company has already added products to its inventories
produced by such quality manufacturers as Dynapac, Champion, Link-Belt,
Takeuchi, Tymco, Vactor, Kawasaki, Kubota, Daewoo, and Stewart & Stevenson.
Second, the Company will seek to increase sales of parts and service - both of
which have considerably higher margins than equipment sales. This increase will
be accomplished through the continued diversification of the Company's parts
product lines and the servicing of equipment produced by manufacturers other
than Case. Third, the Company plans to further develop its fleet of rental
equipment. As the cost of purchasing equipment escalates, short and long-term
rental will become increasingly attractive to the Company's customers.
Management anticipates that rental of equipment will make up an increasing share
of the Company's revenues.
Products
Case Construction Equipment
The construction equipment (the "Equipment") sold, rented and serviced by
the Company generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a smaller machine that digs
trenches for sewer lines, electrical power and other utility pipes and wires);
forklifts (used to load and unload pallets of materials); and skid steer loaders
(smaller version of a wheel loader, used to load and transport small quantities
of material-e.g., dirt and rocks-around a job site). Selling prices for these
units range from $15,000 to $350,000 per piece of equipment.
In Fiscal 1998, Western acquired four additional facilities, in California
and Alaska, and opened one new store in the state of Washington. The
pre-existing Alaska facility was discontinued as it was combined with the
acquired Alaska facility. On December 11, 1997, Western acquired substantially
all of the operating assets used by Case in connection with its business of
servicing and distributing Case agricultural equipment at a facility located in
Yuba City, California. On April 30, 1998, Western acquired substantially all of
the operating assets of Yukon Equipment, Inc. ("Yukon") in connection with
Yukon's business of servicing and distributing construction, industrial, and
agricultural equipment in Alaska. Yukon has facilities in Anchorage, Fairbanks,
and Juneau, Alaska.
In Fiscal 1999, the Company closed three of its smaller facilities and
began servicing the territories served by these small stores by larger
facilities in the region. The Company ended Fiscal 1999 with 24 stores. The
Company has consolidated an additional four facilities in the first quarter of
Fiscal 2000 into larger stores in each region. The closures are intended to
increase efficiencies and reduce costs.
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National O-Ring and Stillman Seal
In January 1996, the Company sold all of the assets of its National O-Ring
and Stillman Seal businesses, comprising the manufacturing business of the
Company, to Hutchinson Corporation ("Hutchinson") for $24,500,000 (the
"Hutchinson Transaction"), 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 and paid in January 1998.
Connectsoft
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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 Connectsoft, Inc.
a closely-held company located in Bellevue, Washington ("Old Connectsoft") which
provided a variety of computer products and services. In connection with the
Connectsoft Merger, Old Connectsoft stockholders 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's
Common Stock and votes together with the Company's Common Stock as a single
class on a one share for one vote basis. Each share of Preferred Stock was
convertible into either one, two or three shares of Common Stock of the Company
if certain benchmarks for pre-tax income of Old Connectsoft and its consolidated
subsidiaries, and Exodus Technologies, Inc., a direct subsidiary of the Company,
were achieved. As such benchmarks were not achieved, the Preferred Stock has
been and is only convertible into Common Stock on a one-for-one basis. To date,
550,919 shares of Preferred Stock have been converted into an equal number of
shares of Common Stock, and 425,620 shares of Preferred Stock remain
outstanding.
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft Communications Corporation
subsidiary, including the network operations center, to eGlobe. The transaction
was amended and closed on June 17, 1999 and was further amended in September
1999. As consideration, eGlobe issued approximately $2,000,000 (as valued) of
its convertible preferred stock to the Company and assumed approximately
$5,182,000 of Connectsoft liabilities and leases, of which approximately
$2,900,000 are lease obligations guaranteed by the Company. Although eGlobe will
be responsible for payment of those assumed liabilities, the assumption of such
liabilities will not relieve the Company from its guarantees until such
liabilities have been paid. The sale to eGlobe was consummated in June 1999.
Thereafter, in August 1999, the agreement with eGlobe was amended. Although
eGlobe will be responsible for payment of those assumed liabilities, the
assumption of such liabilities will not relieve the Company from its guarantees
until such liabilities have been paid. See also "Item 1 - Description of
Business-Summary-Technology Business." InterGlobe
In September 1996, the Company acquired InterGlobe for a purchase price
paid to the InterGlobe stockholders in the aggregate of approximately $400,000,
plus 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 the Company's Common Stock at an exercise
price of $6.00 per share (the "Interglobe Options"), of which all such
Interglobe Options have since been canceled. In August 1998, the Company
discontinued the operations of InterGlobe.
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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 reached an agreement on
July 22, 1998 with Mr. Baganov under which he agreed to terminate his employment
agreement with InterGlobe and cancel his 698,182 performance options. In
consideration, the Company and InterGlobe paid 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.
Mr. Baganov also agreed to vote his 550,000 shares of the Company's Common Stock
in favor of management's nominees for election to the Company's Board of
Directors. Two other former stockholders of InterGlobe had previously resigned
as InterGlobe employees and their employment agreements and InterGlobe Options
were canceled.
Exodus
The Company, through its Exodus subsidiary, had designed and developed a
proprietary software program, marketed as NTerprise. TM, which allows users to
run WindowsTM application server software programs designed for the MicrosoftTM
Windows NTTM operating system developed by Microsoft on (i) users' existing
UnixTM workstations, X-terminals and other X-widows devices, Macintosh terminals
and Java-enabled network computers, which would otherwise not be Windows
compatible, and (ii) on older versions of Windows compatible workstations which
are otherwise incapable of running newer versions of Microsoft compatible
software, such as Office95TM or Lotus NotesTM. The Company decided to
discontinue its Exodus operations in January 1998 following Microsoft's decision
not to renew its suncontractor's license with Exodus.
Seattle OnLine
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. Seattle OnLine ceased
operations in August 1997 and its remaining assets were sold to a privately held
company for $25,000 cash and a sufficient number of shares of preferred stock of
the acquiring company so as to equal $50,000 in value on the date of receipt of
the shares.
TechStar and IDF
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Effective December 11, 1996, the Company acquired TechStar Communications
Corp. ("TechStar"). In connection therewith the Company issued to the former
TechStar stockholders 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
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.
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In August 1997, the Company sold TechStar to IDF, pursuant to an agreement
and plan of merger, dated July 31, 1997 (the "IDF Merger Agreement"), among the
Company, TechStar, IDF and an acquisition subsidiary of IDF. Upon consummation
of the transaction, the Company received 6,171,553 shares of IDF common stock,
representing approximately 58% of the fully diluted outstanding IDF common
stock, and as a result, for accounting purposes, the Company was deemed to have
acquired IDF. Solon D. Kandel, Sergio Luciani and Simontov Moskona, the senior
executive officers of TechStar, received three year options to purchase an
aggregate of 856,550 shares of IDF common stock (the "IDF Options"),
representing approximately an additional 8% of such fully diluted outstanding
IDF common stock. In connection with the transaction (i) all options granted by
the Company under their employment agreements entitling Messrs. Kandel, Luciani
and Moskona to purchase an aggregate of 780,000 shares of Company Common Stock
(subject to achievement of certain financial performance targets), and all
related 120,000 performance options held by other TechStar employees, were
cancelled, (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 were the senior executive officers of
IDF and each resigned their positions between January 1999 and May 1999. Each of
such officers had employment agreements with IDF pursuant to which they had been
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 (a subsidiary of TechStar), 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. However, as none of such IDF Options have
vested as of the end of Fiscal 1999, the number of shares of IDF common stock
that would have been issued upon the exercise of such unvested IDF Options have
reverted back to the Company as additional consideration.
Robert M. Rubin, the Chief Executive Officer and Chairman of the Board and
a Director of the Company, is also a principal stockholder and member of the
board of directors of IDF. Prior to consummation of the transactions
contemplated by the IDF Merger Agreement, Mr. Rubin converted an $800,000 loan
previously made to IDF into preferred stock convertible into 400,000 shares of
IDF common stock.
During Fiscal 1999, the Company loaned IDF a total of $992,000. However,
IDF has in the last two fiscal quarters of Fiscal 1999 experienced a significant
decrease in revenue and has been unable to obtain further financing. Due to
these circumstances and the uncertainty of recovery, the Company has taken a
full reserve against the advances of $992,000 made to IDF.
During the third fiscal quarter of Fiscal 1999, IDF discontinued the
operations of TechStar.
Conese Enterprises Transaction
Effective March 24, 1998, the Company, Western and IDF entered into a
securities purchase agreement with Conese Enterprises, Ltd. ("Enterprises"). As
a result of subsequent discussions, however, the parties mutually agreed to
terminate the securities purchase agreement. On June 27, 1998, the parties
entered into an agreement releasing each other from any obligations under the
securities purchase agreement, and pursuant to the "break up" provisions of the
agreement which the Company reimbursed Enterprises $150,000 for their expenses
in connection with the proposed transactions.
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THE DISTRIBUTION BUSINESS
General
The Company engages in the Distribution Business through Western, of which
it owns approximately 60.6% of its outstanding Common Stock. Western is engaged
in the sale, rental, and servicing of light, medium-sized, and heavy
construction, agricultural, and industrial equipment, parts, and related
products which are manufactured by Case and certain other manufacturers. The
Company believes, based upon the number of locations owned and operated, that it
is the largest independent dealer of Case construction equipment in the United
States. Products sold, rented, and serviced by the Company include backhoes,
excavators, crawler dozers, skid steer loaders, forklifts, compactors, log
loaders, trenchers, street sweepers, sewer vacuums, and mobile highway signs.
Western operates out of 24 facilities located in Washington, Oregon,
Nevada, California, and Alaska. The equipment distributed by Western is
furnished to contractors, governmental agencies, and other customers, primarily
for use in the construction of residential and commercial buildings, roads,
levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
Western's growth strategy consists of acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In such connection, it may seek to operate
additional Case or other equipment retail distributorships, and sell, lease, and
service additional lines of construction equipment and related products not
manufactured by Case. See "Growth Strategy".
Growth Strategy
Western's growth strategy focuses on acquiring additional existing
distributorships, opening new locations and increasing sales at its existing
locations. As opportunities arise, Western intends to make strategic
acquisitions of other authorized Case construction equipment retail dealers
located in established or growing markets, as well as of dealers or distributors
of industrial or construction equipment, and related parts, manufactured by
companies other than Case. In addition to acquisitions, Western plans to open
new retail outlets. Western's strategy has been to test market areas by placing
sales, parts, and service personnel in the target market. If the results are
deemed favorable, a retail outlet is opened with its own inventory of equipment.
Western believes this approach reduces both the business risk and the cost of
market development.
The third aspect of Western's growth strategy is to expand sales at its
existing locations in three ways. First, Western will continue to broaden its
product line by adding equipment and parts produced by manufacturers other than
Case. Western has already added to its inventories products produced by quality
manufacturers such as Dynapac, Champion, Link-Belt, Takeuchi, Tymco, Vactor,
Kawasaki, Kubota, Daewoo and Stewart & Stevenson. Second, Western will seek to
increase sales of parts and service fees, categories which the Company and
Western have found to have considerably higher margins than equipment sales. The
Company believes Western can accomplish this growth through the continued
diversification of the parts product lines and the servicing of equipment
produced by manufacturers other than Case. Third, Western plans to further
develop its fleet of rental equipment. As the cost of purchasing equipment
escalates, short and long-term rental will become increasingly attractive to the
Western's customers. Western's management anticipates that rental of equipment
will make up an increasing shares of Western's revenues.
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Case Construction Equipment
The construction equipment (the "Equipment") sold, rented and serviced by
Western generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a small machine that digs trenches
for sewer lines, electrical power and other utility pipes and wires); forklifts
(used to load and unload pallets of materials); and skid steer loaders (a
smaller version of a wheel loader, used to load and transport small quantities
of material such as dirt and rocks around a job site). Selling prices for this
Equipment ranges from $15,000 to $350,000 per piece of equipment.
Under the terms of standard Case dealer agreements, Western is an
authorized Case dealer for sales of equipment and related parts and services at
locations in Oregon, Washington, Nevada and Northern California (the
"Territory"). The dealer agreements have no defined term or duration, but are
reviewed on an annual basis by both parties, and can be terminated without cause
at any time either by Western on 30 days' notice or by Case on 90 days' notice.
Although the dealer agreements do not prevent Case from arbitrarily exercising
its right of termination, based upon Case's established history of dealer
relationships and industry practice, Western does not believe that Case would
terminate its dealer agreement without good cause.
The dealer agreements do not contain requirements for specific minimum
purchases from Case. In consideration for Western's agreement to act as dealer,
Case supplies to Western items of Equipment for sale and lease, parts,
cooperative advertising benefits, marketing brochures related to Case products,
access to Case product specialists for field support, the ability to use the
Case name and logo in connection with Western's sales of Case products, and
access to Case floor plan financing for Equipment purchases. Such floor planning
arrangements currently provides Western with interest free credit terms of
between one month and twelve months on purchases of specified types of new
Equipment. Principal payments are generally due at the earlier of sale of the
equipment or six months from the date of shipment by Case.
Other Products
Although the principal products sold, leased and serviced by Western are
manufactured by Case, Western also sells, rents and services equipment and sells
related parts (e.g., tires, trailers and compaction equipment) manufactured by
others. Approximately 42% of Western's net sales for fiscal year 1999 resulted
from sales, rental and servicing of products manufactured by companies other
than Case, a higher percentage than the 35% of total net sales for fiscal year
1998 from this category as Western continued its planned growth in product lines
other than Case. Manufacturers other than Case represented by Western offer
various levels of supplies and marketing support along with purchase terms that
vary from cash upon delivery to interest-free 12-month floor plans.
Western's distribution business is generally divided into three categories
of activity: (i) equipment sales, (ii) equipment rentals, and (iii) equipment
service and support.
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Equipment Sales
At each of its distribution outlets, Western maintains a fleet of various
equipment for sale. The equipment purchased for each outlet is selected by
Western's marketing staff based upon the types of customers in the geographical
areas surrounding each outlet, historical purchases as well as anticipated
trends. Subject to applicable limitations in Western's manufacturers' dealer
contracts, each distribution outlet has access to Western's full inventory of
equipment. Western provides only the standard manufacturer's limited warranty
for new equipment, which is generally a one-year parts and service repair
warranty. Customers can purchase extended warranty contracts.
Western sells used Equipment that has been reconditioned in its own service
shops. It generally obtains such used Equipment as "trade-ins" from customers
who purchase new items of Equipment and from Equipment previously rented and not
purchased. Unlike new Equipment, Western's used Equipment is generally sold "as
is" and without a warranty.
Equipment Rentals
Western maintains a separate fleet of equipment that it holds solely for
rental. Such equipment is generally held in the rental fleet for 12 to 36 months
and then sold as used equipment with appropriate discounts reflecting prior
rental usage. As rental equipment is taken out of the rental fleet, Western adds
new equipment to its rental fleet as needed. The rental charges vary, with
different rates for different types of equipment rented. In October 1998,
Western opened its first rental-only store, located in the Seattle, Washington
area, under the name Western Power Rents. This store rents a wide range of pro
ducts including equipment from Case and other manufacturers with whom Western
has dealer agreements as well as equipment from companies with which Western has
had no prior relationship.
Product Support and Service
Western operates a service center and yard at each retail distribution
outlet for the repair and storage of Equipment. Both warranty and non-warranty
service work is performed, with the cost of warranty work being reimbursed by
the manufacturer following the receipt of invoices from Western. Western employs
approximately 140 manufacturer-trained service technicians who perform Equipment
repair, preparation for sale, and other servicing activities. Equipment
servicing is one of the higher profit margin businesses operated by Western.
Western has expanded this business by hiring additional personnel and developing
extended warranty contracts to be purchased by customers for Equipment sold and
serviced by Western, and independently marketing such contracts to its
customers. Western services items and types of Equipment which include those
that are neither sold by Western nor manufactured by Case.
Western purchases a large inventory of parts, principally from Case, for
use in its Equipment service business, as well as for sale to other customers
who are independent servicers of Case Equipment. Generally, parts purchases are
made on standard net 30 day terms.
Western employs one or more persons who take orders from customers for
parts purchases at each retail distribution outlet. The majority of such orders
are placed in person by walk-in customers. Western provides only the standard
manufacturer's warranty on the parts that it sells, which is generally a 90-day
replacement guaranty.
12
<PAGE>
Sales and Marketing
Western's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground power line contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. Western
estimates that it has approximately 9,000 customers, with most being small
business owners, none of which accounted for more than three percent (3%) of its
total sales in the fiscal year ended July 31, 1999.
For fiscal years 1999, 1998, and 1997, the approximate revenue breakdown by
source for the business operated by the Company were as follows:
FY 1999 FY 1998 FY 1997
------- ------- -------
Equipment Sales 60% 69% 69%
Equipment Rental 16% 8% 9%
Product Support 24% 23% 22%
--- --- ---
100% 100% 100%
=== === ===
Western advertises its products in trade publications and its sales
representatives appear at trade shows throughout the Territory. It also
encourages its salespersons to visit customer sites and offer Equipment
demonstrations when requested.
Western believes its sales and marketing activities do not result in a
significant backlog of orders. Although Western has commenced acceptance of
orders from customers for future delivery following manufacture by Case or other
manufacturers, during Fiscal 1999 substantially all of its sales revenues
resulted from products sold directly out of inventory, or the providing of
services upon customer request.
All of Western's sales personnel are employees of Western, and all are
under the general supervision of C. Dean McLain, the Executive Vice President
and a director of the Company, and the President of Western. Western assigns to
each Equipment salesperson a separate exclusive territory, the size of which
varies based upon the number of potential customers and anticipated volume of
sales as well as the geographical characteristics of each area. Western employed
approximately 70 Equipment salespersons on July 31, 1999.
On July 31, 1999, Western employed seven product support salespersons who
sell Western's parts and repair services to customers in assigned territories.
Western has no independent distributors or non-employee sales representatives.
Suppliers
Western purchases the majority of its inventory of Equipment and parts from
Case. No other supplier currently accounts for more than ten percent (10%) of
such inventory purchases in Fiscal 1999. While maintaining its commitment to
Case to primarily purchase Case Equipment and parts as an authorized Case
dealer, in the future Western plans to expand the number of products and
increase the aggregate dollar value of those products which Western purchases
from manufacturers other than Case in the future.
13
<PAGE>
Competition
Western competes with distributors of construction, agricultural and
industrial equipment and parts manufactured by companies other than Case on the
basis of price, the product support (including technical service) that it
provides to its customers, brand name recognition for its products, the
accessibility of its distribution outlets and the overall quality of the Case
and other products that it sells. Western management believes that it is able to
effectively compete with distributors of products produced and distributed by
such other manufacturers primarily on the basis of overall product quality, and
the superior product support and other customer services provided by Western.
Case's two major competitors in the manufacture of a full line of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with the Case Equipment and other
Equipment distributed by Western. These competitors and their product
specialties include JCB Corporation (backhoes), Kobelco Corporation
(excavators), Dresser Industries (light and medium duty bulldozers), Komatsu
Corporation (wheel loaders and crawler dozers) and Bobcat, Inc. (skid steer
loaders).
Western is currently the only Case dealer for construction equipment in
Washington, Alaska, Nevada and in the Northern California area (other than
Case-owned distribution outlets), and is one of two Case dealers in Oregon. None
of the Case dealers in Western's territory are owned by Case. However, Case has
the right to establish other dealerships in the future in the same territories
in which the Company operates. In order to maintain and improve its competitive
position, revenues and profit margins, Western plans to increase its sales of
products produced by companies other than Case.
Environmental Standards and Government Regulation
Western's operations are subject to numerous rules and regulations at the
federal, state and local levels which seek to protect the environment, including
regulating the discharge of hazardous materials into the environment. Western is
subject to federal environmental standards because, in connection with its
operations, it handles and disposes of hazardous materials and discharges sewer
water in its equipment rental and servicing operations. Western is also subject
to local rules and regulations regarding the discharge of waste water into sewer
systems. Western's internal staff is trained to keep appropriate records with
respect to its handling of hazardous waste, to establish appropriate on-site
storage locations for hazardous waste, and to select regulated carriers to
transport and dispose of hazardous waste. Based upon current laws and
regulations, Western believes that its policies, practices and procedures are
properly designed to prevent an unreasonable risk of environmental damage and
the resultant financial liability to Western. No assurance can be given that
future changes in such laws, regulations, or interpretations thereof, changes in
the nature of Western's operations, or the effects of former occupants' past
activities at the various sites at which Western operates, will not have a
material adverse effect upon the Company's operations.
14
<PAGE>
Insurance
Western currently has general, product liability, and umbrella insurance
policies with limits, terms, and conditions which Western and the Company
believe to be consistent with reasonable business practice, although there is no
assurance that such coverage will prove to be adequate in the future. An
uninsured or partially insured claim, or a claim for which indemnification is
not available, or a change in or lapse of any previously existing coverage could
have a material adverse effect upon Western, and in such event would likely
materially adversely affect the Company's business, financial condition, results
from operations and prospects.
Employees
At July 31, 1999, Western employed approximately 420 full-time employees,
or approximately 30 fewer than at July 31, 1998. Of that number, 29 are in
corporate administration, 27 are involved in administration at the branch
locations, 111 are employed in Equipment sales and rental, 86 are employed in
parts sales, and 167 are employed in servicing construction equipment. Staff
reductions during the year ending July 31, 1999 were considered to be relatively
even across all departments.
At July 31, 1999, approximately 19 of Western's service technicians
employed in the Sacramento, California operation were being represented by
Operating Engineers Local Union No. 3 of the International Union of Operating
Engineers, AFL-CIO under the terms of a five-year contract expiring August 31,
2001. As of May 1999, approximately 19 service technicians employed at Western's
facility in Auburn, Washington had voted to be represented in collective
bargaining by Operating Engineers Local Union Nos. 302 and 612 of the
International Union of Operating Engineers, AFL - CIO. Western and the local
unions' representatives are currently in contract negotiations as to a contract
for these employees. Western believes that its relations with its employees are
satisfactory.
The Company has three executive officers and no administrative employees,
but uses some consultants to perform certain administrative duties.
Future Performance and Risk Factors
The future performance, operating results and financial condition of the
Company's Distribution Business are subject to various risks and uncertainties,
including those described below.
Competition.
The Company's Distribution Business operates in a highly
competitive industry and market in which many companies have financial and
personnel resources significantly greater than those of Western, and in which
Western faces a great deal of competition on the basis of price. Such intense
price competition has the effect of holding down Western's profit margins on
product sales. The retail construction equipment industry, including the states
of Washington, Oregon, California, Alaska and Nevada in which Western operates,
is also highly fragmented with many brands of equipment and distributors of such
brands active in the market, thus presenting Western with intense competition.
Moreover, Western's dealership arrangements with Case do not provide Western
with exclusive dealerships in any territory. Although management believes that
it is unlikely that Case will create additional independent dealers in the
states of Oregon, Washington, California, Alaska or Nevada, or will reinstitute
its own proprietary dealerships in that territory, there is no assurance that
Case will not elect to do so in the future. If Western cannot adequately compete
with competing companies or adopt to changes in the marketplace or industry, the
business, financial condition, results from operations and prospects of Western
will be materially adversely affected. See "Business-The Distribution
Business-Competition."
15
<PAGE>
Government Regulation and Environmental Standards.
Western's operations are subject to numerous rules and regulations at the
federal, state and local levels which are designed to protect the environment,
including regulating the discharge of certain hazardous materials into the
environment. Western's internal staff is trained to keep appropriate records
with respect to its handling of hazardous waste, to establish appropriate
on-site storage locations for hazardous waste, and to select regulated carriers
to transport and dispose of hazardous waste. There is always the risk that such
materials might be mishandled, or that there might occur equipment or technology
failures, which could result in significant claims for personal injury, property
damage and clean-up or remediation. Any such claims could have a material
adverse effect on Western. If such claims are upheld and Western is fined or
sanctioned, the business, financial condition and results from operations of
Western, and the Company, may be materially adversely affected. No assurance can
be given that future changes in such laws, regulations, or interpretations
thereof, changes in the nature of Western's operations, or the effects of former
occupants' past activities at the various sites at which Western operates, will
not have a material adverse effect upon the Company's operations, financial
condition, business or prospects. See "Business-The Distribution
Business-Environmental Standards and Government Regulation."
Risk of Termination of Case Dealership.
Under the terms of the standard Case construction equipment sales and
services agreement with its dealers, including Western, Case reserves the right
to terminate Western as an authorized Case dealer at any retail locations, for
any reason, upon 90 days notice to Western. In the Agreement of Purchase and
Sale by and between Case and Western, dated December 4, 1992 (the "Case Purchase
Agreement"), Case acknowledged that its corporate business policy is not to
exercise such discretionary right of termination arbitrarily, and agreed that if
Western's operations at a particular location acquired from Case are profitable
and are terminated by Case for any reason other than "for cause" (defined as any
grounds which Case shall determine in the exercise of its reasonable business
judgment) it would not reinstate its own retail operations at such location
through December 1997. Should its Case dealerships at any one or more locations
be terminated by Case, the Company's business, financial condition, results from
operations and prospects could be materially adversely affected. In the event of
such termination, Western's liquidity position and cash reserves would be
materially adversely affected as all of Western's indebtedness to Case under its
various secured financing agreements would become immediately due and payable.
All of Western's indebtedness to its institutional lenders could also be
accelerated at that time. Furthermore, in the event that Western accelerates
growth of its Distribution Business, dependence upon Case as its principal
supplier, at least in the near term, will increase. In the event of any of the
foregoing, the business, financial condition, results from operations and
prospects of Western will likely be materially adversely affected. See
"Business-The Distribution Business-The Equipment."
Importance of Case Corporation to Operations. During Fiscal 1998 and Fiscal
1999 the Company's Western subsidiary accounted for all of the Company's total
net sales from continuing operations. Approximately 58% of Western's revenues
result from sales, leasing and servicing of equipment and parts manufactured by
Case. As a result, the ability of Case to continue to manufacture products that
Western can successfully market and distribute, largely based on the quality and
pricing of such products, is of material importance to the business, financial
condition, results from operations and prospects of the Company. In the event
that Case should cease to manufacture equipment for the construction equipment
industry, fail to produce sufficient products to stock the Company's inventories
adequately, fail to maintain certain product price levels on its products or to
maintain a good reputation for quality in such industry, the Company's business,
results from operations, financial condition and prospects will be materially
adversely affected.
16
<PAGE>
Effects of Downturn in General Economic Conditions, Cyclicality and
Seasonality.
Demand for all of Western's construction equipment distributed through its
retail operations is significantly affected by general domestic economic
conditions. All of such products and services are either capital goods
themselves, principally sold for inclusion in capital equipment or used for the
provision of construction services by others. Sales of capital goods tend to
fluctuate widely along with trends in overall economic activity in the national
economy. A general inflationary spiral or a continuing increase in prevailing
interest rates could adversely affect new construction, and consequently result
in a significant reduction in demand for the construction equipment sold by
Western. The construction equipment business has also historically been
cyclical, and is subject to periodic reductions in the levels of construction
(especially housing starts) and levels of total industry capacity and equipment
inventory, irrespective of the effects of inflation or increasing interest
rates. In addition, housing construction in the northwest slows down beginning
in November and continuing through to January. Accordingly, Western's operations
may be materially adversely affected by any general downward economic pressures,
adverse cyclical trends, or seasonal factors.
Dependence on Key Personnel.
Western's success in its Distribution Business depends to a significant
degree upon the continuing contributions of its senior management and other key
employees. The Company believes that the future prospects and success of Western
will also depend in large part on its ability to attract and retain
highly-skilled sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that Western will be successful in
attracting, integrating and retaining such personnel. Failure to attract or
retain existing and additional key personnel could have a material adverse
effect on the Company's Distribution Business, operating results, financial
condition or prospects.
Risk Factors Relating to the Company in General
Volatility of Market Prices for the Company's Common Stock.
The market prices for the Company's publicly traded Common Stock has been
historically volatile and there is limited liquidity in such market. Future
announcements concerning the Company's Distribution Business, or its
competitors, including operating results, government regulations, or foreign and
other competition, could have a significant impact on the market price of the
Common Stock in the future. See "Market for Common Equity and Related
Stockholder Matters."
Forward Looking Statements and Associated Risks.
This annual report on Form 10-K contains certain forward-looking
statements, including among others (i) anticipated trends in the Company's
financial condition and results of operations, and (ii) the Company's business
strategy. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements. In
addition to other risks described elsewhere in this "Risk Factors" discussion,
important factors to consider in evaluating such forward-looking statements
include (i) changes in external competitive market factors or in the Company's
internal budgeting process which might impact trends in the Company's results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the industries in which it operates;
and (iv) various competitive factors that may prevent the Company from competing
successfully in the marketplace. In light of these risks and uncertainties, many
of which are described in greater detail elsewhere in this "Risk Factors"
discussion, there can be no assurance that the events predicted in
forward-looking statements will, in fact, transpire.
17
<PAGE>
ITEM 2. Properties
The following table sets forth information as to each of the properties
which the Company owns or leases (all of which are retail sales, rental service,
storage and repair facilities expect as otherwise noted) in connection with its
Distribution Business at July 31, 1999. The properties located in Salinas,
California; Bend and Portland (Whitaker location), Oregon; and Moxee, Washington
were closed in the first quarter of Fiscal 2000.
<TABLE>
<CAPTION>
Location and Use Lessor Lease Annual Rental Size/Square Feet Purchase
Expiration Options
Date
<S> <C> <C> <C> <C> <C>
1745 N.E. Columbia Blvd. Carlton O. Fisher, CNJ 12/31/2000 $83,649(1) Approx. 4 Acres; No
Portland, Oregon 97211 Enterprises plus CPI Building 17,622
adjustments sq.ft.
1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/20001 $33,600(1) Approx. 1 Acre; No
Salem, Oregon 97303 Living Trust Buildings 14,860
sq.ft.
1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 Acres; No
Springfield, Oregon 97477 Company Building 17,024
sq.ft.
West 7916 Sunset Hwy. US Bank 9/30/2003 $69,600(1) Approx. 5 Acres; No
Spokane, Washington 99204 Building 19,200
sq.ft.
12406 Mukilteo Speedway Phil & Jana Pickering 10/31/2008 $114,000(1) Approx. 2.1 No
Mukilteo, Washington 98275 Acres; Building
13,600 sq.ft.
1901 Frontier Loop The Landon Group 4/30/2002 $40,500(1) Approx. 7 Acres; No
Pasco, Washington 99301 Building 14,200
sq.ft.
13184 Wheeler Road, N.E. Maiers Industrial park Month to $38,400(1) Approx. 10 Acres; No
Building 4 Month Building 13,680
Moses Lake, Washington sq. ft.
98837
63291 Nels Anderson Road B&K Management Corp. 10/31/99 $31,800(1) Approx. 1.9 acres No
Bend, Oregon 97701 building 3,600
sq. ft.
4601 N.E. 77th Avenue Parkway Limited 1/31/2001 $157,200 8,627 sq. ft. No
Suite 200 Partnership
Vancouver, Washington
98662
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,000(1) Approx. 8 Acres; No
Auburn, Washington 98001 Building 33,000
sq. ft.
500 Prospect Lane Frederick Peterson 9/15/2002 $26,496(1) Approx. 1.9 Yes
Moxee, Washington 98936 Acres; Building
6,200 sq. ft.
1455 Glendale Avenue McLain-Rubin Realty 1/31/2019 $252,000(2) Approx. 5 Acres; No
Sparks, Nevada 89431 Group (3) Building 22,475
sq.ft.
25886 Clawiter Road Fred Kewel II, Agency 11/30/99 $110,088(1) Approx. 2.8 No
Hayward, California 94545 Acres; Building
21,580 sq.ft.
18
<PAGE>
3540 D Regional Parkway Soiland 2/28/99 $48,234(1) 5,140 sq. ft. No
Santa Rosa, California plus CPI approximately
95403 adjustments 1.25 acres
1751 Bell Avenue McLain-Rubin Realty 2/2/2016 $168,000(2) Approx. 8 Acres; No
Sacramento, California Company LLC(2)(3) Buildings 35,941
95838 sq. ft.
1041 S. Pershing Avenue Raymond Investment 3/14/2001 $44,000(1) Approx. 2 Acres; No
Stockton, California 95206 Corp. plus annual Buildings 8,000
CRI sq. ft.
adjustments
M.E. Robinson 3/31/2001
8271 Commonwealth Avenue, $81,600(1) Approx. 1 acre; Yes
Buena Park, California Building 11,590
90621 sq.ft.
672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/2001 $31,644(1) Approx. 8 Acres; No
Salinas, California 93301 Building 4,000
sq.ft.
13691 Whitaker Way D&J Enterprises 5/1/2001 $77,700 Approx. 2 Acres; No
Portland, Oregon 97230 Building 11,760
sq. ft.
2535 Ellis Street Hart Enterprises 2/15/2002 $33,600 Approx. 2 Acres; Yes
Redding, Oregon 96001 Building 6,200
sq. ft.
913 S. Central McLain-Rubin Realty III 5/31/2017 $205,200(2) Approx. 4.4 No
Kent, WA 98032 (Rental (3) plus CPI Acres; Building
only) adjustments 21,400 sq. ft.
Yes
723 15TH Street 11/02/2002 $18,600 Approx. 1.2
Clarkston, WA 99403 Mark Flerchinger Acres; Building
3,750 sq. ft.
3199 E. Onstott Road 12/31/2017 $54,000 (2) Approx. 13 Acres; No
Yuba City, CA 95991 McLain-Rubin Realty Building 23,900
III (2)(3) sq. ft.
2020 E.Third Avenue Owned N/A N/A Approx. 4 Acres; N/A
Anchorage, AK 99501 Building 15,650
sq. ft.
3510 International Way, C & N Partners 12/15/99 $46,978 Approx. 2 Acres; No
Fairbanks, AK 99701 Building 4500 sq.
ft.
2275 Brandy Lane Excaliber Drill 2/29/2000 $30,000 Approx. .5 Acres; No
Juneau, AK 99801 Building 1,500
sq. ft.
</TABLE>
(1) Net lease with payment of insurance, property taxes and maintenance costs
by the Company.
(2) Net lease with payment of insurance, property taxes and maintenance costs
by the Company, which also pays for structural repairs.
(3) C. Dean McLain and Robert M. Rubin are (i) the Executive Vice President
and Director of the Company and Chief Executive Officer of Western, and (ii) the
President, Chief Executive Officer and Chairman of the Company, respectively.
Messrs. Rubin and McLain are the equity owners of McLain-Rubin Realty Company,
LLC. The terms of its lease with McLain-Rubin Realty Company LLC provide for a
"triple net" arrangement under which Western pays, in addition to rent, all
insurance, property taxes, maintenance costs and structural and other repairs.
19
<PAGE>
Western's operating facilities are separated into nine "hub" outlets and
fourteen "sub-stores" and one "rental-only" store in Kent, Washington. The hub
stores are the main distribution centers located in Auburn, Pasco and Spokane,
Washington; Portland and Springfield, Oregon; Sparks, Nevada; Hayward and
Sacramento, California; and Anchorage, Alaska. The sub-stores are the smaller
retail facilities in Mukilteo, Moses Lake, Kent, Clarkston and Yakima,
Washington; Portland, Salem and Bend, Oregon; Santa Rosa, Stockton Buena Park,
Redding, Yuba City and Salinas, California; and Fairbanks, Alaska.
All of the leased and owned facilities used by Western are believed to be
adequate in all material respects for the current and anticipated needs of the
Distribution Business.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, there are no pending material legal proceedings
in which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate may have a material adverse effect on the results of operations or
financial position of the Company.
In May 1998 a purported derivative lawsuit (the "Derivative Action") was
brought on behalf of the Company against Robert M. Rubin, the Company's Chief
Executive Officer, and the Company's other directors and officers who served
between November 1996 and February 1998. The Derivative Action alleged breaches
of fiduciary duty and waste of corporate assets. Final judicial approval of a
settlement of the Derivative Action was received in August 1999, pursuant to
which the Company will receive a payment (the "Rubin Payment") of $2,800,000
from Mr. Rubin.
The settlement will consist of the following: (a) the assignment by Mr.
Rubin to the Company of his right to $600,000 from Hutchinson which is due under
the Consulting Agreement and Non-Competition Agreement to Mr. Rubin, and which
Mr. Rubin believes will be immediately available upon stockholder ratification
of the Hutchinson Transaction; (b) the assignment of approximately $500,000 as
the "net present value" of the remaining payments (originally to be made in
installments through 2002) due under the Consulting Agreement and
Non-Competition Agreement to Mr. Rubin; (c) the transfer by Mr. Rubin to the
Company of a securities account (valued at approximately $941,000 as of the date
of transfer) containing both cash and unrestricted common stock of various
publicly-traded companies, with the actual value of each component common stock
to be calculated as the product of (i) the number of shares of each security
actually transferred, multiplied by (ii) the average closing price of each
security for the ten trading days preceding the date on which the Company
receives the securities account; and (d) the transfer by Mr. Rubin to the
Company of such number of shares of common stock of Response USA ("Response"), a
publicly-traded company, as equals the quotient of (i) the dollar value of the
Rubin Payment after subtracting the actual value of the payments in (a),(b) and
(c) above, divided by (ii) the average closing price of the Response common
stock during the ten trading days preceding the final judicial approval of the
Settlement. Hutchinson has withheld payments under the Consulting Agreement and
Non-Competition Agreement to Mr. Rubin pending stockholder ratification of the
Hutchinson Transaction, and has agreed to make these payments upon such
stockholder ratification. The payments by Hutchinson will constitute a
significant portion of the Rubin Payment.
20
<PAGE>
In connection with the settlement of the Derivative Action, the Company has
agreed to (a) immediately appoint two new independent directors to the Board of
Directors pending stockholder approval, (b) have its chief financial officer
report on the Company's financial condition and prospects at each regular board
meeting, (c) establish an audit committee of the Board of Directors to be
comprised entirely of independent directors, (d) establish a compensation
committee to be composed of a majority of independent directors, (e) pass a
board resolution regarding the review of unsolicited bona fide offers to acquire
at least a controlling stake in the Company, and (f) pass a board resolution
regarding "related party" transactions.
If the Hutchinson Transaction is ratified by the Company's stockholders,
the Company will release Mr. Rubin, the Company's Chairman and Chief Executive
Officer, from the obligation to repay a $1,000,000 principal amount promissory
note (the "Note") issued by Mr. Rubin to the Company. In return for such
release, Mr. Rubin will assign to the Company his rights to receive payments
under the Non-Competition Agreement and Consulting Agreement with Hutchinson,
and a portfolio of marketable securities with an approximate aggregate market
value as of June 1999 of approximately $941,000. Hutchinson has conditioned its
payments under the Consulting Agreement and Non-Competition Agreement on
stockholder ratification of the Hutchinson Transaction. In the event the Company
stockholders do not ratify the Hutchinson Transaction, Mr. Rubin will remain
responsible for repayment of the Note to the Company. In return for his
assigning to the Company his rights to receive payments from Hutchinson under
the Non-Competition Agreement and the Consulting Agreement, the Company will
agree to reduce his indebtedness under the Note by an amount equal to the
payments by Hutchinson to the Company.
The Class Action
In June 1998 a stockholder class action (the "Class Action") was filed
against the Company's directors alleging breaches of fiduciary duty and loyalty
to the Company and its stockholders in connection with (i) a letter of credit
guarantee by the Company for ERD Waste Corp. ("ERD"), (ii) the Hutchinson
Transaction and (iii) the delisting of the Company's Common Stock and
publicly-traded warrants from NASDAQ in February 1998. The Company has paid
$4,400,000 pursuant to its guarantee for ERD, which sought protection from
creditors under Chapter 11 of the federal bankruptcy laws on September 30, 1997.
Final judicial approval of a settlement, pursuant to which the company will pay
$2,500,000 (the "Class Payment") to members of the stockholder class, was
received in August 1999. The Class Payment will be in the amount of $2,500,000
and will be paid in the form of $600,000 in cash and $1,900,000 in common stock
of Western Power & Equipment Corp. ("Western"). The Western common stock is
presently owned by the Company and will be transferred to a segregated fund for
the benefit of the stockholder class. The Company presently owns approximately
60.6% of the outstanding common stock of Western and, after the Class Payment is
made (and assuming no subsequent ownership changes or transfers) will own
approximately 35% of the Western common stock. The number of shares of Western
common stock to be transferred will be calculated as the quotient of (i)
$1,900,000 divided by (ii) the average closing price of Western common stock
during the ten trading days preceding the final approval of the settlement of
the Class Action. Pursuant to such calculation 777,414 shares of Western owned
by the Company have been allocated. In addition, two of the officers and
directors of the Company are officers or directors of Western. As a result, the
Company will remain able to materially influence the outcome of votes by the
directors and stockholders of Western on matters before its board of directors
and stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
21
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On February 4, 1998, The Nasdaq Stock Market, Inc. ("Nasdaq") delisted the
Company's common stock and warrants (the "Public Warrants") from Nasdaq for (i)
failure to hold an annual stockholders meeting for fiscal year 1997 in violation
of Nasdaq's rules requiring an annual stockholder meeting, (ii) adopting a stock
option plan without stockholder approval in violation of Nasdaq's rules
requiring such stockholder approval, and (iii) the issuance of the Series B-1
Convertible Preferred Stock to the Old Connectsoft stockholders in August 1996
and the private placement of Series B-2 Convertible Preferred Stock in the 1997
private placement violation of Nasdaq's rules which, in effect, require
stockholder approval for any transactions involving the present or potential
issuance of voting securities representing more than 20% of the voting capital
stock outstanding immediately before such transaction. The principal market for
trading the Company's securities is the National Association of Securities
Dealers Over-the-Counter Bulletin Board ("OTCBB"). 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 and
the OTCBB during the periods identified:
Common Stock Public Warrants
------------ ---------------
High Low High Low
---- --- ---- ---
Fiscal 1997
- -----------
First Quarter 10.875 5.25 5.25 2.875
Second Quarter 11.375 7.563 4.875 3.875
Third Quarter 8.1875 3.44 4.50 3.75
Fourth Quarter 6.0000 4.3875 4.50 3.25
Fiscal 1998
- -----------
First Quarter 7.8125 1.9375 5.25 2.25
Second Quarter 3.625 1.75 1.75 1.00
Third Quarter 2.125 .78 * *
Fourth Quarter .875 .33
Fiscal 1999
- -----------
First Quarter .88 .63
Second Quarter .59 .28
Third Quarter .33 .28
Fourth Quarter .32 .25
22
<PAGE>
* Since the Public Warrants were delisted from the Nasdaq National Market
on February 4, 1998, they have been extremely thinly traded on the
Over-The-Counter Bulletin Board. It is the Company's opinion that since February
4, 1998 price information for the Public Warrants is either unreliable or
unavailable, and that trading activity since such date has been extremely
sporadic, and that for such reasons any such price information may either be
misleading, inaccurate, or not indicative of the true market price of the Public
Warrants since such date. However, according to the most recent price
information provided to the Company, the Public Warrants had a bid/ask price on
November 5, 1999 of $.25 and $.63, respectively, and that cumulative trading
volume in the Public Warrants between August 1999 and October 1999 totaled
approximately 6,500 Public Warrants.
The Company extended the exercise period of the Public Warrants from July
31, 1999 to July 31, 2001. On November 5, 1999 the last sale price of the Common
Stock was $0.23. As of November 11, 1999, the Company had approximately 112
record holders of its Common Stock and 6 record holders of its Public Warrants.
Dividend Policy
In the foreseeable future, the Company intends to retain earnings, if any,
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.
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 1999,
1998, 1997, 1996 and 1995 have been derived from the financial statements of the
Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants.
23
<PAGE>
<TABLE>
<CAPTION>
Income Statement Data (all figures in thousands):
Year ended July 31,
-------------------
1999 1998(1) 1997(2) 1996 1995
---- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $163,650 $163,478 $148,130 $106,555 $86,173
(Loss) income from continuing operations (5,054) (4,901) (9,078) 685 1,164
Net (loss) income (3,065) (9,615) (27,257) (1,835)(1) 2,268
Basic and Diluted (Loss) Earnings Per Share:
(Loss) income from continuing operations (0.43) (0.43) (1.16) 0.12 0.20
Net (loss) income (0.26) (0.85) (2.75) (0.32) 0.40
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data (all figures in thousands):
July 31,
--------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $142,409 $146,904 $144,723 $119,055 $76,829
Total liabilities $121,700 121,914 110,742 87,015 56,575
Working capital (deficit) (18,751) (5,972) 2,467 17,218 10,022
Stockholders' equity 12,797 15,862 24,101 22,581 20,254
</TABLE>
(1) Includes loss from discontinued operations for Old Connectsoft,
Connectsoft, Seattle OnLine, InterGlobe, and Exodus.
(2) Includes income from discontinued operations and the gain on the sale of
the manufacturing business of $7.8 million, net of tax, the loss from
discontinued operations of Old Connectsoft for the day ended July 31, 1996
of $10.0 million, net of tax and the discontinued operations of TechStar of
$1.1 million.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial conditions
and results of operations contains certain "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements that involve certain risks and uncertainties, detailed from time to
time in the Company's various commission filings. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected, including, but not limited to, projected sales levels,
expense reductions, reduced interest expense, and increased inventory turnover,
any one or more of which may not be realized. See "Description of Business -
Future Performance and Risk Factors." No assurance can be given that any such
matters will be realized.
General Overview
In previous years the Company engaged in three distinct businesses: the
Distribution Business, the Technology Business and the Telecommunications and
Construction Businesses. The Company formerly was a stockholder of a majority of
the outstanding common stock of a subsidiary through which it engaged in the
Telecommunication and Construction Businesses, but is now only a minority
stockholder. The Company has also, during Fiscal 1998 and Fiscal 1999, either
divested itself of all assets of, or otherwise discontinued all operations of,
the Technology Business. Consequently, the Company's current operations and its
operations during Fiscal 1999 consisted almost entirely of the Distribution
Business which the Company engages in through its subsidiary, Western, of which
it owns approximately 60.6% of the outstanding Common Stock. Accordingly, the
following discussion consists primarily of a discussion of Western. Western
acquired its first seven retail distribution stores in November 1992. Western
expanded to 18 stores in four states by the end of the year ending July 31, 1996
("Fiscal 1996"), to 23 stores in five states by the end of the year ending July
31, 1997 ("Fiscal 1997"), and to 27 stores in five states by the end of the year
ending July 31, 1998 ("Fiscal 1998"). However, during the year ending July 31,
1999 ("Fiscal 1999") the Company closed its Milton - Freewater, Oregon, Elko,
Nevada and Juneau, Alaska stores. At the end of Fiscal 1999 Western had 24
stores. Western's growth has been accomplished through a combination of new
store openings, strategic acquisitions, and to a lesser extent, comparable
stores revenue increases.
25
<PAGE>
Store activity for the last three fiscal years is summarized as follows:
<TABLE>
<CAPTION>
Fiscal No. of Stores at
Year Ending Beginning of No. of Stores No. of Stores No. of Stores No. of Stores at
July 31, Fiscal Year Opened Closed Acquired End of Year
-------- ----------- ------ ------ -------- -----------
<S> <C> <C> <C> <C> <C>
1997 18 2 0 3 23
1998 23 1 1 4 27
1999 27 0 3 0 24
</TABLE>
Western plans to open and acquire additional distribution outlets for Case
products, as well as for products which may be manufactured by other companies.
Western's results can be impacted by the timing of, and costs incurred in
connection with, new store openings and acquisitions.
Subsequent to the end of Fiscal 1999, Western had consolidated four
additional stores into larger neighboring stores. The four stores consolidated
are Salinas, California, Bend, Oregon, Portland, Oregon and Moxee, Washington.
Western plans to open and acquire additional distribution outlets for Case
products, as well as for products which may be manufactured by other companies
as circumstances permit. Western's results can be impacted by the timing of, and
costs incurred in connection with, new store openings and acquisitions as well
as the costs of closing existing stores.
Results of Operations
Fiscal 1999 as Compared with Fiscal 1998
The Company reported net revenue for Fiscal 1999 of $163,650,000, an
increase of 0.1 percent over net revenue of $163,478,000 for Fiscal 1998 and an
increase of $15,520,000 (10.5%) over comparable 1997 sales of $148,130,000.
Approximately $17.4 million of revenue came from stores opened or acquired in
Fiscal 1998 by Western. Stores opened prior to Fiscal 1998 showed an overall
revenue decrease of 3.9% from prior year revenue reflecting a general softening
in economic conditions in the Northwest, increased competitive pressures, and
some weather-related business interruptions.
Western's gross margin was 8.9 percent during Fiscal 1999, which was lower
than its 11.7 percent gross margin during Fiscal 1998. Margins decreased in
Fiscal 1999 due mainly to continued competitive pressures and the first quarter
equipment reserve. The Company believes that Western's management continues to
place a high priority on improving overall gross margins by working to increase
its higher margin segments such as service, parts and rental revenues, focusing
more sales efforts on specialty and niche product lines, and by obtaining higher
prices for new and used equipment.
26
<PAGE>
Selling, general, and administrative expenses were $15,175,000, or 9.3
percent of revenues for Fiscal 1999 as compared to $13,183,000, or 8.1 percent
of revenues for Fiscal 1998. The increase is primarily attributable to net
expenses related to the shareholder litigation of approximately $310,000 and an
increase in bad debt expense related to advances to IDF of $992,000. The
remaining increase in selling, general, and administrative expenses as a
percentage of revenues resulted in part from Western's lower than expected
revenue levels and full year expenses for stores opened or acquired in Fiscal
1998.
Net interest expense for Fiscal 1999 was $5,329,000 up from $4,197,000 in
Fiscal 1998. This was due to the Company's decreased interest income from
decreasing cash reserves in part and to an increase in rental equipment levels
at Western. In addition, effective with deliveries after July 1, 1998, Case
changed factory to dealer terms, lowering from three percent (3%) to two percent
(2%) the cash payment discount if the dealer pays for the machine outright
rather than utilizing the interest-free floor planning. Western was able to take
advantage of the cash discounts on a majority of its Case purchases in Fiscal
1998.
In June 1997, Western obtained a $75 million inventory flooring and
operating line of credit facility through Deutsche Financial Services. The
facility is a three-year, floating rate facility at rates as low as 50 basis
points under the prime rate. Western's management has used this facility to
allow Western to take advantage of more purchase discounts and to lower the
overall interest rate on borrowings.
The gain on disposal of $1,989,000 in Fiscal 1999 reflects the gain from
the disposal of the remaining assets of Connectsoft Communications Corp. in June
1999 to eGlobe. Loss from discontinued operations of $4.7 million for Fiscal
1998 arises from the discontinuation of the operations of the Old Connectsoft,
Connectsoft, Exodus Technologies, Seattle OnLine Acquisition Corp. and
InterGlobe subsidiaries. Effective during the third quarter of Fiscal 1998 the
Company discontinued the operations of these subsidiaries. Losses of $2,320,000
from the discontinued operations after the measurement date of April 30, 1998
have been offset against an anticipated gain from the sale of certain assets of
Connectsoft and Old Connectsoft to eGlobe Inc. in the amount of $3,800,000,
resulting in a deferred gain of $1,480,000. The change in the amount of gain is
due primarily to changes in the consideration given by eGlobe for the assets of
Connectsoft.
Fiscal 1998 Compared with Fiscal 1997
The Company reported net revenue for Fiscal 1998 of $163,478,000, an
increase of $15,348,000 (10.4 percent) over comparable 1997 sales of
$148,130,000. Approximately $17.4 million of revenue came from stores opened or
acquired in fiscal 1998 by Western. Stores opened prior to Fiscal 1998 showed an
overall revenue decrease of 3.9% from prior year revenue reflecting a general
softening in economic conditions in the northwest, increased competitive
pressures, and some weather related business interruptions.
Western's gross margin was 11.7 percent during Fiscal 1998, which is higher
than their 10.7 percent gross margin during Fiscal 1997. Margins increased in
Fiscal 1998 on new unit sales, rental, and service business. Western's
Management continues to place a high priority on improving overall gross margins
by working to increase higher margin service, parts, and rental revenues,
focusing more sales efforts on specialty and niche product lines, and by
obtaining higher prices for new equipment.
Selling, general, and administrative expenses were $13,183,000 or 8.1
percent of revenues for Fiscal 1998 compared to $22,605,000 or 15.3 percent of
sales for Fiscal 1997. The decrease is due largely to the 1997 amounts charged
for ERD totaling $4,985,000. The remaining decrease in selling, general, and
administrative expenses resulted in part from significantly decreased
professional fees and other corporate administrative expenses due to the
discontinuation of the technology group and from management's cost control and
efficiency improvement efforts.
27
<PAGE>
Net interest expense for Fiscal 1998 was $4,197,000, up $1,572,000 from
$2,625,000 in Fiscal 1997. A total of $1,169,000 of this increase was due to an
increase in Western's inventory levels, particularly inventory dedicated to
rentals. In addition, effective with deliveries after July 1, 1998, Case changed
factory to dealer terms lowering from 3% to 2% the cash payment discount if the
dealer pays for the machine outright rather than utilizing the interest-free
floor planning. Western was able to take advantage of the cash discounts on a
majority of its Case purchases in fiscal 1998. In June 1997, Western obtained a
$75,000,000 inventory flooring and operating line of credit facility through
Deutsche Financial Services. The facility is a three-year, floating rate
facility at rates as low as 50 basis points under the prime rate. Western's
management has used this facility to allow Western to take advantage of more
purchase discounts and to lower the overall interest rate on borrowings. Western
believes that the positive impact of the discounted cost of new inventory on
gross margins has more than offset the increased interest expense related to
foregoing the interest-free flooring periods. The remaining increase in net
interest expense of $403,000 is primarily due to decreases in interest income
earned on investments as a result of lower principle invested amounts in Fiscal
1998.
Loss from discontinued operations of $4,690,000 for Fiscal 1998 arises from
the discontinuation of the operations of the Old Connectsoft, Connectsoft,
Exodus Technologies, Seattle OnLine, InterGlobe and TechStar subsidiaries.
Effective during the third quarter of Fiscal 1998 the Company discontinued the
operations of these subsidiaries. Losses of $2,300,000 from the discontinued
operations after the measurement date of April 30, 1998 have been offset against
an anticipated gain from the sale of certain assets of Connectsoft and Old
Connectsoft to eGlobe Inc. in the amount of $3,800,000, resulting in a deferred
gain of $1,500,000. In Fiscal 1997, the Company incurred a loss from
discontinued operations of $15,700,000 primarily comprised of $8,200,000 from
its Exodus subsidiary and a net loss of $3,000,000 from the operations of Old
Connectsoft. In addition, the Free agent development and marketing activities
conducted by Connectsoft incurred an additional $2,800,000 of net losses in
Fiscal 1997. InterGlobe incurred a net loss of $2,224,000 including $1,600,000
of write-offs of goodwill and investment) on total revenues of $1,040,590,
Seattle OnLine incurred a net loss of $1,575,000 on total revenues of $87,000
and TechStar had net income of $1,134,000 on sales of $3,891,000. These losses
were slightly offset by tax benefits recognized of $1,000,000.
Fiscal 1997 Compared with Fiscal 1996
Western's revenues for Fiscal 1997 increased by $41.6 million, or
approximately 39% over Fiscal 1996. The increase was due primarily to the
contribution of the stores acquired or opened in the last year, accounting for
$21.4 million (51%) of the increase in sales. Western's same store revenues
increased $10.2 million or 25% for Fiscal 1997, as compared to Fiscal 1996. For
Fiscal 1997, Western's sales in all departments were up at least 25% compared to
the same period in Fiscal 1996.
Selling, general and administrative ("SG&A") expenses were $22.6 million
(15.3% of sales) in Fiscal 1997, compared to $9.5 million (8.9% of sales) for
the comparative prior year period. The substantial increase in SG&A expenses of
$13.1 million for Fiscal 1997 were attributable to an increase at Western of
$3.4 million and an increase of $4.7 million of corporate SG&A, and included the
ERD bad debt of $5.0 million which had no comparable expense in Fiscal 1996.
Interest expense for the Fiscal 1997 was $2.625 million compared to $1.137
million for Fiscal 1996, predominantly due to increased inventory carried by
Western to support higher equipment sales level, including a significant
investment in equipment dedicated to the rental fleet.
The effective tax rate for Fiscal 1997 was approximately 6.4%, which is
lower than the 37% effective tax rate for the prior year comparative period.
This decrease is a result of the recognition of a valuation allowance against
the net operating loss carryforward and deferred tax assets.
28
<PAGE>
In Fiscal 1997, the Company incurred a loss from discontinued operations of
$16.9 million comprised of $8.2 million from its Exodus subsidiary and a net
loss of $3.1 million from the operations of Old ConnectSoft. In addition, the
free agent development and marketing activities conducted by Connectsoft
incurred an additional $2.8 million of net losses in Fiscal 1997. InterGlobe
incurred a net loss of $2.224 million (including $1.6 million of write-offs of
goodwill and investment) on total revenues of $1,040,590, Seattle OnLine
incurred a net loss of $1.575 million on total revenues of $87,000 and TechStar
had net income of $1,134,000 on sales of $3,891,000.. These losses were offset
by tax benefits recognized of approximately $1.0 million. Losses from
discontinued operations for Fiscal 1996 of $2.5 million are comprised of the
gain from the sale of the manufacturing division of $7.8 million (net of tax of
5.0 million) offset by losses of Old Connectsoft from Fiscal 1996 in the amount
of $10.3 million.
Although Western's sales increased, the increase in Western's operating and
interest expenses and warranty problems with Case backhoe equipment which
Western elected to absorb, resulted in net income of approximately $1.0 million
in Fiscal 1997, as compared with $2.0 million in the prior year.
As a result of the foregoing, in Fiscal 1997, the Company reported a
consolidated net loss of $27.3 million on total net consolidated sales of
approximately $154.5 million.
Liquidity and Capital Resources
General
During Fiscal 1999 the Company's cash, cash equivalents and marketable debt
securities decreased by $4,526,000, from $7,811,000 to $3,285,000, primarily due
to its partial fundings of the discontinued operations of Connectsoft and its
advances to IDF, losses from operations and increased selling, general and
administrative expenses.
The Company's cash and cash equivalents of $2,914,000 as of July 31, 1999
and available credit facilities of Western are considered sufficient to support
current levels of operations for at least the next twelve months. The Company
had by November 12, 1999 received securities, cash and notes with an approximate
value of $1,700,000 from Robert M. Rubin, and approximately $1,100,000 in
payments from Hutchinson are due to the Company in connection with the
settlement of the derivative stockholder litigation. The payments from
Hutchinson are contingent upon ratification by the Company stockholders of the
Hutchinson Transaction. However, there can be no assurance that such payments
will ever be received.
The Company invests substantially all cash and cash equivalents in money
market funds, United States Treasury securities and similar instruments. The
Company seeks to provide a high current return on its investments of cash and
cash equivalents while preserving both liquidity and capital. The established
policy guidelines for its investment portfolio include investments that include
United States Treasury securities, United States government agency obligations,
deposit-type obligations of United States banking institutions, repurchase
agreements, United States denominated A1 grade commercial paper, United States
money market funds and interests in mutual funds that invest in the above listed
instruments. Concentration of the portfolio is limited to not more than 20% of
the investment portfolio in the securities of any one bank, corporation or
non-government issuer.
29
<PAGE>
Western
During the year ended July 31, 1999, Western's cash and cash equivalents
increased by $74,000 primarily due to the increased accounts receivable
collections. Western had positive cash flow from operating activities during the
year of $15,055,000 reflecting net income for the year after adding back
depreciation and amortization. Total purchases of new property and equipment and
rental equipment in Fiscal 1999 approximated $16,000,000. Purchases of fixed
assets during the period were related mainly to the ongoing replacement of aged
operating assets and the purchase of the Anchorage, Alaska facility.
Western's primary needs for liquidity and capital resources are related to
its inventory for sale and its rental and lease fleet inventories, store
openings, and acquisitions of additional stores. Western's primary source of
internal liquidity has been its profitable operations. As more fully described
below, Western's primary sources of external liquidity are equipment inventory
floor plan financing arrangements provided to Western by the manufacturers of
the products Western sells and by Deutsche Financial Services ("DFS") and, with
respect to acquisitions, secured loans from Case.
Under inventory floor planning arrangements the manufacturers of products
sold by Western provide interest free credit terms on new equipment purchases
for periods ranging from one to twelve months, after which interest commences to
accrue monthly at rates ranging from zero percent to two percent over the prime
rate of interest. Principal payments are typically made under these agreements
at scheduled intervals and/or as the equipment is rented, with the balance due
at the earlier of a specified date or sale of the equipment. At July 31, 1999,
Western was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $17,128,000. As of September 30, 1999, approximately
$15,413,000 was outstanding under these manufacturer provided floor plan
arrangements.
In June 1997, Western obtained a $75,000,000 inventory flooring and
operating line of credit through DFS. The DFS credit facility is a three-year,
floating rate facility based on prime with rates between 0.50% under prime to
1.00% over prime depending on the amount of total borrowing under the facility.
Amounts are advanced against Western's assets, including accounts receivable,
parts, new equipment, rental fleet, and used equipment. Western expects to use
this borrowing facility to lower flooring related interest expense by using
advances under such line to finance inventory purchases in lieu of financing
provided by suppliers, to take advantage of cash purchase discounts from its
suppliers, to provide operating capital for further growth, and to refinance
some of its acquisition related debt at a lower interest rate. As of July 31,
1999, approximately $70,863,000 was outstanding under the DFS credit facility.
As of September 30, 1999, approximately $68,443,000 was outstanding under this
facility. At July 31, 1999, Western was in technical default of the leverage
covenant in its loan agreement with DFS, and has requested, but not obtained, a
waiver letter regarding its default for the period since July 31, 1999. There is
no guarantee that Deutsche Financial Services will not call this debt at any
time. Western and DFS have reached a preliminary agreement to revise certain
leverage covenants and provide for financial penalties for violations of such
covenants. Finalization of this increase is expected by November 30, 1999.
Amounts owing under the DFS credit facility are secured by inventory purchases
financed by DFS, as well as all proceeds from their sale or rental, including
accounts receivable thereto.
30
<PAGE>
Inventory; Effects of Inflation and Interest Rates; General Economic
Conditions
Distribution Business
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry is characterized by long order
cycles, high ticket prices, and the related exposure to "flooring" interest.
Western's interest expense may increase if inventory is too high or interest
rates rise. The Company manages its inventory through company-wide information
and inventory sharing systems wherein all locations have access to Western's
entire inventory. In addition, Western closely monitors inventory turnover by
product categories and places equipment orders based upon targeted turn ratios.
All of the products and services provided by Western are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, Western's sales are affected
by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by Western. In addition, although
agricultural equipment sales are less than two percent (2%) of Western's total
revenues, factors adversely affecting the farming and commodity markets also can
adversely affect Western's agricultural equipment related business.
Western's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of Western's target markets and/or products.
The Technology Business
During Fiscal 1999, the Company had no operations in its Technology
Business. During Fiscal 1999, the Company consummated the sale of certain assets
comprising the remaining Technology Business to eGlobe. Prior to such sale the
Company had either discontinued or divested itself of all assets comprising the
Technology Business.
Impact of Year 2000 Related Problems
Year 2000 related problems are the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Western has determined that it will be required to upgrade, modify or
replace significant portions of its software so that its computer systems will
properly utilize dates after December 31, 1999. Western is completing upgrades
of its enterprise application to account for and alleviate Year 2000 related
problems uncovered during internal testing of some software from vendors.
Western presently believes that with these upgrades to existing software, Year
2000 related problems can be mitigated. However, if such upgrades are not made,
are not timely completed, or do not work as anticipated, Year 2000 related
problems could have a material impact on the operations of Western.
31
<PAGE>
Western has initiated its plan to contact all of its significant suppliers
to determine the extent to which Western is vulnerable to those third parties'
failure to remediate their own Year 2000 related problems. There can be no
guarantees that the systems of third parties on which Western's systems rely or
which influence the business of Western's customers will be timely remediated,
that any attempted remediation will be successful, or that such conversions
would be compatible with Western's systems. Western has not yet determined the
projected costs of its Year 2000 project and cannot yet determine whether
Western has any exposure to contingencies related to the Year 2000 related
problems for the products it has previously sold.
There can be no assurance that Western will finish its Year 2000
remediation efforts in time to prevent related problems whenever or if they
occur. As the Company's business consists almost entirely of the Distribution
Business which it engages in through Western, any failure by Western to have
software and systems which are Year 2000 compliant in time to prevent the
occurrence of related problems will materially adversely affect the business,
financial condition, results of operations and prospects of Western and the
Company.
Western will utilize both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. Western plans to
complete its Year 2000 remediation on or before December 1999. Funding for the
costs of the program are anticipated to come from operating cash flows.
Western's current plan to complete the Year 2000 modifications is based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans, and the ability to meet projected time lines. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and other uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
AMERICAN UNITED GLOBAL, INC.
FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Accountants ....................... F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations ................... F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
American United Global, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of American
United Global, Inc. and its subsidiaries at July 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Portland, Oregon
October 22, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
--------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 2,914,000 $ 3,362,000
Investment in marketable debt securities............................................. 371,000 4,449,000
Trade accounts receivable, less allowance
for doubtful accounts of $724,000 and $670,000, respectively........................ 15,500,000 23,708,000
Inventories (Note 4)................................................................. 67,068,000 73,491,000
Prepaid expenses and other receivables............................................... 885,000 287,000
Deferred tax asset (Note 7).......................................................... 1,410,000 1,298,000
Receivable from Chairman (Note 10)................................................... 1,700,000 -
Notes receivable .................................................................... 1,140,000 1,200,000
--------- ---------
Total current assets............................................................. 90,988,000 107,795,000
Property and equipment, net (Note 5)................................................. 9,818,000 8,695,000
Rental equipment fleet, net (Note 5)................................................. 31,366,000 23,080,000
Leased equipment fleet, net (Note 5)................................................. 5,264,000 2,760,000
Intangibles and other assets, net of accumulated
amortization of $1,263,000 and $1,460,000, respectively (Note 12)................... 2,952,000 3,613,000
Investment in unconsolidated subsidiary (Note 3)..................................... - 961,000
Investment in preferred stock (Note 9)............................................... 2,000,000 -
Note Receivable, net of current portion ............................................. 521,000 -
---------- ---------
$ 142,909,000 $ 146,904,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under floor financing lines (Note 6)...................................... $ 17,128,000 $ 11,038,000
Short-term borrowings (Note 6)....................................................... 72,383,000 76,769,000
Current portion of capital lease obligations (Note 10)............................... 17,000 67,000
Accounts payable..................................................................... 13,038,000 18,027,000
Accrued liabilities.................................................................. 4,046,000 5,336,000
Income taxes payable (Note 7)........................................................ 627,000 1,050,000
Deferred gain on discontinued operations (Note 9).................................... - 1,480,000
Due to shareholders (Note 10)........................................................ 2,500,000 -
----------- -----------
Total current liabilities........................................................ 109,739,000 113,767,000
Long-term borrowings (Note 6)........................................................... 48,000 1,156,000
Capital lease obligations, net of current portion (Note 10)............................. 4,755,000 2,827,000
Deferred taxes (Note 7)................................................................. 837,000 690,000
Deferred gain........................................................................... 140,000 -
Deferred lease income................................................................... 6,181,000 3,474,000
--------- ---------
Total liabilities 121,700,000 121,914,000
Minority interest....................................................................... 8,412,000 9,128,000
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 8 and 11):
Series B-1 convertible preferred stock, convertible to common, $3.50 per share
liquidation value, $.01 par value; 1,000,000 shares authorized; 425,620 and
723,862 shares issued and outstanding, respectively................................ 4,000 7,000
Common stock, $.01 par value; 40,000,000 shares authorized; 11,921,529 and 11,617,286
shares issued and outstanding, respectively........................................ 119,000 116,000
Common stock, Class B, non-voting, .01 par value, 25,000,000
shares authorized, no shares issued and outstanding ............................... - -
Additional contributed capital....................................................... 49,954,000 49,954,000
Accumulated deficit.................................................................. (37,280,000) (34,215,000)
----------- -----------
Total shareholders's equity...................................................... 12,797,000 15,862,000
---------- ----------
$ 142,909,000 $146,904,000
============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales................................................................ $ 163,650,000 $ 163,478,000 $ 148,130,000
Cost of goods sold....................................................... 149,056,000 144,302,000 132,260,000
----------- ----------- -----------
Gross profit...................................................... 14,594,000 19,176,000 15,870,000
Selling, general and administrative expenses............................. 15,175,000 13,083,000 22,605,000
---------- ---------- ----------
Operating income (loss)........................................... (581,000) 6,093,000 (6,735,000)
Interest expense, net.................................................... 5,329,000 4,197,000 2,625,000
--------- --------- ---------
Income (loss) from continuing operations before income taxes, equity
in loss of unconsolidated subsidiary and minority interest........ (5,910,000) 1,896,000 (9,360,000)
Benefit (provision) for income taxes (Note 7)............................ 1,101,000 (1,354,000) 703,000
Equity in loss of unconsolidated subsidiary.............................. (961,000) (4,730,000) -
Minority interest in loss (earnings) of consolidated subsidiaries........ 716,000 (713,000) (421,000)
------- -------- --------
Loss from continuing operations .................................. (5,054,000) (4,901,000) (9,078,000)
Discontinued operations, net of taxes (Note 9):
Loss from operations, (net of tax benefit of $1,423,000 in 1998 and
$966,000 in 1997)..................................................... - (4,690,000) (15,776,000)
Gain on disposal...................................................... 1,989,000 - -
--------- ---------- ------------
1,989,000 (4,690,000) (15,776,000)
Net loss ................................................................ (3,065,000) (9,591,000) (24,854,000)
Dividends on preferred stock............................................. - (24,000) (2,403,000)
----------- ---------- ----------
Net loss available for common shareholders............................... $ (3,065,000) $ (9,615,000)$ (27,257,000)
============= ============== ==============
Basic and diluted earnings (loss) per share:
(Loss) earnings from continuing operations............................ $ (0.43) $ (0.43) $ (1.16)
Gain (loss) from discontinued operations.............................. 0.17 (0.42) (1.59)
------------- ------------- -------------
Basic and diluted loss per share......................................... $ (0.26) $ (0.85) $ (2.75)
============= ============= ============
Weighted average number of shares........................................ 11,748,210 11,311,791 9,919,626
========== ========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------- ------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at July 31, 1996.................................. - $ - 6,267,000 $ 63,000
Net loss .................................................
Dividend on preferred stock...............................
Issuance of common shares................................. 1,886,000 19,000
Issuance of preferred stock............................... 1,377,000 14,000
Conversion of preferred stock to common................... (280,000) (3,000) 2,031,000 20,000
Tax benefit related to stock option plans and warrants....
Amortization of deferred compensation.....................
Exercise of stock options................................. 243,000 2,000
Stock options issued to non-employees.....................
Warrants issued in connection with acquisition............ --------- --------- ----------- ---------
Balance at July 31, 1997.................................. 1,097,000 11,000 10,427,000 104,000
Net loss .................................................
Dividend on preferred stock...............................
Issuance of common shares................................. 250,000 3,000
Conversion of preferred stock to common................... (373,000) (4,000) 838,000 8,000
Amortization of deferred compensation.....................
Exercise of stock options................................. 102,000 1,000
----------- ---------- --------- ---------
Balance at July 31, 1998.................................. 724,000 7,000 11,617,000 116,000
Net loss .................................................
Conversion of preferred stock to common................... (298,000) (3,000) 304,000 3,000
-------- ------ ------- -----
Balance at July 31, 1999.................................. 426,000 $ 4,000 11,921,000 $ 119,000
======= ============= ========== =============
ADDITIONAL RETAINED TOTAL
CONTRIBUTED EARNINGS SHAREHOLDERS'
CAPITAL OTHER (DEFICIT) EQUITY
Balance at July 31, 1996.................................. 20,654,000 (793,000) 2,657,000 22,581,000
Net loss ................................................. (24,854,000) (24,854,000)
Dividend on preferred stock............................... 2,286,000 (2,403,000) (117,000)
Issuance of common stock.................................. 8,525,000 8,544,000
Issuance of preferred stock............................... 15,411,000 15,425,000
Conversion of preferred stock to common................... (17,000)
Tax benefit related to stock option plans and warrants.... 356,000 356,000
Amortization of deferred compensation..................... 597,000 597,000
Exercise of stock options................................. 854,000 856,000
Stock options issued to non-employees..................... 571,000 571,000
Warrants issued in connection with acquisition............ 142,000 142,000
------- -------- ----------- -------
Balance at July 31, 1997.................................. 48,782,000 (196,000) (24,600,000) 24,101,000
Net loss ................................................. (9,591,000) (9,591,000)
Dividend on preferred stock............................... 141,000 (24,000) 117,000
Issuance of common stock.................................. 473,000 476,000
Conversion of preferred stock to common................... (4,000) -
Amortization of deferred compensation..................... 196,000 196,000
Exercise of stock options................................. 562,000 563,000
------- -------- ------------ ----------
Balance at July 31, 1998.................................. 49,954,000 - (34,215,000) 15,862,000
Net loss ................................................. (3,065,000) (3,065,000)
---------- -------- ---------- ----------
Balance at July 31, 1999.................................. $ 49,954,000 $ - $ (37,280,000) $ 12,797,000
============= ============ ============== =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations................................... $ (5,054,000) $ (4,901,000) $ (7,944,000)
Net gain (loss) from discontinued operations ......................... 1,989,000 (4,690,000) (16,910,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 11,779,000 1,448,000 2,646,000
Long-term asset impairment.......................................... - - 5,725,000
Loss on settlement.................................................. 310,000 - 1,800,000
Loss on standby letter of credit......................................... - - 4,985,000
Amortization of deferred compensation............................... - 196,000 597,000
Gain on disposal of business........................................ (1,989,000) (220,000) -
Gain on sale of fixed assets........................................ (45,000) - -
Deferred tax provision.............................................. - - (11,000)
(Loss) income applicable to minority interest....................... (716,000) 713,000 421,000
Undistributed loss of affiliate..................................... 1,553,000 4,730,000 -
Stock option compensation........................................... - - 271,000
Imputed interest.................................................... - - 305,000
Change in assets and liabilities, net of effects of acquisition
and dispositions:
Trade accounts receivable......................................... 8,208,000 (10,584,000) (7,255,000)
Inventories....................................................... 1,299,000 (2,280,000) (17,673,000)
Notes receivable.................................................. (500,000) 3,503,000 -
Intangible and other assets....................................... - 1,638,000 -
Prepaid expenses and other receivable............................. 1,000 70,000 (1,646,000)
Lease equipment, net.............................................. (2,504,000)
Accounts payable.................................................. (5,295,000) (2,122,000) 14,181,000
Accrued liabilities............................................... (1,290,000) (5,462,000) 6,588,000
Income taxes payable.............................................. (164,000) (2,254,000) (3,329,000)
Change in deferred revenue........................................ 2,707,000 (950,000) 950,000
Change in deferred gain on disposition of Technology Group........ - 1,480,000 -
Borrowings under term loans....................................... (4,286,000) 67,179,000 242,000
Inventory floor financing........................................... 6,090,000 (47,246,000) 1,126,000
--------- ----------- ---------
Net cash provided by (used in) operating activities............... 12,093,000 248,000 (14,931,000)
Cash flows from investing activities:
Purchase of property and equipment.................................... (2,711,000) (6,332,000) (1,222,000)
Purchase of rental equipment, net..................................... (13,315,000)
Sale (purchase) of debt securities.................................... 4,078,000 5,569,000 (3,750,000)
Proceeds on sales of fixed assets..................................... 2,235,000 - -
Acquisition of businesses, net of cash acquired....................... - - (1,497,000)
----------- ------------ ----------
Net cash used in investing activities............................. (9,713,000) (763,000) (6,469,000)
Cash flows from financing activities
Long term debt repayments............................................. (1,068,000) - -
Net borrowings (payments) under revolving credit agreements........... - (7,323,000) 7,287,000
Principal payments under capitalized lease obligations................ (60,000) (348,000) (327,000)
Proceeds from sale of stock........................................... - 480,000 9,182,000
Subsidiary purchase of treasury stock.......................... - (1,816,000) -
Exercise of stock options............................................. - 562,000 856,000
Collections (increase) of receivable from shareholder, net............ (1,700,000) 38,000 (400,000)
---------- ---------- ----------
Net cash (used in) provided by financing activities............... (2,828,000) (8,407,000) 16,598,000
---------- ---------- ----------
Net (decrease) in cash and cash equivalents.............................. (448,000) (8,922,000) (4,802,000)
Cash and cash equivalents beginning of year.............................. 3,362,000 12,284,000 17,086,000
--------- ---------- ----------
Cash and cash equivalents end of year.................................... $ 2,914,000 $ 3,362,000 $ 12,284,000
============= ============== =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
American United Global, Inc., a Delaware corporation (the "Company") is
engaged, through its operating subsidiary, in the distribution business through
its 60.6% owned subsidiary, Western Power & Equipment Corp. ("Western"). Western
is engaged in the sale, rental and service of light, medium and heavy
construction, industrial and agricultural equipment and related parts. These
sales are conducted from 24 regional distribution operations owned by Western
located in the states of Washington, Oregon, California, Alaska and Nevada. A
majority of this equipment is manufactured by Case Corporation ("Case").
The Company is also involved in the engineering, design and construction
business through a minority owned subsidiary, IDF International, Inc. ("IDF").
The Company had been engaged in the technology business through
subsidiaries, which provided telecommunications products and services, a
proprietary intelligent communications system, as well as software and
networking products. Such products and services were provided by the Company's
wholly and majority owned subsidiaries as follows:
Connectsoft Communications Corp. ("CCC"), a wholly owned subsidiary had
been developing a telephony server product that reads email and select web
content over the telephone which was marketed under the name "Vogo Server". The
assets of CCC have been sold to an unrelated third party as discussed in Note 9.
Exodus Technologies, Inc., an 80.4%-owned subsidiary, had developed a
proprietary application server software, marketed as NTERPRISE, allows users to
run Windows application server software programs designed for Microsoft Windows
NT operating system on users' existing Unix workstations.
InterGlobe Networks, Inc. provided network consulting services and managed
a network operations center providing internet connectivity services.
The technology business has been accounted for as discontinued operations
for the years ending July 31, 1999, 1998 and 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority shareholders' proportionate share of
the equity of Western, which was 39.4% at July 31, 1999 and 1998.
Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
F-7
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash
In accordance with Western's borrowing agreement with Deutsche Financial
Services ("DFS"), Western has a cash account restricted by DFS for the purpose
of paying down the line of credit. Restricted cash included in the cash balances
totaled $724,000 and $865,000 at July 31, 1999 and 1998, respectively.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
based upon the first-in, first-out method for parts inventory and the specific
identification for equipment inventories.
Investment Securities
Investments in marketable debt securities represent primarily treasury
notes and are carried at market value as these investments have been classified
as available for sale securities at July 31, 1999 and 1998.
Property and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, ranging from 5 to 20
years. Expenditures for replacements and major improvements are capitalized.
Repairs and maintenance costs are expensed as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts; any gain or loss thereon is included in the
results of operations.
Intangible Assets and Investment in Unconsolidated Subsidiary
Intangible assets acquired in business acquisitions such as goodwill, and
noncompete agreements represent value to the Company. Intangibles are amortized
using the straight-line method over the assets' estimated useful lives ranging
from 20 to 40 years. Such lives are based on the factors influencing the
acquisition decision and on industry practice.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted cash
flows of the underlying assets. Adjustments are made if the sum of the expected
future net cash flows is less than book value.
Investments in unconsolidated subsidiary represents the Company's 38.5% and
47.6% ownership in IDF International, Inc. ("IDF") as of July 31, 1999 and 1998.
Net losses for IDF for the years ended July 31, 1999 and 1998 were approximately
$2,250,000 and $9,930,000. The loss for 1998 includes impairment of goodwill of
$7,500,000. Accordingly, the Company reduced its investment in unconsolidated
subsidiary by $866,000 and $4,727,000, representing the Company's share of such
loss during the years ended July 31, 1999 and 1998. In addition, because of
IDF's financial condition described more fully in Note 3, the Company has
written off its remaining investment in IDF of $95,000 for a total loss in
fiscal 1999 of $961,000.
F-8
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future consequences of temporary differences between the carrying
amounts for financial reporting purposes and the tax bases of assets and
liabilities.
Revenue Recognition
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Equipment rental and service revenue is generally
recognized over the period such services are provided.
Advertising Expense
Western expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1999, 1998 and 1997 was $311,000, $434,000
and $501,000, respectively.
Fair Value of Financial Instruments
The recorded amounts of cash and cash equivalents, accounts receivable,
short term borrowings, accounts payable and accrued liabilities as presented in
the consolidated financial statements approximate fair value based on the
short-term nature of these instruments. The recorded amount of long-term debt
approximates fair value as the actual interest rates approximate current
competitive rates. The fair value of marketable debt securities held
approximates the carrying value at July 31, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the fiscal
periods presented. Actual results could differ from those estimates.
Employee Stock Options
The Company accounts for stock based employee compensation plans under the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." This standard defines a fair value-based method
of accounting for these equity instruments. This method measures compensation
cost based on the value of the award and recognizes that cost over the service
period. The Company elected to continue using the rules of APB Opinion No. 25
and provides pro forma disclosures of net income and earning per share as if
Statement No. 123 had been applied.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
has been adopted by the Company during fiscal 1998. Applying the provisions of
the statement had no material effect on the Company's earnings per share
computations for the years ending July 31, 1999, 1998 and 1997.
F-9
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computations of basic and fully diluted
earnings per share for the years ending July 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerators:
Net loss from continuing operations..................... $ (5,054,000) $ (4,901,000) $ (9,078,000)
Dividend on preferred stock............................. - (24,000) (2,403,000)
---------- ------------- -----------
Net loss after preferred dividends...................... (5,054,000) (4,925,000) (11,481,000)
Discontinued operations................................. 1,989,000 (4,690,000) (15,776,000)
--------- ---------- -----------
Net loss ............................................... (3,065,000) (9,615,000) (27,257,000)
========== ========== ===========
Denominator:
Denominator for basic and diluted earnings per share -
Weighted average outstanding shares..................... 11,748,210 11,311,791 9,919,626
========== ========== =========
Basic and diluted earnings (loss) per share:
Loss from continuing operations........................... (0.43) (0.43) (1.16)
Income (loss) from discontinued operations................ 0.17 (0.42) (1.59)
---- ----- -----
Basic and diluted net loss per share...................... (0.26) (0.85) (2.75)
===== ===== =====
</TABLE>
Diluted and basic earnings per share are the same, since the inclusion of
common stock equivalents in the computation would be antidilutive.
Reclassifications
Certain reclassifications have been made to the fiscal year 1998 and 1997
financial statements to conform to the financial statement presentation for
fiscal 1999. Such reclassifications have had no effect on the Company's net loss
or shareholders' equity.
F-10
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
Distribution Business Acquisitions
On January 17, 1997 Western acquired the operating assets of Sahlberg
Equipment, Inc. ("Sahlberg"), a four-store Northwest distributor of noncompeting
lines of equipment with facilities in Kent, Washington, Portland, Oregon,
Spokane, Washington and Anchorage, Alaska. The purchase price for the assets of
Sahlberg was an aggregate of approximately $5,290,000, consisting of $3,844,000
for equipment inventory, $797,000 for parts inventories, $625,000 for fixed
assets, and $24,000 for work-in-process. The acquisition was accounted for as a
purchase.
On December 11, 1997, Western acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California. The acquisition was consummated for approximately $142,000 in cash,
$628,000 in installment notes payable to Case and the assumption of $1,175,000
in inventory floor plan debt with Case and its affiliates. The acquisition was
accounted for as a purchase.
On April 30, 1998, Western acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska. The
acquisition was consummated for approximately $4,766,000 in cash, the assumption
of approximately $2,786,000 in floor plan debt with Case and its affiliates, and
50,000 shares of Western's common stock. The acquisition was accounted for as a
purchase.
Technology acquisitions
During the year ended July 31, 1997, the Company acquired InterGlobe
Networks, Inc. and the assets of Seattle OnLine, Inc. These operations were
discontinued in the year ended July 31, 1998. See Note 9.
During August 1997 the Company merged TechStar Communications Corp, a
wholly owned subsidiary, into IDF, pursuant to an agreement and plan of merger
dated July 31, 1997 among the Company, IDF and an acquisition subsidiary of IDF
(the "IDF Merger Agreement"). Upon Consummation of the transaction, the Company
received 6,171,553 shares of IDF common stock, representing approximately 63% of
the then outstanding shares and approximately 58% of the fully diluted
outstanding IDF common stock, as a result of which, the Company was deemed to
have acquired IDF. In connection with the transaction,(i) all options granted by
the Company under employment agreements entitling Messrs. Kandel, Luciani and
Moskona to purchase an aggregate of 780,000 shares of the Company's common
stock, and all additional authorized but ungranted employee stock options for
120,000 shares were cancelled, (ii) Messrs. Kandel and Luciani tendered their
resignations as directors of the Company, (iii) each of Messrs. Kandel, Luciani
and Moskona publicly sold all but 174,900 of their remaining shares of Company
stock and utilized $600,000 of the net proceeds to invest in convertible
securities of IDF.
Messrs. Kandel, Luciani and Moskona were the senior executives and officers
of IDF and had 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, options to acquire IDF shares which vest based upon IDF and its
consolidating subsidiaries, including TechStar and Heyden Wegman, achieving all
or certain pro-rated portions of annual pre-tax income targets in each of fiscal
years ending July 31, 1998, 1999 and 2000. In the event that any or all of such
IDF Options do not vest, the number of shares of IDF common stock that would
have been issued upon the exercise of such IDF Options shall be issued to the
Company as additional merger consideration. In September 1998 Messr. Luciani
tendered his resignation with IDF. Messr. Kandel tendered his resignations in
January of 1999.
F-11
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Messrs. Robert M. Rubin and Lawrence Kaplan, the Chief Executive Officer
and Chairman of the Board and a Former Director of the Company, respectively,
are also principal stockholders and members of the board of directors of IDF and
were such prior to the consummation of the IDF merger. Pursuant to the terms of
the IDF Merger Agreement, Mr. Rubin converted an $800,000 loan previously made
to IDF into Preferred Series B stock of IDF which is convertible into 400,000
shares of IDF common stock. In addition, through GV Capital Inc., an affiliate
of Mr. Kaplan, IDF offered $3,000,000 of five year, 8.0% notes convertible into
IDF Series A Convertible Preferred Stock at 1.25 per share. $600,000 of such
notes were purchased by 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.
During the year ended July 31, 1998 IDF's five year Convertible Notes were
converted into 1,400,000 shares of IDF Series A Preferred Stock and 1,080,000
shares of IDF Convertible Series C Preferred stock at $1.25 per share.
The Series A, B and C Convertible Preferred Stock of IDF have voting rights
that are the same as IDF Common Stock, thus subsequent to the conversion of said
Notes, the Company owns 62% of the outstanding common stock, which represents
47.6% of the voting capital stock as of July 31, 1998. As a result of the
decrease in the ownership percentage by the Company to less than 50%, the
Company has accounted for the results of the operations of IDF using the equity
method of accounting effective as of August 1, 1997.
During the past two fiscal quarters, IDF has experienced a significant
decrease in revenue and has been unable to obtain further financing. As a
result, IDF has severe cash flow and other financial difficulties and is
pursuing alternative measures which include the possible sale of Hayden-Wegman,
its New York City based operating subsidiary.
Due to the circumstances described above and the uncertainty of recovery,
the Company has taken a full reserve against the advances of $992,000 made to
IDF this fiscal year and the remaining investment in IDF.
Pro Forma
The following unaudited pro forma summary combines the consolidated results
of operations as if the aforementioned acquisitions had been acquired as of the
beginning of each period presented, including the impact of certain adjustments.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Net sales............................ $ 173,414,000 $ 171,505,000
Net loss ........................... (9,654,000) (25,885,000)
Basic and diluted loss per share..... $ (.85) $ (2.61)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results of combined operations.
F-12
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31,
--------
1999 1998
---- ----
<S> <C> <C>
Parts ............................ $ 10,101,000 $ 8,535,000
Equipment new and used............... 56,967,000 64,956,000
---------- ----------
$ 67,068,000 $ 73,491,000
============= ==============
</TABLE>
5. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
JULY 31,
--------
1999 1998
---- ----
<S> <C> <C>
Machinery and equipment...................... $ 3,869,000 $ 3,236,000
Furniture and office equipment............... 2,291,000 2,309,000
Computer equipment........................... 1,299,000 1,146,000
Land......................................... 420,000 840,000
Building and leasehold improvements.......... 5,486,000 4,280,000
Vehicles .................................... 1,841,000 1,291,000
--------- ---------
.. 15,206,000 13,102,000
Less: Accumulated depreciation.............. (5,388,000) (4,407,000)
---------- ----------
Property plant & equipment, net.............. $ 9,818,000 $ 8,695,000
========== ==========
Rental equipment fleet....................... 36,395,000 23,080,000
Less: Accumulated depreciation.............. (5,029,000) -
----------- ----------
Rental equipment fleet, net.................. $ 31,366,000 $ 23,080,000
=========== ===========
Leased equipment fleet, net.................. $ 5,264,000 $ 2,760,000
=========== ===========
</TABLE>
F-13
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. BORROWINGS
The Company is in default on an unsecured note payable in the amount
of $1,500,000 to an unrelated third party. The note bore interest at 8%
through April 30, 1999. While in default, the note bears interest at 12%.
Western has inventory floor plan financing arrangements with Case
Credit Corporation, an affiliate of Case, for Case inventory and with other
finance companies affiliated with other equipment manufacturers. The terms
of these agreements generally include a one-month to six-month interest
free term followed by a term during which interest is charged. Principal
payments are generally due at the earlier of sale of the equipment or
twelve to forty-eight months from the invoice date.
In June 1997, Western obtained a $75,000,000 inventory flooring and
operating line of credit through DFS. The DFS credit facility is a
three-year, floating rate facility based on prime with rates between 0.50%
under prime to 1.00% over prime depending on the amount of total borrowing
under the facility. Amounts may be advanced against Western's assets,
including accounts receivable, parts, new equipment, rental fleet, and used
equipment. Interest payments on the outstanding balance are due monthly.
All floor plan debt is classified as current since the inventory to
which it relates is generally sold within twelve months of the invoice
date.
The following table summarizes the debt and inventory floor plan
financing arrangements:
<TABLE>
<CAPTION>
Maturity July 31,
Interest Rate Date 1999 1998
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Note Payable 8%(12% default 4/30/99 $1,500,000 $1,500,000
rate)
Case Credit Corporation Prime + 2% 8 - 48 17,128,000 11,038,000
(10.00%) months
Deutsche Financial Services Prime - 0.5% 12 - 36 70,883,000 75,886,000
(7.50%) months
Other variable 12 - 48 48,000 133,000
(8.00%-10.00%) months
----------- -----------
$89,559,000 $88,557,000
=========== ===========
</TABLE>
F-14
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At July 31, 1999, Western was in technical default of the leverage
covenant and the minimum tangible net worth covenant in the Deutsche
Financial Services Loan Agreement. Western asked for but did not obtain a
waiver letter as of July 31, 1999 and thereafter. There is no assurance
that Deutsche Financial Services will not call this debt at any time after
July 31, 1999. If DFS does call the debt, it will become immediately due
and payable in full. The amount due to Deutsche Financial Services is
therefore included as a current liability.
7. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................ $ (978,000) $ 1,227,000 $ (422,000)
State ............................. (156,000) 162,000 119,000
-------- ------- -------
(1,134,000) 1,389,000 (303,000)
Deferred:
Federal............................ 29,000 (32,000) (357,000)
State ............................. 4,000 (3,000) (43,000)
----- ------ -------
33,000 (35,000) (400,000)
------ ------- --------
$ (1,101,000) $ 1,354,000 $ (703,000)
=============== =============== ===============
</TABLE>
F-15
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal reasons for the variation from the customary
relationship between income taxes at the statutory federal rate and that
shown in the consolidated statement of income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... $ (2,009,000) $ 495,000 $ (2,797,000)
Valuation allowance........................................ 1,011,000 590,000 1,966,000
State income taxes, net of federal income tax benefit...... (152,000) 159,000 76,000
Other .................................................. 49,000 110,000 52,000
---------- ----------- -----------
$ (1,101,000) $ 1,354,000 $ (703,000)
</TABLE>
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JULY 31,
1999 1998
---- ----
<S> <C> <C>
Depreciation and amortization................ $ (837,000) $ (780,000)
Valuation allowance.......................... (5,387,000) (4,377,000)
---------- ----------
Gross deferred tax liabilities............... (6,224,000) (5,157,000)
---------- ----------
Inventory reserve............................ 918,000 775,000
Bad debt reserve............................. 282,000 261,000
Accrued vacation and bonuses................. 96,000 98,000
Other .................................... 482,000 532,000
Loss carryforwards........................... 4,107,000 3,186,000
Loss on Western initial public offering...... 131,000 131,000
Stock options................................ 782,000 782,000
------- -------
Gross Deferred Tax Assets.................... 6,798,000 5,765,000
--------- ---------
$ 574,000 $ 608,000
=============== ===============
</TABLE>
At July 31, 1999, the Company had federal income tax loss carryforwards of
$12,303,000 which will begin to expire in 2011. Utilization of such net
operating losses will be subject to annual limitations in the event of a change
in ownership of the Company of more than 50%.
F-16
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY
A total of 976,539 shares of the Company's Series B-1 convertible preferred
stock were issued in September 1996 in connection with the acquisition of
ConnectSoft, Inc. Such shares have a $3.50 per share liquidation value and are
convertible into shares of the Company's common stock at a conversion ratio of
one for one. Through the year ended July 31, 1999 a total of 550,869 shares were
converted to common stock at the ratio of one for one, leaving 425,670 shares
outstanding at July 31, 1999.
In January of 1997, the Company issued 400,000 shares of Series B-2
preferred stock in a private placement. Proceeds from the private placement
totaled $10,000,000. The Series B-2 preferred stock carried a $25 per share
liquidation preference over the Company's common stock, and paid a 7% cumulative
quarterly dividend in additional shares of Series B-2 preferred stock. As of
July 31, 1997, a total of 280,000 of the preferred shares had been converted
into approximately 2,031,000 common share at prices ranging from $3.31 to $3.80.
All of the remaining 120,000 preferred shares outstanding at July 31, 1997 were
converted into approximately 585,000 shares at a price of $5.37 per share in
September, 1997, leaving no shares outstanding at July 31, 1998.
The shares had provided for a discount conversion feature which has been
accounted for as an imputed dividend to the preferred shareholders. Total
dividend expense was $24,000 and $2,403,000 for the fiscal years ending July 31,
1998 and 1997, respectively. A total of $2,121,000 was recognized as a dividend
imputed by the discount conversion feature of the preferred shares for the year
ended July 31, 1997. All of the dividends were paid in additional shares of
common stock concurrent with the conversion of the preferred shares to common
stock.
In addition, purchasers of the preferred shares acquired 350,000 five-year
warrants at a purchase price of $.01 per warrant, entitling the holders to
purchase 350,000 shares of Company common stock at $8.58 per share.
On February 25, 1994, the Company completed a public offering of 920,000
units at $5.25 per unit, each unit consisting of one share of common stock, $.01
par value, and one redeemable common stock purchase warrant. Each warrant
entitled the holder to purchase one share of common stock until July 31, 1998,
at an exercise price of $7.50. During fiscal 1999, the exercise period for the
920,000 warrants was extended to July 31, 2001. The warrants are subject to
redemption by the Company at a redemption price of $.10 per warrant under
certain circumstances.
Western has been authorized to issue 10,000,000 shares of "blank check"
preferred stock, with respect to which all the conditions and privileges thereof
can be determined solely by action of Western's Board of Directors without
further action of its shareholders. As of July 31, 1999 none were issued and
outstanding.
F-17
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DISCONTINUED OPERATIONS
In April, 1998, the Company approved a formal plan to dispose of or close
down the remaining operations of the Technology Group of Companies including
Exodus Technologies, Connectsoft, Inc., Connectsoft Communications Corp. and
InterGlobe Networks, Inc. Although the results of these subsidiaries have
previously been included in the consolidated financial statements, the
subsidiaries operated as a separate line of business whose products, activities
and customers differed from other operations of the Company. Based upon this
determination, the results of operations of these subsidiaries have been
accounted for as discontinued operations and accordingly, their operating
results are segregated in the accompanying statements of operations.
In April 1999, IDF, the minority owned subsidiary of the Company
discontinued the operations of TechStar Communications, Inc. The Company has
therefore treated the operations of TechStar for the year ended July 31, 1997 as
discontinued, since during this time TechStar was a wholly owned subsidiary of
the Company.
Revenues for the Technology group of companies for the years ending July
31, 1999, 1998 and 1997 were $67,000, $2,108,000 and $6,415,000, respectively.
Sale of the assets of Connectsoft Communications Corporation
On July 10, 1998, the Company entered into an agreement to sell
substantially all of the assets of its Connectsoft subsidiary, including the
network operations center ("NOC") to eGlobe, Inc., formerly known as Executive
TeleCard, Ltd. ("eGlobe"). The agreement, as amended June 17 and September, 1999
provided consideration for the assets of eGlobe Convertible Preferred Stock
valued by the Company at approximately $2,000,000. eGlobe assumed approximately
$5,182,000 of Connectsoft liabilities and leases, of which approximately
$2,900,000 are lease obligations guaranteed by the Company. Although eGlobe will
be responsible for payment of those assumed liabilities, the assumption of such
liabilities will not relieve the Company from its guarantees until such
liabilities have been paid. The Company provided eGlobe with a working capital
loan of $500,000 secured by a promissory note. The Promissory note bears
interest at prime (8.0% at July 31, 1999) and is payable in 12 monthly
installments beginning September 1, 1999 or upon eGlobe achieving certain equity
or debt financing milestones as defined in the note. The Company and eGlobe are
presently negotiating revised payment terms.
For the year ending July 31, 1998, the net deferred gain of $1,480,000 had
been included under the caption Deferred gain on discontinued operations in the
accompanying consolidated balance sheets and the final gain on disposal of
$1,989,000 has been recognized in the accompanying consolidated statement of
operations for the year ended July 31, 1999.
F-18
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company and Western lease certain facilities and certain computer
equipment and software under non-cancelable lease agreements. As more fully
described in Note 14, the building portion of five of the Western's facility
leases qualify under SFAS 13 as "capital leases" (i.e., an acquisition of an
asset and incurrence of a liability). The remaining facility lease agreements
have terms ranging from month-to-month to nine years. Certain of the facility
lease agreements provide for options to renew and generally require the Company
to pay property taxes, insurance, and maintenance and repair costs. Total rent
expense under all operating leases aggregated $2,000,000, $1,833,000, and
$1,971,000 for the years ended July 31, 1999, 1998, and 1997, respectively. The
computer equipment lease expires August 1999 and meets certain specific criteria
to be accounted for as a capital lease.
Assets recorded under capital leases are as follows:
<TABLE>
<CAPTION>
JULY 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Capitalized asset value.................... $ 4,978,000 $ 3,036,000 $ 3,836,000
Less: Accumulated amortization............ (550,000) (315,000) (448,000)
-------- -------- --------
$ 4,428,000 $ 2,721,000 $ 3,388,000
=============== =============== ===============
</TABLE>
Future minimum lease payments under all non-cancelable leases as of July
31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
- -------------------- ------ ------
<S> <C> <C>
2000 ..........................................................................$ 442,000 $ 1,720,000
2001 ........................................................................... 459,000 1,374,000
2002 ........................................................................... 485,000 882,000
2003 ........................................................................... 510,000 726,000
2004 ........................................................................... 525,000 572,000
Thereafter..........................................................................8,875,000 6,642,000
---------- ---------
Total annual lease payments........................................................11,926,000 $ 11,916,000
===========
Less: Amount representing interest with imputed rates from 6% to 15%.............. 6,524,000
- -- ---------
Present value of minimum lease payments............................................ 4,772,000
Less: Current portion............................................................. 17,000
-----------
Long-term portion.................................................................$ 4,755,000
===========
</TABLE>
F-19
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Contingencies
The Company is guarantor on certain liabilities, including the capital
lease obligations assumed by eGlobe as described in Note 9.
Western issues purchase orders to Case Corporation for equipment purchases.
Upon acceptance by Case, these purchases become non-cancellable by Western. As
of July 31, 1999 the total of such purchase orders was $5,923,000.
The Company has entered into sales contracts under which the customer may
require the Company to repurchase equipment at specified dates and specified
prices. The Company records the proceeds from such sales contracts as deferred
lease income. The difference between the sale contract amount and the repurchase
obligation is recognized as revenue over the period of the repurchase
obligation. The remaining repurchase obligation is recorded as a sale if and
when the customer does not exercise the repurchase option. At July 31, 1999,
repurchase obligations aggregated $5,602,000.
Legal Proceedings
Except as set forth below, there are no pending material legal proceeds in
which the Company or any of its subsidiaries is a party, or to which any of
their respective properties are subject, which either individually or in the
aggregate, may have a material adverse effect on the results of operations or
financial position of the Company.
In May 1998, a lawsuit was filed on behalf of the Company in a purported
shareholder derivative action against Mr. Rubin and certain other directors of
the Company. In June 1998, a shareholder class action was filed against the same
directors.
On June 1, 1999 an agreement was entered into by all parties whereby the
class action was settled for $2,500,000 which is payable, net of costs, to
approved claimant shareholders. The settlement will consist of $600,000 in cash
from insurance proceeds and $1,900,000 in shares of Western Power common stock
owned by the Company. When the Western shares are distributed to the
stockholders, the Company will no longer own greater than 50% of Western, and
will account for Western using the equity method. In addition, on June 1, 1999
the derivative action was also settled for $2,800,000 which amount is payable by
Robert M. Rubin to the Company. This settlement consists of $1,100,000 from Mr.
Rubin's assignment of his rights to certain consulting payments from Hutchinson
Corporation and the transfer by Mr. Rubin to the Company of $1,700,000 of cash,
securities and notes in a brokerage account. Both settlement agreements were
approved by the court on August 23, 1999 and the settlements have been reflected
in the financial statements as of July 31, 1999. All amounts due from Mr. Rubin
to the Company pursuant to the derivative action settlement were received by
November 12, 1999 except for the Hutchinson payments, the receipt of which is
conditioned upon shareholder approval of the Hutchinson Transaction.
11. STOCK OPTION PLANS
The 1991 Employee Incentive Stock Option Plan (The "1991 Stock Option
Plan")
Key employees of the Company can receive incentive options to purchase an
aggregate of 750,000 shares of common stock at initial exercise prices equal to
100% of the market price per share of the Company's common stock on the date of
grant. The 1991 Stock Option Plan was approved by the Board of Directors and
shareholders in June 1991 and became effective from May 21, 1991. In the fiscal
year ending July 31, 1997, 126,550 options were granted to the principal
shareholder under this plan. No additional options were issued under this plan
in the fiscal years ending July 31, 1999 and 1998.
F-20
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 Employee Stock Option Plan (The "1996 Plan")
In April 1996, the Company's Board of Directors authorized and approved the
creation of the 1996 Plan for which two million shares of the Company's common
stock has been reserved. Concurrent with the 1996 Plan's adoption, options to
acquire 800,000 shares at an exercise price of $3.78 per share were granted to
the Company's principal shareholder and management. In May, 1996 options to
acquire an additional 250,000 shares at an exercise price of $5.25 were granted
to two other employees. All exercise prices represented the fair market value of
the Company's common stock on the date of grant. Options for 100,000 shares
granted at $5.25 have been canceled and options for 126,550 shares issued to the
principal shareholder at an exercise price of $3.78 have been canceled. The
250,000 shares issued to two other employees have been cancelled.
There were no additional options issued under the 1996 plan for the years
ending July 31, 1999 and 1998. During the year ended July 31, 1997, a total of
605,000 options were granted to employees under the 1996 Plan at prices ranging
from $4.375 to $5.125. All exercise prices represented the fair market value of
the Company's common stock on the date of grant. These options generally vest
one third upon issuance and one-third upon the first and second anniversary date
of the issuance. The life of the options issued under the 1996 plan is five
years from the date of the grant.
During the year ending July 31, 1998, certain of the consultants exercised
warrants at a price of $6.30, which resulted in the issuance of 57,600
additional shares of common stock and 57,600 publicly traded warrants.
Additionally, 50,000 options were exercised at a price of 4.75 resulting in the
issuance of 50,000 shares of common stock.
Pursuant to the acquisition of Connectsoft Inc., the Company granted
300,000 options at a price of $6.625. At July 31, 1999, a total of 15,000 of
these options remain outstanding. The decrease is due to the cancellation of
285,000 options.
Pursuant to the terms of a settlement agreement the Company issued 150,000
options in fiscal 1998 to non-employees resulting in a $300,000 charge which was
accrued in 1997, representing their estimated fair value using the Black Scholes
method of option valuation.
Western Stock Option Plan
In March 1995, the Company, as the sole shareholder of Western, approved
Western's 1995 Stock Option Plan, as previously adopted by the Board of
Directors (the "Plan"), under which key employees, officers, directors and
consultants of Western can receive incentive stock options and non-qualified
stock options to purchase up to an aggregate of 300,000 shares of common stock.
In December 1995, the shareholders amended the 1995 stock option plan to
increase the number of shares underlying the plan from 300,000 to 850,000
shares. In December 1996 the stockholders amended the 1985 stock option plan to
increase the number of shares underlying the plan to 1,500,000 shares. The Plan
provides that the exercise price of incentive stock options be at least equal to
100 percent of the fair market value of the common stock on the date of grant.
With respect to non-qualified stock options, the Plan requires that the exercise
price be at least 85 percent of fair value on the date such option is granted.
Upon approval of the Plan, Western's Board of Directors awarded non-qualified
stock options for an aggregate of 200,000 shares, all of which provide for an
exercise price of $6.50 per share. On December 28, 1995, the exercise price of
the options previously granted was lowered to $4.50 per share, the market price
as of that date. All options granted upon approval of the Plan are exercisable
commencing August 1, 1996 and expire on July 31, 2005.
F-21
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 1996, Western's Board of Directors approved the grant of an
additional 347,000 options to employees, directors and consultants of Western at
an exercise price of $4.375 per share, the market price as of the date of grant.
These options vest ratably over a two-year period commencing August 1, 1996.
In January, 1998, Western's shareholders approved an amendment to this plan
providing for the grant on August 1 of each fiscal year, a total of 5,000
options to each non-employee director of Western. The options have an exercise
price equal to the market price on the date of the grant and a term of 5 years
from the date of the grant.
During the fiscal year ended July 31, 1998 Western issued a total of
714,000 options at average exercise price of $4.62 and an expiration date of 5
years from the date of grant.
The following table includes option information for the Company's plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FAIR VALUE OF
NUMBER OF WEIGHTED OPTION
STOCK OPTION ACTIVITY SHARES EXERCISE PRICE GRANTED
--------------------- ------ -------------- -------
<S> <C> <C> <C>
July 31, 1996 1,705,000 $5.07
Options granted 3,015,000 5.79 $3.032
Options exercised (236,000) 3.57
Options canceled (346,000) 5.39
-------- ----
July 31, 1997 4,138,000 5.55
Options granted 150,000 6.50 2.000
Options exercised (50,000) 4.75
Options canceled (2,366,000) 5.97
---------- ----
July 31, 1998 1,872,000 4.55
Options granted - - -
Options exercised - -
Options canceled (190,000) 5.50
-------- ----
July 31, 1999 1,682,000 $4.48
========= =====
</TABLE>
F-22
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock options outstanding and exercisable
for the Company at July 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Range Shares Life Price Shares Price
- -------------------- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$3.13 to 3.78 857,000 1.8 $3.64 857,000 $3.64
$4.38 to 4.75 175,000 2.8 4.38 175,000 4.38
$5.13 to 5.50 407,000 2.2 5.16 407,000 5.16
$6.00 to 6.63 243,000 2.5 6.37 243,000 6.37
$3.13 to 6.63 1,682,000 2.0 4.48 1,682,000 $4.48
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for options
granted to employees and directors. If compensation cost for the Company's stock
option plans had been determined based on the fair value at the grant date for
awards in fiscal 1999 and fiscal 1998 in accordance with the provisions of SFAS
No. 123, the Company's net loss per share would have changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1999 1998
---- ----
<S> <C> <C>
Net loss, as reported...................................... $ (3,065,000) $ (9,615,000)
Net loss, pro forma........................................ $ (3,202,000) $ (10,284,000)
Net basic and diluted loss per share, as reported.......... $ (0.26) $ (0.85)
Net basic and diluted loss per share, pro forma............ $ (0.47) $ (0.91)
</TABLE>
F-23
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1999 1998
---- ----
<S> <C> <C>
Expected volatility........................ .79 .79
Risk-free interest rate.................... 6.11% 6.11%
Expected life of options in years.......... 5.0 5.0
Expected dividend yield.................... 0.00% 0.00%
</TABLE>
12. INTANGIBLE ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
JULY 31,
1999 1998
---- ----
<S> <C> <C>
Goodwill ..................................$ 2,952,000 $ 3,044,000
Non-compete agreement...................... - 42,000
Other assets............................... - 527,000
--------- ----------
$ 2,952,000 $ 3,613,000
========= ==========
</TABLE>
Goodwill is amortized over lives ranging from 20 to 40 years and the
non-compete agreement is amortized over 2 years.
F-24
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES INTANGIBLE ASSETS
The Company paid interest of $5,482,000, $5,221,000 and 4,307,000 during
the fiscal years 1999, 1998, and 1997, respectively. The Company received an
income tax refund of $834,000 during fiscal 1999, and paid $1,097,000 and
$1,621,000 in income taxes, net of refunds, during fiscal 1998 and 1997,
respectively.
In December 1997 a capital lease obligation of $397,000 was incurred by
Western when they entered into a 20 year lease for the Yuba City, California
facility.
In July 1997 a capital lease obligation of $292,000 was incurred by Western
when they entered into a lease for computer equipment and software.
In June 1997 a capital lease obligation of $680,000 was incurred by Western
when they entered into a 20 year lease for the Kent, Washington facility.
Western has consummated various acquisitions using, in part, the assumption
of notes payable and the issuance of Western common stock and notes payable.
Such non-cash transactions have been excluded from the statements of cash flows.
Capital lease obligations of $356,000 were incurred during the year ended
July 31, 1997 when the Company entered into various leases for computer hardware
and software.
14. RELATED PARTIES
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold by
Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, the
President and a director of Western, and Robert M. Rubin, the Chairman and a
director of Western. Simultaneous with its acquisition of the Sacramento
Operation real property and improvements, MRR leased such real property and
improvements to Western under the terms of a 20 year commercial lease agreement
dated March 1, 1996 with Western paying an initial annual rate of $168,000.
Under the lease, such annual rate increases to $192,000 after five years and is
subject to fair market adjustments at the end of ten years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
F-25
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 1, 1997, the real property and improvements used in connection with
the Sahlberg operation located in Kent, Washington, was purchased by
McLain-Rubin Realty Company II, LLC ("MRR II"), a Delaware limited liability
company, the owners of which are Messrs. C. Dean McLain, the President and a
director of Western, and Robert M. Rubin, the Chairman and a director of
Western. Simultaneous with its acquisition of the Kent, Washington, real
property and improvements, MRR II leased such real property and improvements to
Western under the terms of a 20-year commercial lease agreement dated June 1,
1997 with Western paying an initial annual rate of $205,000. Under the lease,
such annual rate increases to $231,000 after five years and is subject to
additional adjustments at the end of ten and fifteen years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
On December 11, 1997, the real property and improvements used in connection
with Case's Yuba City, California operation, was purchased by McLain-Rubin
Realty Company III, LLC ("MRR III"), a Delaware limited liability company, the
owners of which are Messrs. C. Dean McLain, the President and a director of
Western, and Robert M. Rubin, the Chairman and a director of Western.
Simultaneous with its acquisition of the Yuba City, California real property and
improvements, MRR III leased such real property and improvements to Western
under the terms of a 20-year commercial lease agreement dated effective December
11, 1997 with Western paying an initial annual rate of $54,000. Under the lease,
such annual rate increases to $59,000 after five years and is subject to
additional adjustments at the end of ten and fifteen years. In addition to base
rent, Western is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
In February, 1999, the real property and improvements used in connection
with Western's Sparks, Nevada operation and upon which such operation is
located, were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms of a
real property purchase and sale agreement. MRR is a Delaware limited liability
company the owners of which are Messrs. C. Dean McLain, the President and
Chairman of Western, and Robert M. Rubin, a director of Western. The sale price
was $2,210,000 in cash at closing. Subsequent to the closing of the sale,
Western entered into a 20-year commercial lease agreement with MRR for the
Sparks, Nevada facility at an initial rental rate of $252,000 per year with
increases at five, ten, and fifteen years resulting in a maximum annual rental
rate of $374,000. The present value of the minimum lease payments at the
commencement of the lease back transaction aggregated $3,052,000. The lease is a
net lease with payment of insurance, property taxes and maintenance costs paid
by Western. The sale resulted in a deferred gain which will be amortized over
the life of the lease pursuant to generally accepted accounting principles. In
accordance with SFAS 13, the building portion of the lease is being accounted
for as a capital lease (see Note 10) while the land portion of the lease
qualifies for treatment as an operating lease.
F-26
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between
the Company and ERD Waste Corp. ("ERD"), the Company agreed to provide certain
financial accommodation to ERD by making available a $4.4 million standby letter
of credit expiring May 31, 1998 issued by Citibank, N.A. in favor of Chemical
Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the principal
lender to ERD and its subsidiaries, and upon issuance of the Letter of Chase
Bank (formerly Chemical Bank) made available $4.4 million of additional funding
to ERD under ERD's existing lending facility. 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 23.0% of the outstanding ERD Common Stock.
In consideration for making the Letter of Credit available, in addition to
repayment by ERD of all amounts drawn under the Letter of Credit and the grant
of a security interest in certain machinery and equipment of ENSA to secure such
repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs
and expenses in connection with making the Letter of Credit available, as well
as the amount of all interest paid by the Company on drawings under the Letter
of Credit prior to their repayment by ERD.
In September 1996, a subsidiary of ERD which operated a waste facility in
Nassau County, New York was cited by the New York State Department of
Environmental Conservation ("DEC") for violating certain DEC regulations. Such
waste facility had accounted for approximately 13% of ERD's consolidated
revenues. The Company has been advised by ERD that under the terms of a
Settlement Agreement reached with the State of New York in November 1996, all
violations alleged by the DEC have been resolved in consideration for, among
other things, ERD's agreement to voluntarily cease incineration operations at
the waste facility on or before March 31, 1997. Such incineration operations
ceased on April 15, 1997.
On November 8, 1996, the Company and ERD amended and restated their
agreements to provide that if and to the extent that the Letter of Credit
provided by the Company is called for payment, ERD will issue to the Company its
convertible note bearing interest at 12% per annum, payable monthly, and payable
as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's
receipt of the initial proceeds from any public or private placement of debt or
equity securities of ERD, or (iii) completion of any bank refinancing by ERD, to
the extent of all proceeds available after payment of other secured
indebtedness. In addition, the ERD notes, if issued, will be convertible, at any
time at the option of the Company, into ERD Common Stock at a conversion price
equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire
$4.4 million note is issued and converted into ERD Common Stock. In addition to
the collateral provided under the May 30, 1996 agreement, ERD also provided the
Company with a junior mortgage on the waste facility owned by ERD's subsidiary,
subordinated to existing indebtedness encumbering such facility.
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M.
Rubin agreed to indemnify the Company for all losses, if any, incurred by the
Company as a result of issuance of the Letter of Credit for the benefit of ERD.
In consideration of his negotiating the modification of the ERD agreement, on
November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed
to amend the indemnity agreement with Mr. Rubin to limit his contingent
liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage
beneficial ownership in the outstanding Company Common Stock as of May 30, 1996)
of all losses that the Company may incur in connection with its having provided
the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's
reimbursement obligations are also subject to pro rata reduction to the extent
of any repayments made directly by ERD or from proceeds received by the Company
from the sale of ERD capital stock described above.
F-27
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February of 1997, the Company loaned $500,000 to ERD Waste Corp. The
loan was secured by a short term note bearing interest at 2% above the prime
lending rate of the Company's commercial bank (8.5% at April 30, 1997) and a
second collateral and security position on all accounts receivable of ERD
subject to the primary collateral position held by Chase Bank and was personally
guaranteed by Mr. Rubin. Principal together with accrued interest was due
October 5, 1997.
In September 1997 ERD filed for protection from creditors under Chapter 11
of federal bankruptcy laws. In October, 1997 Chemical bank drew the $4.4 million
available on the standby letter of credit. As a result, the Company recorded a
loss of approximately $5.0 million, related to the February Note and the
September letter of credit. Mr. Rubin had personally guaranteed approximately
$1.6 million of the ERD loss.
On June 28, 1996 the Company entered into a credit agreement with Mr. Rubin
pursuant to which Mr. Rubin delivered a demand promissory note for up to
$1,200,000 and payment in full was due July 31, 1998. Mr. Rubin's indebtedness
was secured by his pledge of 150,000 shares of company common stock and his
collateral assignment of all payments to him under the terms of his consulting
and non-competition agreements with Hutchinson, in the aggregate amount of
$1,200,000. Such collateral assignment was converted to a payment rights
assignment agreement in July 1998 calling for Hutchinson to make all payments
pursuant to Mr. Rubin's consulting and non-competition agreement directly to the
company. Simultaneously the due date of the note was extended from July 31, 1998
to the earlier of shareholder approval of the Hutchinson transaction or July 31,
1999. On June 1, 1999 all payments due to Mr. Rubin pursuant to the consulting
agreement were formally assigned to the Company as part of the derivative action
settlement. Shareholder approval of the Hutchinson transaction is required in
order for the Company to receive these payments and a proposal calling for such
approval will be included in the fiscal 1999 proxy and voted upon at the fiscal
1999 shareholders' meeting.
As of July 31, 1998 the Company owned 50,000 shares of common stock in a
publicly traded company that Mr. Rubin serves as a director and holds a minority
interest.
15.EMPLOYEE SAVINGS PLAN
The Company has a voluntary savings plan pursuant to Section 401(k) of the
Internal Revenue Code, whereby eligible participants may contribute a percentage
of compensation subject to certain limitations. The Company has the option to
make discretionary qualified contributions to the plan, however, no Company
contributions were made for fiscal 1999, 1998 or 1997.
16. SEGMENT INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," which requires the reporting of certain financial
information by business segment. For the purpose of providing segment
information, management believes that all of the Company's operations consist of
one segment. However, the Company evaluates performance based on revenue and
gross margin of three distinct business components. Revenue and gross margin by
component are summarized as follows:
F-28
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Business Component Year Ended Year Ended Year Ended
Net Revenues July 31, 1999 July 31, 1998 July 31, 1997
- ------------ ------------- ------------- -------------
<S> <C> <C> <C>
Equipment Sales $ 98,450 $112,061 $102,349
Equipment Rental 25,771 13,389 12,464
Product Support 39,429 38,028 33,317
------ ------ ------
Totals $ 163,650 $163,478 $148,130
========= ======== ========
Gross Margins
Equipment Sales $2,591 $8,334 $7,172
Equipment Rental 5,017 3,555 2,046
Product Support 6,986 7,287 6,652
----- ----- -----
Totals $14,594 $19,176 $15,870
======= ======= =======
</TABLE>
F-29
<PAGE>
AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II
AMERICAN UNITED GLOBAL INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
Accounts Receivable Reserve:
<S> <C> <C> <C> <C> <C>
Fiscal year ended July 31, 1999 $726,000 $732,000 $ --- $(734,000) $724,000
Fiscal year ended July 31, 1998 807,000 825,000 --- (906,000) 726,000
Fiscal year ended July 31, 1998 652,000 875,000 285,000 (1,005,000) 807,000
Inventory Reserve:
Fiscal year ended July 31, 1999 2,833,000 884,000 --- (1,204,000) 2,513,000
Fiscal year ended July 31, 1998 1,597,000 1,734,000 --- (498,000) 2,833,000
Fiscal year ended July 31, 1997 1,212,000 598,000 --- (293,000) 1,597,000
</TABLE>
F-30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Officers, Directors and Key Employees
The following table sets forth information with respect to directors,
nominees for directors, executive officers and key employees of the Company as
of November 1, 1999. Except for matters discussed in Item 3 of this Annual
Report, there are no pending legal proceedings to which any director, nominee
for director or executive officer of the Company is a party adverse to the
Company.
Name Age Position
- ---- --- --------
Robert M. Rubin 59 Chairman of the Board of Directors, President
and Chief Executive Officer
C. Dean McLain 44 Director and Executive Vice President of the
Company; President and Chief Executive
Officer of Western
Howard Katz 56 Executive Vice President, Chief Operating
Officer and Director
David M. Barnes 56 Vice President of Finance, Chief Financial
Officer and Director
Robert M. Rubin. Mr. Rubin has served as the Chairman of the Board of
Directors of the Company since May 1991, and was its Chief Executive Officer
from May 1991 to January 1, 1994. Between October 1990 and January 1, 1994, Mr.
Rubin served as the Chairman of the Board and Chief Executive Officer of the
Company and its subsidiaries; from January 1, 1994 to January 19, 1996, he
served only as Chairman of the Board of the Company and its subsidiaries. From
January 19, 1996 to the present, Mr. Rubin has served as Chairman of the Board,
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 was Chairman of the Board, Chief Executive Officer and is 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 ("ACC"), a public
company formerly engaged in providing on-site health care services, including
intra-dermal infusion therapies. In April 1995, ACC, operating subsidiaries made
assignments of their assets for the benefit of creditors without resort to
bankruptcy proceedings. Mr. Rubin is also the Chairman of the Board of both
Western and IDF, a publicly held company of which the Company is a minority
stockholder. The Company owns approximately 60.6% of the outstanding common
stock of Western. Mr. Rubin owns approximately 13% of the fully-diluted IDF
common stock. Mr. Rubin is also a director and minority stockholder of Diplomat
Direct Marketing Corporation, a public company principally engaged in the
women's apparel catalog retailing business and Med-Emerg, Inc., a publicly-held
Canadian management company for hospital emergency rooms and out-patient
facilities.
33
<PAGE>
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 functioned as the chief financial officer
of the Company since May 15, 1996, and has been a director since November 8,
1996. Mr. Barnes is also presently the chief financial officer of Nextron
Communications, a privately-held Internet yellow pages designer and developer
based in San Jose, CA, and of Interactive Imagination, Inc., a privately-held
start-up video game developer based in Seattle, WA. Mr. Barnes served as a
Director of Universal Self Care, Inc., a distribution and retailer of products
and service principally for diabetes from May 1991 to June 1995. Mr. Barnes is a
director, the President and a minority stockholder of ACC. In April 1995, ACC's
operating subsidiaries made assignments of their assets for the benefit of
creditors without resort to bankruptcy proceedings.
Howard Katz. Mr. Katz has been Executive Vice President of the Company
since April 15, 1996. From December 1995 through April 15, 1996, Mr. Katz was a
consultant for, and from January 1994 through December 1995 he held various
executive positions, including Chief Financial Officer from December 1994
through December 1995, with National Fiber Network (a fiber optics
telecommunications company). From January 1991 through December 1993, Mr. Katz
was the President of Katlaw Construction Corp., a company that provides general
contractor services to foreign embassies and foreign missions located in the
United States. Prior to joining Katlaw Construction Corp., Mr. Katz was employed
as a management consultant by Coopers and Lybrand, LLP and as a divisional
controller for several large public companies.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the amount of all compensation paid by the
Company for services rendered during each of the three fiscal years of the
Company ended July 31, 1999, 1998, and 1997 to each of the Company's most highly
compensated executive officers and key employees whose total compensation
exceeded $100,000, and to all executive officers and key employees of the
Company as a group.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS
------
NAME AND FISCAL SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
PRINCIPAL YEAR ($) ANNUAL STOCK UNDER-LYING PAYOUTS COMPEN-SATION
POSITION COMPEN-SATIONAWARD(S) OPTIONS/ ($) SATION ($)
- -------- ----- ------- ------- --------------------- -------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($) ($) SARS(#)
Robert M. Rubin 1999 375,000 -0- -0- -0- -0- -0- -0-
Chairman, 1998 350,000 -0- -0- -0- -0- -0- -0-
President and 1997 325,000 -0- -0- -0- -0- -0- -0-
Chief Executive
Officer
Howard Katz 1999 91,738 -0- -0- -0- -0- -0- -0-
Executive Vice- 1998 197,000 -0- -0- -0- -0- -0- -0-
President and 1997 131,968 -0- -0- -0- 200,000 -0- -0-
Director
David M. Barnes 1999 127,000 -0- -0- -0- -0- -0- -0-
Chief Financial 1998 156,000 -0- -0- -0- -0- -0- -0-
Officer and 1997 129,807 -0- -0- -0- 100,000 -0- -0-
Director
C. Dean McLain (1) 1999 290,000 -0- -0- -0- -0- -0- -0-
Executive Vice 1998 280,000 68,935 -0- -0- -0- -0- -0-
President and 1997 268,587 18,658 -0- -0- -0- -0- -0-
Director;
President of
Western
</TABLE>
(1) Paid by Western.
35
<PAGE>
STOCK OPTION PLANS
Option Grants in Fiscal Year 1999
No options were issued in fiscal year 1999.
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
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on Value at FY-End at FY-End
Name Exercise (#) Realized Exercisable Exercisable
Robert Rubin -0- -0- 560,000 $0
Howard Katz -0- -0- 350,000 $0
David Barnes -0- -0- 200,000 $0
C. Dean McLain -0- -0- 233,000 $0
Employment, Incentive Compensation and Termination Agreements
Robert M. Rubin
Mr. Rubin is employed by the Company as the Chairman of the Board of
Directors of the Company and of its subsidiaries. Mr. Rubin is so employed
pursuant to an amended and restated employment agreement, dated as of June 3,
1998 (the "Restated Agreement") for a term expiring July 31, 2001. The Restated
Agreement was amended in connection with the initial public offering of Western
(the "Western IPO"). 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 Mr. Rubin). 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, as adjusted for any 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 City
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 (the
"Consolidated Net Income") of the Company, including all of its consolidated
subsidiaries other than Western, as determined by the Company's independent
auditors using generally accepted accounting principles, consistently applied,
is greater than or equal to $2,000,000 for Fiscal 1997; (ii) $100,000 on
November 1, 1998 if the Consolidated Net Income is greater than or equal to
$2,500,000 for Fiscal 1998; and (iii) $125,000 on November 1, 1999 if the
Consolidated Net Income is greater than or equal to $3,000,000 for Fiscal 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 (other than Mr. Rubin).
36
<PAGE>
Following the amendment of Mr. Rubin's employment agreement with the
Company, which is now in effect as the Restated Agreement, Western entered into
a separate employment agreement with Mr. Rubin, effective June 14, 1995 and
which expired on July 31, 1998. Pursuant to such agreement, Mr. Rubin served as
Chairman of the Board of Western and received 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 below) 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.
John Shahid
John Shahid is the former president, Chief Executive Officer and director
of the Company. Upon the closing of the Hutchinson Transaction on January 19,
1996, the Company entered into a termination agreement with Mr. Shahid whereby
he resigned as an officer and director of the Company and its subsidiaries and
received severance payments totaling $815,833. These payments represented salary
payments under his employment agreement through December 31, 1998, as well as a
bonus payment for Fiscal1996 in the amount of $90,000. This agreement also
provided that the Company retained Mr. Shahid as a consultant for two years
ending April 1, 1998, for which he was paid an aggregate of $200,000 in equal
quarterly installments.
C. Dean McLain
C. Dean McLain serves as the President and Chief Executive Officer of
Western pursuant to a ten-year employment agreement expiring July 31, 2005. This
employment agreement superseded Mr. McLain's earlier employment agreement with
the Company, which is further described below and which was terminated upon the
execution of his employment agreement with Western. Pursuant to such agreement,
Mr. McLain received 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 and $290,000 per annum in Fiscal 1999 and will receive $300,000 per
annum in Fiscal 2000. For each of the fiscal years ending 2001, 2002, 2003, 2004
and 2005, 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 has been
entitled to receive bonus payments in each of the fiscal years from Fiscal 1996
through and including Fiscal 2000, inclusive, equal to five percent (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
Western'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.
37
<PAGE>
Under the terms of his amended employment agreement, the 150,000 stock
options exercisable at $6.50 per share awarded in March 1995 to Mr. McLain under
Western's 1995 Stock Option Plan 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. These options were subsequently repriced at $4.50 per share in December
1995. The grant of all stock options to Mr. McLain pursuant to his amended
employment agreement was ratified at Western's 1995 Annual Meeting. 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 years from Fiscal 1996 through and including Fiscal 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 during the
nine -year period 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.
Prior to the Western IPO, C. Dean McLain served as President and Chief
Executive Officer 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. Such agreement entitled
Mr. McLain to scheduled increases in his base salary up to $172,300 per year
during the fiscal year ending July 31, 1998. The terms of such employment
agreement also provided for the issuance to Mr. McLain of an aggregate of 20,000
shares of the Company's Common Stock at $.01 per share. In addition, Mr. McLain
received options to acquire an aggregate of 45,000 shares of the Company's
Common Stock at fair market value ($4.75 per share) on the date of grant under
the Company's 1991 Stock Option Plan, and additional options under the Company's
1991 Stock Option Plan to purchase 150,000 shares of Company Common Stock at
fair market value ($5.50 per share) on the date of grant. These options have
since been repriced to $3.125 per share.
Howard Katz
Howard Katz is an Executive Vice President and a director of the Company.
Mr. Katz is presently receiving severance payments of approximately $75,000
annually, plus benefits, under a severance agreement which provides for payments
over a three-year period ending July 31, 2001. Prior to July 31, 1998, Mr. Katz
served as the Company's Executive Vice President since April 15, 1996 and
received an annual base salary of $185,000 through July 31, 1998.
David M. Barnes
David M. Barnes is a director of the Company and functions as its Chief
Financial Officer. In Fiscal 1999 Mr. Barnes received a base salary of $50,000
plus severance payments aggregating $75,000 and certain executive benefits. In
Fiscal 2000 Mr. Barnes will continue in these capacities with a base salary of
$75,000 plus certain executive benefits. Between May 15, 1996 and July 31, 1998
Mr. Barnes served as the Company's Chief Financial Officer and received an
annual salary of $150,000.
38
<PAGE>
Amended Employee Stock Option Plans
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 original 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. The
amended plans extended the options' expiration dates and permitted all options
to vest upon consummation of the Hutchinson Transaction. 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 so amend the Plans. All of these options granted under the
Plans were exercisable through January 19, 1998 (two years after the closing
date of the Hutchinson Transaction) at which time any unexercised options held
by terminated employees expired, and options held by retained Company employees
reverted 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, such that upon exercise,
these options shall be treated as non-qualified stock options for tax purposes.
As a result of such option exercise period extension, the Company incurred an
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 closing bid price of the Common
Stock on January 19, 1996 (the closing date of the Hutchinson Transaction and
the effective date of the option extension).
Compensation Committee Interlocks and Insider Participation
During Fiscal 1998 and Fiscal 1999 the Board of Directors' Compensation
Committee (the "Compensation Committee") did not meet. 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 determined by his employment agreements executed in August 1994, and
his amended and restated employment agreement dated as of June 3, 1996, which
were both approved by the Board of Directors. In June 1995, following completion
of Western's IPO, 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 for each of Fiscal 1996 and Fiscal 1997, and make it
payable only if Consolidated Net Income of the Company exceeded $1,500,000 in
each fiscal year. For information concerning Mr. Rubin's June 1996 amended and
restated employment agreement, see "Employment, Incentive Compensation and
Termination Agreements." Mr. Rubin also entered into a separate employment
agreement with Western. Mr. McLain's annual compensation was set by his amended
employment agreement with Western. See "Employment, Incentive Compensation and
Termination Agreements."
During Fiscal 1998 and Fiscal 1999, other than Messrs. Rubin and McLain,
who during such time were officers and members of the Board of Directors, no
officers or employees of the Company or any subsidiary participated in the
Board's compensation decisions. In Fiscal 1998 and Fiscal 1999, other than Mr.
Rubin, no Compensation Committee member was an officer or employee of the
Company or any of its subsidiaries. While Mr. Rubin serves on the Compensation
Committees of the Boards of Directors of other publicly held corporations, no
executive officers or directors of such companies serve on the Company's
Compensation Committee. The Company's Audit, Compensation and Stock Option
Committees are presently each comprised of Messrs. Rubin and Katz.
39
<PAGE>
No director of the Company is paid to attend Board meetings, although they
are reimbursed for their actual expenses.
Upon the closing of the Hutchinson Transaction in January 1996, 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 is to 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 was to receive
payments aggregating $1,000,000. Such payments are pledged as collateral by Mr.
Rubin for his $1,200,000 loan. No payments have or will be made to Mr. Rubin
under his agreements with Hutchinson, unless and until the Hutchinson
Transaction and such payments are ratified by the Company's stockholders at a
special Meeting or any subsequent special or annual meeting of Company
stockholders. These payments are also necessary to effectuate the settlement of
the Derivative Action.
Transactions with Diplomat Corporation
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.
Transactions with ERD Waste Corp.
The Company has incurred a loss of approximately $5,000,000 as a result of
certain transactions it entered into with ERD Waste Corp. ("ERD") in Fiscal
1997. On September 30, 1997, ERD filed for reorganization under Chapter 11 of
the federal bankruptcy laws. The Company has recorded a $5,000,000 net loss in
connection with these transactions, which included making available for ERD's
benefit a $4,400,000 letter of credit and making an additional $500,000 loan,
for Fiscal 1997.
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, and owns approximately 25.1% of the
outstanding ERD Common Stock.
40
<PAGE>
Pursuant to an agreement dated May 30, 1996 (the "ERD Agreement") between
the Company and ERD, the Company agreed to provide certain financial
accommodations to ERD by making available a $4,400,000 standby letter of credit
(the "Letter of Credit") originally issued by Citibank, N.A. ("Citibank") and
later assumed by North Fork Bank in favor of Chase Bank ( "Chase Bank") on
behalf of ERD. Chase Bank was the principal lender to ERD and its subsidiaries,
and upon issuance of the Letter of Credit, Chase Bank made available to ERD
$4,400,000 of additional funding 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. In
consideration for the Company making the Letter of Credit available, ERD agreed
that, in addition to repaying all amounts drawn under the Letter of Credit and
granting to the Company a security interest in certain machinery and equipment
of ENSA to secure such repayment, it would (i) pay all the Company's fees, costs
and expenses payable to Citibank, N.A. and others in connection with making the
Letter of Credit available, as well as all interest paid by the Company on
monies drawn upon the Letter of Credit prior to repayment by ERD, and (ii) 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. Pursuant to the foregoing
agreement, ERD paid nothing in fees and expenses to Citibank on behalf of the
Company, but issued 100,000 shares of ERD Common Stock to the Company. ERD
Common Stock was then traded on the NASDAQ National Market and, at the time of
closing of the transaction with ERD, the closing price of ERD Common Stock, as
traded on NASDAQ was $9.25 per share.
Under the terms of an indemnity agreement, dated May 30, 1996, Robert M.
Rubin agreed to indemnify the Company for any and all of its losses resulting
from issuance of the Letter of Credit to 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 any and all losses
incurred by the Company in connection with the Letter of Credit to ERD. Mr.
Rubin's reimbursement obligations are also subject to pro rata reduction to the
extent of any repayments made directly by ERD or from proceeds received by AUGI
from the sale of ERD capital stock described above. In addition, Mr. Rubin
personally guaranteed the $500,000 additional advance from the Company to ERD.
In August 1996, a subsidiary of ERD that operated a waste facility in Long
Beach, New York was cited by the New York State Department of Environmental
Conservation ("DEC") for violating certain DEC regulations. ERD and the DEC
reached an agreement in November 1996 to settle such violations, which resulted
in the closing of the Long Beach, New York facility on April 15, 1997. 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 Company demands payment
on the Letter of Credit, ERD will issue to the Company its $4,400,000 principal
amount 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
$4,400,000 principal amount of the convertible note is issued and converted into
ERD Common Stock. In addition to the collateral provided under the ERD
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.
41
<PAGE>
In February 1997, the Company advanced an additional $500,000 to ERD,
payable on demand (the "Advance Loan").
The Advance Loan is secured by a short-term promissory note, due October 5,
1997, bearing interest at two percent (2%) above the prime lending rate of the
Company's commercial bank (which was 8.5% on April 30, 1997) and a second
collateral and security position on all accounts receivable of ERD, subject to
the priority interests of Chase Bank.
On September 30, 1997, ERD filed for reorganization under Chapter 11 of the
federal bankruptcy laws. On October 29, 1997, Chase Bank drew $4,400,000 from
the Letter of Credit. As a result, the Company became liable to North Fork Bank,
the issuer of the Letter of Credit, for such amount, 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 $5,000,000 of claims
and a lien on certain ERD assets. However, the federal bankruptcy courts will
not sustain or honor this lien on the basis of the common control between the
Company and ERD resulting from Mr. Rubin's offices with each. If the lien is not
sustained, the Company will be only a general unsecured creditor of ERD. As a
result of the foregoing development, the Company recorded a $5,000,000 net loss
in connection with the Letter of Credit and Advance Loan to ERD 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 proceedings or otherwise, Mr.
Rubin has agreed to personally indemnify the Company for the first $1,600,000 of
such loss.
The Company's 1996 Stock Option Plan
As of November 1, 1999, the directors and executive officers listed below
hold outstanding non-qualified options to acquire shares of Common Stock granted
under the Company's 1996 Stock Option Plan, adopted on April 25, 1996 and
amended as of July 30, 1996 (the "1996 Plan"), as follows:
<TABLE>
<CAPTION>
Recipient Date of Grant Number of Options (3) Exercise Price (1)(2)
- --------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Robert M. Rubin April 25, 1996 450,000 $3.78125
October 4, 1996 30,000 $5.125
C. Dean McLain April 25, 1996 150,000 $3.78125
Howard Katz April 25, 1996 150,000 $3.78125
October 4, 1996 100,000 $5.125
May 21, 1997 100,000 $4.375
David M. Barnes May 15, 1996 100,000 $5.25
October 4, 1996 50,000 $5.125
May 21, 1997 50,000 $4.375
</TABLE>
(1) The exercise prices of all options equal the average of the closing bid and
ask prices of the Common Stock as reported on the NASDAQ National Market on
the date of grant.
(2) As the market value of the Common Stock underlying options issued under the
1996 plan (measured as the average of the closing bid and ask price) on
November 4, 1999, which was $0.23 per share, none of the foregoing options
issued under the 1996 Plan (including unexercisable options) are
"In-the-money."
(3) These options are fully exercisable.
42
<PAGE>
On July 30, 1996, the Board of Directors amended the terms of the 1996
Stock Option Plan to make all options granted thereunder exercisable without
stockholder approval. On that date the market price of the Company's Common
Stock was $6.0125 per share. As a result of the amendment, the Company incurred
a compensation charge equal to $1,670,667, representing the aggregate value of
such unexercised in-the-money (i.e., options for which the market price of the
underlying Common Stock is above the exercise price) 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 are fully vested. The options to
acquire 156,550 shares granted to Mr. Rubin and 50,000 shares granted to Mr.
Barnes in October 1996 are fully vested.
In June 1996, the Company agreed to loan 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 demand and in no
event later than July 31, 1998. Mr. Rubin's indebtedness is secured by his
pledge of 150,000 shares of Common Stock and his assignment of all payments due
to him under his Consulting Agreement and Non-Competition Agreement with
Hutchinson, which currently aggregate $1,200,000.
Mr. 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, and including Mr. Rubin's
conversion of an $800,000 loan previously made to IDF into preferred stock
convertible into an additional 400,000 shares of IDF common stock. Subsequent
the IDF Merger, Mr. Rubin has served as Chairman of the Board of Directors of
IDF and has also received a three year employment agreement from IDF at an
annual salary of $75,000.
The Company has agreed to provide up to $1,000,000 in financing to IDF, a
minority-owned subsidiary. As of June 18, 1999, the Company had provided IDF
with $992,000. These funds were used for working capital, the payment of certain
delinquent taxes and other liabilities of Hayden Wegman, an IDF subsidiary, and
costs related to the discontinuation of operations of TechStar. The Company has
now taken a full reserve against the $992,000 in advances to IDF due to IDF's
significant decrease in revenue and its inability to obtain further financing,
which have made recovery uncertain.
Lawrence Kaplan, a former 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.
The Company's 1991 Stock Option Plan
As of November 1, 1999 certain directors and executive officers of the
Company hold outstanding non-qualified options granted under the Company's 1991
Stock Option Plan (the "1991 Plan") to acquire an aggregate of 289,550 shares of
Common Stock.
The Company granted to Mr. McLain options to purchase 38,000 shares of
Common Stock at $3.125 per share and options to purchase 45,000 shares of Common
Stock at $4.875 per share, under the 1991 Plan. All such options are fully
exercisable.
The Company granted to Mr. Rubin options to purchase 80,000 shares of
Common Stock at $3.125 per share and options to purchase 126,550 shares at
$5.125 per share. All such options are fully exercisable.
43
<PAGE>
Compensation Committee Report On Executive Compensation
The Board of Directors believes that offering its senior executive officers
employment agreements is 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. During Fiscal 1998, Messrs.
Rubin and McLain were both under contract with the Company (Mr. McLain was no
longer under contract as of and since July 23, 1998). The Board believes this
enabled it to concentrate on negotiating particular employment contracts rather
than establishing more general compensation policies for all management and
other personnel. 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 employed under a contract approved by
the full Board of Directors. See "Executive Compensation-Employment, Incentive
Compensation and Termination Agreements." Upon the effective date of the Western
IPO 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."
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 the Company's performance and industry compensation
standards. A significant percentage of the compensation paid to each of Messrs.
Rubin and McLain under their respective employment agreements 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 each such executive is responsible. See
"Employment, Incentive Compensation and Termination Agreements," above.
Compliance with Section 16(a) of the Exchange Act.
To the knowledge of the Company, no officers, directors, beneficial owner
of more than 1 percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended July 31, 1999.
44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 1, 1999
with respect to the beneficial ownership of the Common Stock of the Company by
each beneficial owner of more than five percent (5%) of the total number of
outstanding shares of the Common Stock of the Company, each director and all
executive officers and directors of the Company as a group. Unless otherwise
indicated, the owners have sole voting and investment power with respect to
their respective shares. The table does not include options or SARs that have
not yet vested or are not exercisable within 60 days of the date hereof.
<TABLE>
<CAPTION>
Name and Address* Number of Shares Percentage of
of Beneficial Owner Office(s) Beneficially Owned(1) Common Stock (1)
- ------------------- --------- --------------------- ----------------
<S> <C> <C> <C>
Robert M. Rubin Director, President, Chief 782,798 (2)(3)(7)(9) 6.3
Executive Officer
C. Dean McLain Director, Executive 233,000 (4)(5) 1.9
4601 N.E. 77th Avenue Vice-President and
Suite 200 President of Western
Vancouver, WA 98662 Power and Equipment Corp.
("Western")
Howard Katz Executive Vice President 350,000 (6)(8) 2.9
and
Director
David M. Barnes Vice President of Finance 200,000 (6)(8) 1.6
and Director (6)(8)
Rubin Family Irrevocable
Stock Trust 1,025,000(7) 8.8
25 Highland Blvd. --------- ------
Dix Hills, NY 11746
All Directors and Executive 1,565,798 (2)(3)(5)(6)(9) 11.8
========= ====
Officers as a Group (4 persons)
</TABLE>
45
<PAGE>
* Unless otherwise indicated, the address of each such beneficial owner is
11130 NE 33rd Place, Bellevue, WA 98004.
(1) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding
for the purposes of computing the percentage ownership of any other person
shown in the table.
(2) Includes 222,798 shares of Common Stock owned by Mr. Rubin, and
non-qualified options to purchase 80,000 shares granted to Mr. Rubin at an
exercise price of $3.125 per share and 126,550 shares at an exercise price
of $5.125 per share issued under the Company's 1991 Stock Option Plan which
are fully exercisable.
3) Includes non-qualified options to acquire 323,450 shares granted to Mr.
Rubin under the 1996 Stock Option Plan on April 25, 1996 at an exercise
price of $3.78125 per share, the fair market value of the Common Stock on
the date of option grant. Options to acquire 30,000 shares were also
granted to Mr. Rubin on October 4, 1996 under the 1996 Stock Option Plan.
The 1996 Stock Option Plan was amended in July 1996 to make options granted
under the plan exercisable without stockholder approval. Mr. Rubin's
continuing employment by the Company is governed by the terms of his
employment agreement.
(4) Includes non-qualified options to acquire 150,000 shares granted to Mr.
McLain under the 1996 Stock Option Plan. See Note (3). Mr. McLain's
continuing employment by the Company is governed by the terms of his
employment agreement.
(5) Includes (i) options to purchase 38,000 shares of the Company's Common
Stock at $3.125 per share granted under the Company's 1991 Stock Option
Plan, (ii) options to purchase 45,000 shares of the Company's Common Stock
at $4.875 per share under the 1991 Stock Option Plan, and (iii) options to
purchase 150,000 shares of the Company's Common Stock at $3.78125 per share
granted under the 1996 Stock Option Plan, all of which are exercisable.
(6) Includes options granted to Mr. Katz under the 1996 Plan to purchase
100,000 shares at an exercise price of $5.125 per share, options to
purchase 100,000 shares at an exercise price of $4.375 per share, and
options to purchase 150,000 shares at an exercise price of $3.78125, all of
which are exercisable.
(7) Robert M. Rubin, a grantor of the Rubin Family Irrevocable Stock Trust (the
"Trust") disclaims beneficial ownership of the shares held by the Trust.
See "Insider Participation," "Executive Compensation-Employment, Incentive
Compensation and Termination Agreements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(8) Includes options granted to Mr. Barnes to purchase 50,000 shares at an
exercise price of $4.375 per share, options to purchase 100,000 shares at
an exercise price of $5.25 per share and options to purchase 50,000 shares
at $5.125 per share, all of which are exercisable.
(9) Excludes shares of Common Stock beneficially owned by the Trust, as to
which Mr. Rubin disclaims beneficial ownership.
46
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation-Compensation Committee Interlocks and Insider
Participation" and "Executive Compensation-Employment, Incentive Compensation
and Termination Agreements", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements are included in Part II Item 8 beginning at page
F-1.
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Exhibit
Number Description
3.1 Certificate of Incorporation of Registrant.(1)
3.2 By-laws of Registrant. (2)
4.1 Specimen Certificate of Common Stock. (3)
4.2 1991 Employee Stock Option Plan. (1)
10.1 Asset Purchase Agreement, dated July 10, 1998, by and among Executive
TeleCard, Ltd., American United Global, Inc., Connectsoft Communications
Corporation, Connectsoft Holding Corp., and C-Soft Acquisition Corp.*
10.2 Amendment No. 1 to Asset Purchase Agreement, dated July 30, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.3 Amendment No. 2 to Asset Purchase Agreement, dated August _, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
47
<PAGE>
10.4 Amendment No. 3 to Asset Purchase Agreement, dated June 17, 1999, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.5 Assignment and Assumption Agreement, dated as of June 17, 1999, by and
among Vogo Networks, LLC, Connectsoft Communications Corporation, and
Connectsoft Holding Corp.*
10.6 Certificate of Designations, Rights and Preferences of Series G Cumulative
Convertible Redeemable Preferred Stock of Executive TeleCard, Ltd.*
10.7 Form of Promissory Note payable to American United Global, Inc. in the
aggregate principal amount of $500,000.*
10.8 Form of Promissory Note payable to Connectsoft Communications Corporation
in the aggregate principal amount of $200,000.*
10.9 Registration Rights Agreement, dated as of June 17, 1999, by and between
Executive TeleCard, Ltd. and American United Global, Inc.*
10.10Security Agreement, dated as of June 17, 1999, by and between American
United Global, Inc. and Vogo Networks, LLC.*
21 Subsidiaries of the Company*.
27 Financial Data Schedule*
(1) Included with the filing of the Company's Registration Statement on Form
S-1 on October 18, 1991, as amended by Amendment No. 1, dated December 18,
1991, Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated
January 24, 1992 and Amendment No. 4, dated January 28, 1992.
(2) Filed as an Exhibit to the Definitive Proxy Materials of Alrom Corp., a New
York corporation (the Company's predecision), as filed on December 10,
1991.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
* Filed herewith
48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 12, 1999
AMERICAN UNITED GLOBAL, INC.
By:./s/ Robert M. Rubin
-----------------------
Robert M. Rubin, Chairman
In accordance with the Securities and Exchange Commission, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Robert M. Rubin Chairman of the Board, Chief November 12, 1999
- -------------------- Executive Officer and Director
Robert M. Rubin
/s/ C. Dean McLain Executive Vice President and November 12, 1999
- ------------------ Director
C. Dean McLain
/s/ David M. Barnes Vice President--Finance and Chief November 12, 1999
- -------------------- Financial and Chief Accounting
David M. Barnes Officer
/s/ Howard Katz Executive Vice President and November 12, 1999
- ------------------- Director
Howard Katz
49
<PAGE>
EXHIBIT LIST
3.1 Certificate of Incorporation of Registrant.(1)
3.2 By-laws of Registrant. (2)
4.1 Specimen Certificate of Common Stock. (3)
4.2 1991 Employee Stock Option Plan. (1)
10.1 Asset Purchase Agreement, dated July 10, 1998, by and among Executive
TeleCard, Ltd., American United Global, Inc., Connectsoft Communications
Corporation, Connectsoft Holding Corp., and C-Soft Acquisition Corp.*
10.2 Amendment No. 1 to Asset Purchase Agreement, dated July 30, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.3 Amendment No. 2 to Asset Purchase Agreement, dated August _, 1998, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.4 Amendment No. 3 to Asset Purchase Agreement, dated June 17, 1999, by and
among Executive TeleCard, Ltd., American United Global, Inc., Connectsoft
Communications Corporation, Connectsoft Holding Corp., and C-Soft
Acquisition Corp.*
10.5 Assignment and Assumption Agreement, dated as of June 17, 1999, by and
among Vogo Networks, LLC, Connectsoft Communications Corporation, and
Connectsoft Holding Corp.*
10.6 Certificate of Designations, Rights and Preferences of Series G Cumulative
Convertible Redeemable Preferred Stock of Executive TeleCard, Ltd.*
10.7 Form of Promissory Note payable to American United Global, Inc. in the
aggregate principal amount of $500,000.*
10.8 Form of Promissory Note payable to Connectsoft Communications Corporation
in the aggregate principal amount of $200,000.*
10.9 Registration Rights Agreement, dated as of June 17, 1999, by and between
Executive TeleCard, Ltd. and American United Global, Inc.*
10.10Security Agreement, dated as of June 17, 1999, by and between American
United Global, Inc. and Vogo Networks, LLC.*
21 Subsidiaries of the Company*.
27 Financial Data Schedule*
50
<PAGE>
(1) Included with the filing of the Company's Registration Statement on Form
S-1 on October 18, 1991, as amended by Amendment No. 1, dated December 18,
1991, Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated
January 24, 1992 and Amendment No. 4, dated January 28, 1992.
(2) Filed as an Exhibit to the Definitive Proxy Materials of Alrom Corp., a New
York corporation, as filed on December 10, 1991.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 3303330 81-NY) and incorporated herein by reference
thereto.
* Filed herewith
51
<PAGE>
EXHIBIT 10.1
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (this "Agreement"), entered into this 10th day
of July, 1998, by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation
("AUGI"), CONNECTSOFT COMMUNICATIONS CORPORATION, a Delaware corporation
("CCC"), CONNECTSOFT HOLDING CORP., a Washington corporation ("Connectsoft") and
EXECUTIVE TELECARD, LTD., a Delaware corporation ("EXTEL") and C-SOFT
ACQUISITION CORP., a Delaware corporation, and a wholly-owned subsidiary of
EXTEL (the "Buyer).
W I T N E S S E T H :
WHEREAS, CCC is engaged in the business of developing a unified,
intelligent communications system which it markets under the name FreeAgent(TM)
(the "FreeAgent Technology"); and
WHEREAS, Connectsoft owns and (through an affiliate, InterGlobe
Networks, Inc. ("InterGlobe")) operates a central telecommunications network
center (the "CNOC") located in Seattle, Washington and the hardware networking
equipment, computers and software associated therewith (the "CNOC Business");
and
WHEREAS, the Buyer is interested in acquiring substantially all of the
assets and business associated with the FreeAgent Technology and the CNOC
Business (collectively, referred to herein as the "Businesses"); and
WHEREAS, each of CCC and Connectsoft (hereinafter individually and
collectively referred to as the "Seller") has agreed to sell (a) all or
substantially all of the tangible and intangible assets of CCC, including
without limitation, all software, engineering, developments and technology
associated with the FreeAgent Technology, and (b) the hardware networking
equipment, computers and software relating to the CNOC Business (collectively,
the "Assets"), and the Businesses, to the Buyer, and the Buyer has agreed to
purchase such Assets and the Businesses, all upon the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth, the sufficiency of which is hereby
acknowledged, the parties hereby covenant and agree as follows:
1. ASSETS.
1.1 Acquired Assets. Subject to the terms and conditions of this
Agreement, on the Closing Date (as such term is hereinafter defined), the Seller
<PAGE>
shall sell, transfer and deliver to the Buyer, and the Buyer shall purchase and
receive from the Seller, the Assets, including, but not limited to, the
following:
(a) All items of tangible fixed assets, furniture, fixtures,
machinery, equipment, computers, computer systems and vehicles of CCC and
Connectsoft which are used in the operation of the Businesses, and which are set
forth on Schedule 1.1(a) hereto (collectively, the "Fixed Assets"), all of which
are presently held by CCC other than the CNOC, which is presently held by
Connectsoft;
(b) All inventory and supplies of the Seller;
(c) All trade names, trademarks, patents, copyrights, customer
lists, supplier lists, trade secrets, computer software programs, engineering,
technical information, and other such knowledge and information constituting the
"know-how" of the Seller;
(d) The goodwill of the Businesses and their value as going
concerns;
(e) To the extent assignable, all licenses and permits of the
Seller;
(f) All books, records, printouts, drawings, data, files, notes,
notebooks, accounts, invoices, correspondence and memoranda of the Seller; and
(g) All other rights and assets of any kind, tangible or
intangible, of the Seller (including the Material Contracts listed on Schedule
5.8 hereto, which Buyer specifically assumes the obligations thereunder) whether
or not reflected in their internal financial statements or on their books and
records.
On the Closing Date, the Seller shall execute and deliver to the Buyer a bill of
sale in respect of the Assets, all in the form of Exhibit A annexed hereto and
made a part hereof.
1.2 Excluded Assets. Notwithstanding anything in this Agreement to the
contrary, the Assets shall not include, and the Seller shall retain (a) all
cash, marketable securities, accounts receivable and notes receivable of the
Seller, (b) those specific assets of the Seller relating to the Businesses which
are identified on Schedule 1.2 to this Agreement, (c) all bank accounts of the
Seller, (d) all rights to any tax refunds of the Seller, (e) the Seller's stock
record books, minute books, and tax returns, (f) all of the Seller's rights
under this Agreement, and (g) those miscellaneous other assets or properties of
each of CCC and Connectsoft which are not related to either the FreeAgent
Technology or the CNOC Business and which are identified on Schedule 1.2
(collectively, the "Excluded Assets").
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<PAGE>
2. LIABILITIES.
2.1 Assumed Liabilities. Subject to the terms and conditions of
this Agreement, on the Closing Date, the Seller shall assign to the Buyer, and
the Buyer shall assume and agree to pay and perform when due, only the specific
liabilities, obligations and indebtedness, including without limitation trade
payables and obligations under capitalized leases of CCC relating to the Assets,
which are listed on Schedule 2.1 to this Agreement, as same are constituted on
the Closing Date (collectively, the "Assumed Liabilities") and the Material
Contracts listed on Schedule 5.8. On the Closing Date, the Buyer shall execute
and deliver to the Seller an assumption agreement in respect of the Assumed
Liabilities and the Material Contracts, all in the form of Exhibit B annexed
hereto.
2.2 Limitation on Amount and Timing of Payment of Assumed
Liabilities.
(a) Notwithstanding the provisions of Section 2.1 above or
any other provision of this Agreement it is expressly understood and agreed
by and among the parties hereto that (i) the Buyer shall not assume more than
$4,500,000 in the aggregate principal amount of Assumed Liabilities, and (ii)
the Buyer shall not be required to pay more than $500,000 in the aggregate
principal amount of Assumed Liabilities on or before April 30, 1999.
(b) In the event the Buyer is required to pay more than
$500,000 in the aggregate principal amount of Assumed Liabilities on or before
April 30, 1999, then Buyer, as its sole remedy for any breach under Section
2.2(a)(ii), shall have the right to borrow from AUGI the positive difference of
(i) the amount the Buyer is required to pay of the Assumed Liabilities on or
before April 30, 1999, less (ii) $500,000. The obligation of AUGI to loan such
funds to Buyer shall be conditioned upon a certificate of the Buyer's Chief
Financial Officer representing the amount the Buyer is required to pay in cash
of the Assumed Liabilities on or before April 30, 1999. The loan shall be
evidenced by a promissory note in the form attached hereto as Exhibit C. Buyer
shall have no remedy for a breach of Section 2.2(a)(ii) if Buyer waives
extension of the UPS Note as a condition to Closing under Section 10.1(i)
herein.
2.3 Excluded Liabilities. Except for the Assumed Liabilities and
the Material Contracts, the Buyer shall not assume, and shall have no liability
for, any debts, liabilities, executory obligations, claims or expenses of the
Seller of any kind, character or description, whether accrued, absolute,
contingent or otherwise, including, without limitation, any liabilities relating
to the Seller's conduct of the Businesses prior to the Closing Date (the
"Excluded Liabilities"). The Seller shall be solely liable and responsible to
make timely payment when due of all such Excluded Liabilities.
-3-
<PAGE>
3. CONSIDERATION.
3.1 Consideration to the Seller. The entire purchase price for the
Assets (the "Consideration") shall consist of (i) the assumption by the Buyer of
the Assumed Liabilities, and the Buyer's payment and performance, when due, of
all such Assumed Liabilities, subject only to the provisions of Section 2.2 of
this Agreement, and (ii) the rights granted under the Letter Agreement to be
delivered at the Closing in the form annexed hereto as Exhibit E.
3.2 Allocation of Purchase Price. The fair market values of the
Assets and the allocation of the Purchase Price among the Assets for purposes of
Section 1060 of the Internal Revenue Code shall be as agreed between Buyer and
Seller on or before the Closing Date and included as Schedule 3.2 and Buyer and
Seller agree to be bound by such fair market value determination and allocation
and to complete and attach Internal Revenue Service Form 8594 to their
respective tax returns accordingly. If Buyer and Seller can not agree on the
allocation, the Purchase Price shall be allocated among the Assets by Seller's
outside accountants which determination shall be final.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND AUGI. In
connection with the sale of the Assets to the Buyer and in order to induce the
Buyer to enter into this Agreement, each of CCC, Connectsoft and AUGI hereby
jointly and severally represents and warrants to the Buyer, as of the date of
this Agreement (unless otherwise indicated), as follows:
4.1 Organization, Good Standing and Qualification. CCC is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, Connectsoft is a corporation duly organized, validly
existing and in good standing under the laws of the State of Washington, and
AUGI is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, each with full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, and to own its assets and conduct its business
as owned and conducted on the date hereof. The Seller is duly qualified to
operate its respective businesses as a foreign corporation under the laws of
each jurisdiction where the nature of its businesses or the location of its
properties makes such qualification necessary and the failure to be so qualified
would have a material adverse effect on the subject Seller or its assets,
properties, businesses or financial condition (a "Material Adverse Effect").
4.2 Authorization of Agreement. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby by the Seller and AUGI have been duly and validly authorized
by the Board of Directors of the Seller, and by AUGI (as the sole stockholder of
each of CCC and Connectsoft). No further corporate authorization is required on
-4-
<PAGE>
the part of each Seller or AUGI to consummate the transactions contemplated
hereby.
4.3 Valid and Binding Agreements. This Agreement, and, when
executed, all other agreements, instruments of transfer or assignment, documents
and other instruments delivered, constitute and will constitute the legal, valid
and binding obligation of the Seller and AUGI (to the extent a party thereto),
enforceable against the Seller and AUGI in accordance with their respective
terms, except to the extent limited by bankruptcy, insolvency, reorganization
and other laws affecting creditors' rights generally, and except that the remedy
of specific performance or similar equitable relief is available only at the
discretion of the court before which enforcement is sought.
4.4 Disclosure and Duty of Inquiry. No representation or warranty
by the Seller or AUGI in this Agreement and no statement or information
contained in the schedules hereto or any certificate furnished or to be
furnished to the Buyer hereunder contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact necessary,
in light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading. The Buyer is not nor will it be
required to undertake any independent investigation to determine the truth,
accuracy and completeness of the representations and warranties made by the
Seller and AUGI pursuant to this Article 4.
5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF AUGI AND THE SELLER.
In connection with the sale of the Assets to the Buyer and in order to induce
the Buyer to enter into this Agreement, each of CCC, Connectsoft and AUGI hereby
jointly and severally represents and warrants to the Buyer, as of the date of
this Agreement (unless otherwise indicated), as follows:
5.1 No Breach of Statute or Contract. Neither the execution and
delivery of this Agreement by the Seller, nor compliance with the terms and
provisions of this Agreement, will: (a) violate any statute or regulation of any
governmental authority, domestic or foreign, affecting the Seller, (b) except as
set forth in Schedule 5.1 to this Agreement, require the issuance of any
authorization, license, consent or approval of any federal or state governmental
agency or any other person; or (c) except as set forth in Schedule 5.1 to this
Agreement, conflict with or result in a breach of any of the terms, conditions
or provisions of the certificate of incorporation or by-laws of the Seller or
any judgment, order, injunction, decree, agreement or instrument to which the
Seller is a party, or by which the Seller is bound, or constitute a default
thereunder.
5.2 Title to and Condition of Purchased Assets. The Seller owns, or
leases the Assets listed on Schedule 1.1(a) as being leased, and as of the
Closing Date will have good and marketable title in and to, or a valid leasehold
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<PAGE>
interest in, all of the Assets, free and clear of all liens, liabilities,
charges, claims, options, restrictions on transfer or other encumbrances of any
nature whatsoever, except for (a) liens or encumbrances disclosed in Section 5.2
to this Agreement; and (b) miscellaneous materialmen's or mechanics liens or
liens for current taxes not yet due and payable or which are being contested in
good faith by appropriate proceedings and which are listed on Schedule 5.2
(collectively, "Permitted Liens"). All material items of machinery, equipment,
vehicles, and other personal property owned or leased by the Seller are listed
in Schedule 5.2 to this Agreement and, except as and to the extent disclosed in
Schedule 5.2 to the Agreement, all such personal property is included in the
Assets and is in good operating condition and repair (reasonable wear and tear
excepted) and is adequate for its use in the Seller's Businesses as presently
conducted. The Assets constitute all of the assets and properties which are
required for the Seller's Businesses as presently conducted and as proposed to
be conducted by the Seller as of the date hereof.
5.3 Ownership of Businesses. No portion of the Businesses is owned
or operated by any person or entity other than the Seller, except that
InterGlobe operates the CNOC.
5.4 Form SB-2 Information; Financial Statements. CCC has furnished
to EXTEL a copy of the Form SB-2 Registration Statement of CCC, as filed with
the Securities and Exchange Commission ("SEC") on September 4, 1997 (the
"Registration Statement"), which Registration Statement has not, as yet, been
declared effective by the SEC. On or before the closing of the transactions
contemplated by this Agreement, such Registration Statement shall be withdrawn.
Annexed hereto as Schedule 5.4 is an unaudited balance sheet of CCC as at April
30, 1998 and the unaudited statement of income (loss) of CCC for the nine months
ended April 30, 1998 (collectively, the "April 1998 Financial Statements"). The
April 1998 Financial Statements were prepared by management of CCC, fairly set
forth the assets and liabilities and financial conclusion of CCC and its results
of operations as at April 30, 1998 and for the fiscal period then ended, and
were prepared in accordance with generally accepted accounting principles,
consistent with those of prior periods, subject only to the absence of financial
statement footnotes (which would not differ materially from those of the most
recent audited financial statements) and year end audit adjustments (which would
not be material). The financial statements included in the Registration
Statement (a copy of which has been provided to the Buyer) present fairly, in
all material respects, the financial condition of CCC as of July 31, 1997 and
the results of operations and cash flows for the respective periods then ended
and have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved. The
financial statements referred to in this Section 5.4 do not reflect the
operations of any business or any portion of Seller's Businesses not included in
the Assets. Except as expressly set forth in the April 1998 Financial Statements
and those financial statements included in the Registration Statement, as
disclosed pursuant to this Agreement, or non-material
-6-
<PAGE>
liabilities arising in the normal course of the Seller's Businesses since April
30, 1998, except for the Assumed Liabilities, there are no liabilities or
obligations (including, without limitation, any tax liabilities or accruals)
of the Seller, including any contingent liabilities, that are, in the aggregate,
material to the Seller.
5.5 No Material Changes. Except as otherwise described in Schedule
5.5 to this Agreement, since July 31, 1997, there has been no material adverse
change in the financial condition, operations, or Businesses of the Seller, or
any damage, destruction, or loss (whether or not covered by insurance) of the
Assets materially and adversely affecting the financial condition, operations,
or Businesses of the Seller, provided, that the offering of the Businesses and
the Assets for sale, the preparation for such sale pursuant to the terms and
conditions of this Agreement, and the public disclosure of the same shall not
constitute such a material adverse change.
5.6 Insurance Policies. Schedule 5.6 to this Agreement contains a
true and correct schedule of all insurance coverages held by the Seller
concerning the Businesses and the Seller's assets and properties. To the
Seller's knowledge, the Seller is not in violation of any requirements of any
its insurance carriers, and the Seller has received no written notice of any
default or violation under or in respect of any of the foregoing.
5.7 Permits and Licenses. Except as set forth in Schedule 5.7, the
Seller possesses (and there are included in the Assets being transferred to the
Buyer) all required permits, licenses and/or franchises, from whatever
governmental authorities or agencies (domestic and/or foreign) requiring the
same and having jurisdiction over the Seller, necessary in order to operate the
Businesses in the manner presently conducted, all of which permits, licenses
and/or franchises are valid, current and in full force and effect, except where
the failure to have or maintain any such permit, license and/or franchise would
not have or could not reasonably be expected to have a material adverse effect
on the Assets or the Businesses. The Seller has heretofore conducted the
Businesses in compliance in all material respects with the requirements of such
permits, licenses and/or franchises, and the Seller has not received written
notice of any default or violation in respect of or under any of such permits,
licenses and/or franchises, except where such default would not have or could
not reasonably be expected to have a Material Adverse Effect on the Assets or
the Businesses.
5.8 Contracts and Commitments.
(a) Schedule 5.8 to this Agreement lists all material contracts
contracts, leases, commitments, technology agreements, software development
agreements, software licenses, indentures and other agreements to which the
Seller is a party (collectively, "Material Contracts"), all of which are
included in the Assets except as indicated in Schedule 5.8 except that Schedule
5.8 need not list any such
-7-
<PAGE>
agreement that is listed on any other schedule hereto, or was entered into
in the ordinary course of the Businesses of the Seller and that, in any case:
(i) is for the purchase of supplies or other inventory items in the ordinary
course of the Businesses; (ii) is related to the purchase or lease of any
capital asset involving aggregate payments of less than $25,000 per annum; or
(iii) may be terminated without penalty, premium or liability by the Seller on
not more than thirty (30) days' prior written notice; provided however, that
Schedule 5.8 shall list all technology agreements, software development
agreements and software licenses involving the Seller and all Assumed
Liabilities, regardless of the duration thereof or the amount of payments called
for or required thereunder, other than standard software licenses of software
products available to the Businesses' customers generally.
(b) Except as set forth in Schedule 5.8 to this Agreement, all
Material Contracts are in full force and effect, and the Seller is in compliance
in all material respects with all of the Material Contracts and with all Assumed
Liabilities, and has not received any written notice that any party to any
Material Contract is in material breach or default of such Material Contract or
is now subject to any condition or event which has occurred and which, after
notice or lapse of time or both, would constitute a material default by any
party under any such Material Contract. Except as set forth in Schedule 5.8 to
this Agreement, none of the Material Contracts will be voided, revoked or
terminated, or voidable, revocable or terminable, upon and by reason of the
assignment thereof to the Buyer pursuant to this Agreement. The Seller has
delivered true and correct copies of all Material Contracts to the Buyer.
(c) To the best of each Seller's knowledge, no purchase
commitment by the Seller relating to the Businesses is materially in excess of
the normal, ordinary and usual requirements of the Businesses.
(d) Except as set forth in Schedule 5.8 to this Agreement, the
Seller does not have any outstanding contracts with or commitments to officers,
employees, technicians, agents, consultants or advisors relating to the
Businesses that are not cancelable by the Seller without penalty, premium or
liability (for severance or otherwise) on less than thirty (30) days' prior
written notice.
5.9 Customers and Suppliers. Except as set forth in Schedule
5.9 to this Agreement, the Seller has not received any written notice of any
claim by or dispute with, or any existing, announced or anticipated changes in
the policies of, any material clients, customers, referral sources or suppliers
of the Seller which would have a Material Adverse Effect on the Businesses as
presently conducted.
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<PAGE>
5.10 Labor, Benefit and Employment Agreements.
(a) Except as set forth in Schedule 5.10 to this Agreement, the
Seller is not a party to and does not have any commitment or obligation in
respect of (i) any collective bargaining agreement or other labor agreement
relating to any employees of the Seller, or (ii) any agreement with respect to
the employment or compensation of any non-hourly and/or non-union employee(s) of
the Businesses. Schedule 5.10 sets forth the amount of all compensation or
remuneration (including any discretionary bonuses) paid by the Seller during the
1997 calendar year to employees or consultants of the Seller who presently
receive aggregate compensation or remuneration at an annual rate in excess of
$35,000.
(b) No union is now certified or, to the best of the Seller's
knowledge, claims to be certified, as a collective bargaining agent to represent
any employees of the Seller, and there are no labor disputes existing or, to the
best of the Seller's knowledge, threatened, involving strikes, slowdowns, work
stoppages, job actions or lockouts of any employees of the Seller.
(c) With respect to any "multiemployer plan" (as defined in
Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) to which the Seller or any of its past or present affiliates has at
any time been required to make contributions, neither the Seller nor any of its
past or present affiliates has, at any time on or after April 29, 1980, suffered
or caused any "complete withdrawal" or "partial withdrawal" (as such terms are
respectively defined in Sections 4203 and 4205 of ERISA) therefrom on its part.
(d) Except as disclosed in Schedule 5.10, the Seller does not
maintain, or have any liabilities or Assumed Liabilities of any kind with
respect to, any bonus, deferred compensation, pension, profit sharing,
retirement or other such benefit plan, and does not have any potential or
contingent liability in respect of any actions or transactions relating to any
such plan other than to make contributions thereto if, as and when due in
respect of periods subsequent to the date hereof. Without limitation of the
foregoing, (i) the Seller has made all required contributions to or in respect
of any and all such benefit plans, (ii) no "accumulated funding deficiency" (as
defined in Section 412 of the Internal Revenue Code of 1986, as amended (the
"Code")) has been incurred in respect of any of such benefit plans, and the
present value of all vested accrued benefits thereunder does not, on the date
hereof, exceed the assets of any such plan allocable to the vested accrued
benefits thereunder, (iii) there has been no "prohibited transaction" (as
defined in Section 4975 of the Code) with respect to any such plan, and no
transaction which could give rise to any tax or penalty under Section 4975 of
the Code or Section 502 of ERISA, and (iv) there has been no "reportable event"
(within the meaning of Section 4043(b) of ERISA) with respect to any such plan.
All of such plans which constitute, are intended to constitute, or have been
treated by the Seller as "employee pension
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<PAGE>
benefit plans" or other plans within Section 3 of ERISA have been determined by
the Internal Revenue Service to be "qualified" under Section 401(a) of the Code,
and have been administered and are in compliance with ERISA and the Code; and
the Seller does not have any knowledge of any state of facts, conditions or
occurrences such as would impair the "qualified" status of any of such plans.
All of the matters listed on Schedule 5.10 shall constitute Excluded
Liabilities.
(e) Except for the group insurance programs listed in Schedule
5.10, the Seller does not maintain any medical, health, life or other employee
benefit insurance programs or any welfare plans (within the meaning of Section
3(1) of ERISA) for the benefit of any current or former employees, and, except
as required by law, the Seller does not have any liability, fixed or contingent,
for health or medical benefits to any former employee.
5.11 Accounts Payable. Except as set forth in Schedule 5.11, the
Seller is current in its payment of all accounts payable relating to the
Businesses, and has received no notice, not subsequently withdrawn or cured,
from any vendor, supplier or other person with respect to non-payment or late
payment of any accounts payable of the Businesses, or any threatened suspension
or termination of the provision of goods or services to the Businesses, which
suspension or termination would have a Material Adverse Effect on the financial
condition, operations, or Businesses of the Seller.
5.12 Compliance with Laws.
(a) To the Seller's knowledge, the Seller is in compliance in
all material respects with all laws, statutes, regulations, rules and ordinances
applicable to the conduct of its Businesses as presently constituted; and the
Seller has received no written notice of any default or violation under or in
respect of any of the foregoing.
(b) Without limitation of Section 5.12(a) above, except as set
forth on Schedule 5.12 to this Agreement, to the best of the Seller's knowledge
the Seller has not, at any time during the three (3) year period prior to the
date hereof, (i) handled, stored, generated, processed or disposed of any
hazardous substances in violation of any federal, state or local environmental
laws or regulations, or (ii) otherwise committed any material violation of any
federal, state or local environmental laws or regulations (including, without
limitation, the provisions of the Environmental Protection Act, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, and other applicable environmental statutes and regulations) or any
material violation of the Occupational Safety and Health Act.
(c) Except as set forth in Schedule 5.12 to this Agreement,
neither the Seller nor, to the best of the Seller's knowledge, any of the
Seller's directors or officers has received any written notice of default or
violation,
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nor, to the best of the Seller's knowledge, is the Seller or any of its
directors or officers in default or violation, with respect to any judgment,
order, writ, injunction, decree, demand or assessment issued by any court or any
federal, state, local, municipal or other governmental agency, board,
commission, bureau, instrumentality or department, domestic or foreign, relating
to any aspect of the Seller's Businesses, affairs, properties or assets. Neither
the Seller nor, to the best of the Seller's knowledge, any of its directors or
officers, has received written notice of, been charged with, or is under
investigation with respect to, any violation of any provision of any federal,
state, local, municipal or other law or administrative rule or regulation,
domestic or foreign, relating to any aspect of the Seller's Businesses, affairs,
properties or assets, which violation would have a Material Adverse Effect on
the financial condition, operations, or Businesses of the Seller or upon any
material portion of the Assets.
(d) Schedule 5.12 sets forth the date(s) of the last known
audits or inspections (if any) of the Seller conducted by or on behalf of the
Environmental Protection Agency, the Occupational Safety and Health
Administration, the federal Department of Health and Human Services and/or any
agency thereof (including, without limitation, the Health Care Financing
Administration) or intermediary acting on its behalf, any corresponding or
comparable state or local governmental department, agency or authority, and any
other governmental and/or quasi-governmental agency (federal, state and/or
local).
5.13 Litigation. Except as disclosed in Schedule 5.13 to this
Agreement, there is no suit, action, arbitration, or legal, administrative or
other proceeding, or governmental investigation (including, without limitation,
any claim alleging the invalidity, infringement or interference of any patent,
patent application, or rights thereunder owned or licensed by the Seller)
pending, or to the best knowledge of the Seller, threatened, by or against the
Seller that relates in any material way to the Businesses or any of the Assets.
All of the matters listed on Schedule 5.13 shall constitute Excluded
Liabilities. The Seller is not aware of any state of facts, events, conditions
or occurrences which might properly constitute grounds for or the basis of any
suit, action, arbitration, proceeding or investigation against or with respect
to the Seller or that relate in any material way to the Businesses or any of the
Assets, which, if adversely determined, would have a Material Adverse Effect on
the financial condition, operations, or Businesses of the Seller or upon any
material portion of the Assets.
5.14 Intellectual Property.
(a) Schedule 5.14 to this Agreement sets forth a list and
brief description of the nature and ownership of: (i) all patents, patent
applications, copyright registrations and applications, registered trade names,
and trademark registrations and applications, both domestic and foreign, which
are presently owned, filed or held by the Seller and/or any of its directors,
officers, stockholders or employees and which in any material way relate to or
are used in the Businesses; (ii) all licenses, both domestic and foreign, which
are owned or controlled by the Seller and/or any of its directors, officers,
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stockholders, or employees and which in any material way relate to or are used
in the Businesses; and (iii) all franchises, licenses and/or similar
arrangements granted to the Seller by others and/or to others by the Seller.
None of the patents, patent applications, copyright registrations or
applications, registered trade names, trademark registrations or applications,
franchises, licenses or other arrangements set forth or required to be set forth
in Schedule 5.14 is subject to any pending challenge known to the Seller.
(b) Schedule 5.14 also lists (i) the jurisdictions in which
such intellectual property has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) licenses,
sublicenses and other agreements as to which the Seller is a party and pursuant
to which any person is authorized to use any Intellectual Property (as defined
herein), and (iii) licenses, sublicenses and other agreements as to which the
Seller is a party and pursuant to which the Seller is authorized to use any
third party patents, trademarks or copyrights, including software ("Third Party
Intellectual Rights") which are incorporated in, are or form a part of any
product of the Seller.
(c) Schedule 5.14 lists all hardware, computer software,
identifiable know-how (and the manner in which such know-how is memorialized)
and other identifiable technology (collectively, the "Seller Technology") which
the Seller owns or licenses and is included in the Assets, and the nature of the
Seller's rights in each item of Seller Technology. Schedule 5.14 also describes
the technology design and development that is currently ongoing or planned for
1998.
(d) The Seller owns, or is licensed or otherwise possesses
all necessary rights to use all patents, trademarks, trade names, service marks,
copyrights and any applications therefor, maskworks, net lists, schematics,
technology, know-how, trade secrets, inventory, ideas, algorithms, processes,
computer software programs and applications (in both source code and object code
form), and tangible or intangible proprietary information or material
("Intellectual Property") that are used or marketed in its business as presently
conducted and as proposed to be conducted or included or proposed to be included
in its products or proposed products.
(e) To the knowledge of the Seller, there is no unauthorized
use, disclosure, infringement or misappropriation of any Intellectual Property
rights of the Seller, any trade secret material to the Seller or any
Intellectual Property right of any third party to the extent licensed by or
through the Seller by any third party, including any employee or former employee
of the Seller. Except as set forth in Schedule 5.14, the Seller has never
entered into any
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agreement to indemnify any other person against any charge of infringement of
any Intellectual Property. Except as set forth in Schedule 5.14, there are no
royalties, fees or other payments payable by the Seller to any person by reason
of the ownership, use, sale or disposition of Intellectual Property.
(f) The Seller is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in material breach of any license, sublicense or other
agreement relating to the Intellectual Property or Third Party Intellectual
Property Rights.
(g) The Seller has not (i) been served with process, or is
aware that any person is intending to serve process on the Seller, in any suit,
action or proceeding which involves a claim of infringement of any patents,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party and (ii) brought any action, suit or
proceeding for infringement of Intellectual Property against any third party. To
the knowledge of the Seller, the business of the Seller as presently conducted
and as proposed to be conducted, the Seller's products or proposed products do
not infringe any patent, trademark, service mark, copyright, trade secret or
other proprietary right of any third party.
(h) The Seller has made available to the Buyer copies of all
agreements executed by officers, employees and consultants of the Seller
regarding the protection of proprietary information and the assignment to the
Seller of any Intellectual Property arising from services performed for the
Seller by such persons.
(i) The Seller has, to the extent it deemed necessary and
appropriate, obtained or entered into written agreements with third parties in
connection with the disclosure to, or use or appropriation by, third parties, of
trade secret or proprietary Intellectual Property owned by the Seller and not
otherwise protected by a patent, a patent application, copyright, trademark, or
other registration or legal scheme ("Confidential Information"), and does not
know of any situation involving such third party use, disclosure or
appropriation of Confidential Information where the lack of such a written
agreement is likely to result in any material adverse effect on the Seller or
the Assets.
5.15 Sensitive Payments. To the best of the Seller's knowledge,
the Seller has not (a) made any contributions, payments or gifts to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payment or gift is illegal under
the laws of the United States or the jurisdiction in which made, (b) established
or maintained any unrecorded fund or asset for any purpose or made any false or
artificial entries on its or their books, or (c) made any payments to any person
with
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the intention that any part of such payment was to be used for any purpose other
than that described in the documents supporting the payment.
5.16 Real Property. Except as set forth in Schedule 5.16 to this
Agreement, the Seller neither owns or has any interest of any kind (whether
ownership, lease, or otherwise) in any real property except to the extent of the
Seller's leasehold interests under the leases for its Businesses premises, true
and complete copies of which leases (including all amendments thereto) are
annexed to Schedule 5.16 (the "Leases"). The Seller, and to the knowledge of the
Seller, the landlords thereunder, are presently in compliance with all of their
respective Assumed Liabilities under the Leases, and the premises leased
thereunder are in good condition (reasonable wear and tear excepted) and are
adequate for the operation of the Seller's Businesses as presently conducted.
5.17 Status of Payment Obligations in Respect of Assumed
Liabilities. Schedule 5.17 annexed hereto sets forth the current status of all
payment obligations of the Seller and/or AUGI in respect of each of the Assumed
Liabilities set forth on Schedule 2.1 annexed hereto.
5.18 Disclosure and Duty of Inquiry. Sellers have filed all tax
returns required to be filed (except for returns that have been properly
extended) and have paid all taxes shown as owing (other than taxes currently
being contested in good faith by appropriate proceedings, for which amounts have
been reserved in accordance with generally accepted accounting principles
("GAAP")). No tax returns are currently the subject of audit and there has been
no extension of time for assessment of taxes or waiver of the statute of
limitations with respect to taxes. Neither Seller is party to any tax sharing or
allocation agreement and neither has ever been a member of an affiliated group
filing a consolidated federal income tax return. The Buyer is not nor will it be
required to undertake any independent investigation to determine the truth,
accuracy and completeness of the representations and warranties made by the
Seller pursuant to this Article 5.
6. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF AUGI. In connection
connection with the sale of the Assets to the Buyer and in order to induce the
Buyer to enter into this Agreement, AUGI hereby represents and warrants to the
Buyer, as of the date of this Agreement (unless otherwise indicated), as
follows:
6.1 Absence of Undisclosed Liabilities. Except as expressly set
forth in the Registration Statement or as disclosed pursuant to schedules to
this Agreement, or arising in the normal course of the Seller's Businesses since
July 31, 1997, to the best of AUGI's knowledge there are no liabilities or
obligations (including, without limitation, any tax liabilities or accruals) of
either Seller, including any contingent liabilities, that are, in the aggregate,
material to the Businesses or which could have Material Adverse Effect on the
Assets, other than the Assumed Liabilities identified on Schedule 2.1. To the
best of AUGI's
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knowledge, the amount of each of the Assumed Liabilities is correctly set
forth on Schedule 2.1 in all material respects and, subject to obtaining an
extension of the UPS Note (as herein described), not more than $500,000 of such
Assumed Liabilities will be payable on or before April 30, 1999.
6.2 Disclosure and Duty of Inquiry. The Buyer is not nor will it be
required to undertake any independent investigation to determine the truth,
accuracy and completeness of the representations and warranties made by AUGI
pursuant to this Article 6.
7. REPRESENTATIONS AND WARRANTIES OF EXTEL AND THE BUYER In connection
with the purchase of the Assets from the Seller hereunder, EXTEL and the Buyer
hereby jointly and severally represent and warrant to the Seller and AUGI as
follows:
7.1 Organization, Good Standing and Qualification. Each of EXTEL
and the Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all necessary power and
authority to execute and deliver this Agreement, to perform the Assumed
Liabilities hereunder, and to consummate the transactions contemplated hereby.
Each of EXTEL and the Buyer has all requisite corporate power and authority to
own its properties and to conduct its business as currently conducted, and to
execute, deliver and perform its Assumed Liabilities under this Agreement. The
Buyer is a wholly-owned subsidiary of EXTEL.
7.2 Authorization of Agreement. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby by EXTEL and the Buyer have been duly and validly authorized
by all necessary and appropriate action by the respective Board of Directors and
stockholders of EXTEL and the Buyer; and EXTEL and the Buyer each have the full
legal right, power and authority to execute and deliver this Agreement, to
perform the Assumed Liabilities hereunder, and to consummate the transactions
contemplated hereby. No further corporate authorization is necessary on the part
of EXTEL or the Buyer to consummate the transactions contemplated hereby.
7.3 Valid and Binding Agreement. This Agreement and, when executed
and delivered, all other agreements, instruments of transfer or assignment,
documents, and other instruments, constitute and will constitute the legal,
valid and binding obligation of EXTEL and the Buyer, enforceable against EXTEL
and the Buyer in accordance with their respective terms, except, in each case,
to the extent limited by bankruptcy, insolvency, reorganization and other laws
affecting creditors' rights generally, and except that the remedy of specific
performance or similar equitable relief is available only at the discretion of
the court before which enforcement is sought.
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7.4 No Breach of Statute or Contract. Neither the execution and
delivery of this Agreement, nor compliance with the terms and provisions of this
Agreement or such other agreements on the part of EXTEL or the Buyer will: (a)
violate any statute or regulation of any governmental authority, domestic or
foreign, affecting EXTEL or the Buyer; (b) require the issuance of any
authorization, license, consent or approval of any federal or state governmental
agency (except to the extent that EXTEL or the Buyer may be required to be
qualified as a foreign corporation in certain jurisdictions in which it is not
currently so qualified, and to the extent that EXTEL or the Buyer may be
required to reapply for any permits, licenses and/or franchises which are not
assignable as part of the Assets and any consent of EXTEL's current lenders as
may be required); or (c) conflict with or result in a breach of any of the
terms, conditions or provisions of any judgment, order, injunction, decree,
note, indenture, loan agreement or other agreement or instrument to which EXTEL
or the Buyer is a party, or by which EXTEL or the Buyer is bound, or constitute
a default thereunder.
7.5 Disclosure. EXTEL and the Buyer have previously delivered to
the Seller and AUGI a true and correct copy of the Annual Report on Form 10-K
for the year ended March 31, 1998, as filed by EXTEL with the SEC, including
therein audited and unaudited financial information (the "EXTEL Public
Filings"). The EXTEL Public Filings comply with the SEC disclosure requirements
applicable thereto and do not contain any untrue statement of a material fact or
omit to state any material fact necessary in light of the circumstances under
which it was made, in order to make the statements therein not misleading. Since
the date of the most recent EXTEL Public Filings, (a) there has been no material
change in the capitalization of EXTEL or the Buyer, (b) the businesses of EXTEL,
the Buyer and their respective subsidiaries have been operated in the normal
course, and (c) there has been no material adverse change in the financial
condition, operations or businesses of EXTEL, the Buyer, or their respective
subsidiaries (taken as a consolidated whole) from that reflected in such report.
7.6 Litigation. There is no suit, action, arbitration, or legal,
administrative or other proceeding, or governmental investigation pending, or to
the knowledge of EXTEL or the Buyer, threatened, against EXTEL or the Buyer (i)
which challenges EXTEL's or the Buyer's ability to consummate the transactions
provided for herein, or (ii) materially restricts or affects the business
operations of EXTEL or the Buyer either before or after the Closing.
7.7 Disclosure and Duty of Inquiry. No representations or
warranties by Buyer or EXTEL in this Agreement and no statement or information
contained in the schedules hereto or any certificate furnished or to be
furnished to Seller or AUGI hereunder contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. The Seller and AUGI are
not and will not be required to
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undertake any independent investigation to determine the truth, accuracy and
completeness of the representations and warranties made by EXTEL and the Buyer
in this Article 7.
8. PRE-CLOSING COVENANTS. Each of the Seller and AUGI covenants
covenants and agrees that, from April 15, 1998 (the date of execution of a
letter of intent regarding the transactions contemplated hereby) through and
including the Closing Date:
8.1 Representations and Warranties. The representations and
warranties contained in Articles 4 and 5 of this Agreement shall be true and
correct in all material respects as of the Closing Date as if made on such date.
8.2 Access to Information.
(a) The Seller shall permit the Buyer and its counsel,
accountants and other representatives, upon reasonable advance notice to the
Seller, during normal business hours and without undue disruption of the
Businesses of the Seller, to have reasonable access to all properties, books,
accounts, records, contracts, documents and information relating to the
Businesses and, to the extent reasonably required by the Buyer for its due
diligence, the Seller. The Buyer and its representatives shall also be permitted
to freely consult with the Seller's counsel concerning the Businesses.
(b) Each of the Seller and AUGI will make available to the
Buyer and its accountants all financial records relating to the Seller and
the Businesses, and shall cause the Seller's accountants to cooperate with the
Buyer's accountants and make available to the Buyer's accountants all work
papers and other materials developed by or in the possession of the Seller's
accountants, for the purpose of assisting the Buyer's accountants in the
performance of an audit of the Businesses for all periods subsequent to January
1, 1996.
8.3 Conduct of Businesses in Normal Course. The Seller shall carry
on the Businesses in substantially the same manner as heretofore conducted and
as provided under the Management Agreement dated April 15, 1998, and shall not
make or institute any unusual or novel methods of service, sale, purchase,
lease, management, accounting or operation that will vary materially from those
methods used by the Seller as of the date hereof, without in each instance
obtaining the prior written consent of the Buyer.
8.4 Preservation of Businesses and Relationships. The Seller shall,
without making or incurring any unusual commitments or expenditures, use all
reasonable efforts to preserve its business organization intact, and preserve
its present relationships with referral sources, clients, customers, suppliers
and others having business relationships with the Seller.
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8.5 Maintenance of Insurance. The Seller shall continue to carry
its existing insurance, to the extent obtainable upon reasonable terms.
8.6 Corporate Matters. The Seller shall not, without the prior
written consent of the Buyer:
(a) amend, cancel or modify any Material Contract or enter
into any material new agreement, commitment or transaction except, in each
instance, in the ordinary course of business;
(b) modify in any material respect (i) any material agreement
relating to the Businesses to which the Seller is a party or by which it may be
bound, or (ii) any policies, procedures or methods of doing business relating to
the Businesses, except in each case in the ordinary course of business;
(c) except pursuant to commitments in effect on the date
hereof (to the extent disclosed in this Agreement or in any schedule hereto),
make any capital expenditure(s) or commitment(s), whether by means of purchase,
lease or otherwise, or any operating lease commitment(s), in excess of $50,000
in the aggregate;
(d) dispose of or transfer any Asset outside of the ordinary
course of business, or sell, assign or dispose of any capital asset(s) with a
net book value in excess of $15,000 as to any one item or $50,000 in the
aggregate;
(e) materially change its method of collection of accounts or
notes receivable, or accelerate or slow in any material respect its payment of
accounts payable;
(f) forgive any obligation or performance (past, present or
future) owed to the Businesses, except for any intercompany obligation owed by
AUGI or its Affiliates to the Seller;
(g) incur any material liability or indebtedness except, in
each instance, in the ordinary course of business
(h) subject any of the assets or properties of the Businesses
to any further liens or encumbrances, other than Permitted Liens;
(i) make any payments to any Affiliate of the Seller; or
(j) agree to do, or take any action in furtherance of, any of
the foregoing.
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9. ADDITIONAL AGREEMENTS OF THE PARTIES.
9.1 Confidentiality. Notwithstanding anything to the contrary
contained in this Agreement, and subject only to any disclosure requirements
which may be imposed upon any party under applicable state or federal securities
or antitrust laws, it is expressly understood and agreed by the parties that,
except with respect to matters or information which are publicly available other
than by reason of a breach of this Section 9.1, (i) this Agreement, the
schedules hereto, and the conversations, negotiations and transactions relating
hereto and/or contemplated hereby, and (ii) all financial information, business
records and other non-public information concerning either party which the other
party or its representatives has received or may hereafter receive, shall be
maintained in the strictest confidence by the recipient and its representatives,
and shall not be disclosed to any person that is not associated or affiliated
with the recipient and involved in the transactions contemplated hereby, without
the prior written approval of the party which provided the information. The
parties hereto shall use their best efforts to avoid disclosure of any of the
foregoing or undue disruption of any of the business operations or personnel of
the parties, and no party shall issue any press release or other public
announcement regarding the transactions contemplated hereby without the prior
approval of each other party (such approval not to be unreasonably withheld or
delayed) unless otherwise required under applicable laws and regulations,
including SEC rules and regulations. In the event that the transactions
contemplated hereby shall not be consummated for any reason, each party
covenants and agrees that neither it nor any of its representatives shall retain
(other than information which is publicly available other than by reason of a
breach of this Section 9.1) any documents, lists or other writings of any other
party which it may have received or obtained in connection herewith or any
documents incorporating any of the information contained in any of the same (all
of which, and all copies thereof in the possession or control of the recipient
or its representatives, shall be returned to the party which provided the
information).
9.2 Exclusivity. From the date hereof through any termination of
this Agreement in accordance with Section 13 below, the Seller and AUGI shall
not (and shall not permit any of their stockholders, directors, officers,
Affiliates, agents or representatives to) negotiate with or enter into any other
commitments, agreements or understandings with any person, firm or corporation
(other than its Affiliates) in respect of any sale of capital stock or assets of
the Seller, any merger, consolidation or corporate reorganization, or any other
such transaction relating to the Seller or the Businesses.
9.3 Bill of Sale; Transfer Documents; Assumption Agreement.
(a) On the Closing Date, the Seller shall execute and
deliver to the Buyer a bill of sale in respect of the Assets in substantially
the form of
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Exhibit A annexed hereto (the "Bill of Sale"). In addition, to the extent that
specific assignments may be necessary or appropriate in respect of any of the
Assets, and/or to the extent that any of the Assets are represented by
certificates of title or other documents, then the Seller shall execute and
deliver to the Buyer any and/or additional transfer documents, and shall endorse
to and in the name of the Buyer all certificates of title and other such
documents, as may be necessary or appropriate in order to effect the full
transfer to the Buyer or its designee(s) of all of the Assets.
(b) On the Closing Date, the Seller and the Buyer shall
execute and deliver to one another an assignment and assumption agreement in
respect of the Assumed Liabilities in substantially the form of Exhibit B
annexed hereto (the "Assumption Agreement"). In addition, to the extent that
specific assignments may be required in order to effect the assignment to and
assumption by the Buyer of any particular Assumed Liabilities, the Seller and
the Buyer shall execute and deliver to one another such additional assignment
and assumption documents.
9.4 Additional Agreements and Instruments. On or before the Closing
Date, the Seller, AUGI, EXTEL, and the Buyer shall execute, deliver and file all
exhibits, agreements, certificates, instruments and other documents, not
inconsistent with the provisions of this Agreement, which, in the opinion of
counsel to the parties hereto, shall reasonably be required to be executed,
delivered and filed in order to consummate the transactions contemplated by this
Agreement.
9.5 Non-Interference. Neither EXTEL, the Buyer, the Seller, nor
AUGI shall cause to occur any act, event or condition which would cause any of
their respective representations and warranties made in this Agreement to be or
become untrue or incorrect in any material respect as of the Closing Date, or
would interfere with, frustrate or render unreasonably expensive the
satisfaction by the other party or parties of any of the conditions precedent
set forth in Sections 10 and 11 below.
9.6 Management Agreement. On the Closing Date, the Management
Agreement dated April 15, 1998, as amended June 22, 1998, shall terminate as
provided in Section 5.2(ii) of the Management Agreement; provided however,
within 13 months of the Closing Date, EXTEL or Buyer shall pay AUGI in the
amount of $150,000 as reimbursement for advances of expenses by AUGI to CCC. The
obligation shall be evidenced by a promissory note to be delivered at the
Closing in the form attached hereto as Exhibit D.
9.7 Letter Agreement. On the Closing Date, AUGI and the Seller, on
the one hand, and EXTEL and the Buyer, on the other hand, shall execute and
deliver to each other the letter agreement in the form annexed hereto as Exhibit
E.
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10. CONDITIONS PRECEDENT
10.1 Conditions to Obligations of EXTEL and Buyer. The obligations
of EXTEL and the Buyer to consummate the transactions contemplated by this
Agreement are further subject to the satisfaction, at or before the Closing
Date, of all the following conditions, any one or more of which may be waived in
writing by the Buyer:
(a) Accuracy of Representations and Warranties. All
representations and warranties made by the Seller and/or AUGI in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
as though such representations and warranties were made on and as of that date.
(b) Performance. The Seller and AUGI shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by them on or before the Closing Date.
(c) Certification. The Buyer shall have received a
certificate, dated the Closing Date, signed by the Seller and AUGI, certifying,
in such detail as the Buyer and its counsel may reasonably request, that the
conditions specified in Sections 10.1(a) and 10.1(b) above have been fulfilled.
(d) Resolutions. The Buyer shall have received certified
resolutions of the Board of Directors and the sole stockholder of the Seller and
of the Board of Directors of AUGI, in form reasonably satisfactory to counsel
for the Buyer, authorizing the Seller's and AUGI's execution, delivery and
performance of this Agreement and all actions to be taken by the Seller and AUGI
hereunder.
(e) Absence of Litigation. No action, suit or proceeding by or
before any court or any governmental body or authority, against either the
Seller or AUGI or pertaining to the transactions contemplated by this Agreement
or their consummation, shall have been instituted on or before the Closing Date,
which action, suit or proceeding would, if determined adversely, have a Material
Adverse Effect.
(f) Due Diligence. The Buyer shall have completed, to its
satisfaction, due diligence of the properties and assets of the Businesses,
contracts, agreements, books, records and documents relating to the Seller and
the Assets.
(g) Consents. All necessary consents of third parties required
for the consummation of this Agreement and the proposed transaction, including:
(i) any parties to any Material Contracts (including, without limitation,
contracts with customers of the Businesses), and any licensing authorities which
are material to the Businesses, and (ii) any governmental authorities or
agencies to
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the extent required to be obtained prior to the Closing in
connection with the transactions contemplated by this Agreement, shall have been
obtained and true and complete copies thereof delivered to the Buyer.
(h) Material Adverse Effect. On the Closing Date, there shall
not have occurred any event or condition materially and adversely affecting the
Assets or the financial condition, operations or Businesses of the Seller,
except as disclosed in this Agreement or the schedules hereto on the date
hereof.
(i) Extension of UPS Note. AUGI shall have obtained prior to
the Closing Date, an extension until not earlier than November 1999 of the $1.5
million note of Connectsoft and AUGI payable to UPS, which is currently due and
payable on April 30, 1999 (the "UPS Note").
(j) Intercompany Obligations. The Buyer shall have received
from AUGI and its Affiliates written releases or other assurances, in form and
substance reasonably satisfactory to the Buyer, that AUGI and its Affiliates
will not assert against the Buyer or the Assets or any of Buyer's Affiliates any
claims in respect of obligations owed by the Seller to AUGI and its Affiliates,
except for the Note to be delivered at the Closing in the form annexed hereto as
Exhibit D.
(k) Additional Working Capital. EXTEL shall have obtained a
minimum of $1.0 million of additional working capital financing for the
Businesses upon such terms and conditions as shall be reasonably acceptable to
EXTEL.
(l) Bill of Sale. On or before the Closing Date, the Seller
shall have executed and delivered the Bill of Sale to the Buyer.
(m) Keyman Agreement. On or before the Closing Date, Howard
Katz shall have entered into an employment agreement with EXTEL on terms and
conditions mutually agreeable to Howard Katz and EXTEL.
(n) Non-Disclosure Agreements. All employees of CCC shall have
executed and delivered to CCC (and Buyer shall have received copies thereof)
Non-Disclosure Agreements in form and substance reasonably satisfactory to
Buyer.
10.2 Conditions to Obligations of AUGI and Seller. The
obligations of AUGI and the Seller to consummate the transactions contemplated
by this Agreement are further subject to the satisfaction, at or before the
Closing Date, of all the following conditions, any one or more of which may be
waived in writing by AUGI:
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(a) Accuracy of Representations and Warranties. All
representations and warranties made by EXTEL and the Buyer in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
as though such representations and warranties were made on and as of that date.
(b) Performance. EXTEL and the Buyer shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by EXTEL and the Buyer on or before the Closing Date.
(c) Certification. The Seller and AUGI shall have received a
certificate, dated the Closing Date, executed by EXTEL and the Buyer,
certifying, in such detail as the Seller and AUGI and their counsel may
reasonably request, that the conditions specified in Sections 10.2(a) and
10.2(b) above have been fulfilled.
(d) Resolutions. The Seller and AUGI shall have received
certified resolutions of the Board of Directors and sole stockholder of the
Buyer and of the Board of Directors of EXTEL, in form reasonably satisfactory to
counsel for the Seller and AUGI, authorizing the Buyer's and EXTEL's execution,
delivery and performance of this Agreement and all actions to be taken by the
Buyer and EXTEL hereunder.
(e) Consents. All necessary consents of third parties required
for the consummation of this Agreement and the proposed transaction, including:
(i) any parties to any Material Contracts (including, without limitation,
contracts with customers of the Businesses), and any licensing authorities which
are material to the Businesses, and (ii) any governmental authorities or
agencies to the extent required to be obtained prior to the Closing in
connection with the transactions contemplated by this Agreement, shall have been
obtained and true and complete copies thereof delivered to the Buyer.
(f) Assumption Agreement. The Buyer shall have executed and
delivered to the Seller the Assumption Agreement.
(g) Promissory Note. The Buyer and EXTEL shall have executed
and delivered to AUGI the Note in the form annexed hereto as Exhibit D.
(h) Letter Agreement. The Buyer and EXTEL shall have executed
and delivered to AUGI and the Seller the letter agreement in the form annexed
hereto as Exhibit E.
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11. CLOSING.
11.1 Place and Date of Closing. Unless this Agreement shall be
terminated pursuant to Section 13 below, the consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of the Buyer, or such other location as is agreed to between the parties, at
10:00 A.M. local time on the date that is three (3) business days after the
satisfaction of all conditions to Closing set forth herein, it being understood
that the parties hereto shall use their best efforts to satisfy the conditions
precedent to Closing, in each case on or before July 15, 1998 (the date of the
Closing being referred to in this Agreement as the "Closing Date"). If,
notwithstanding the parties' best efforts, such conditions shall not have been
satisfied by such date, then the Closing Date shall be extended to the date that
is three (3) Businesses days after the satisfaction of all such conditions, but
which shall not in any case be later than July 31, 1998 ("Outside Closing
Date"), unless the parties hereto agree in writing otherwise.
11.2 Deliveries at Closing. At the Closing, the Seller and the
Buyer, respectively, will deliver the following documents:
(a) The Seller and AUGI will deliver or cause to be delivered
to EXTEL and to the Buyer:
(i) a copy of the by-laws of the Seller and resolutions
adopted by the Seller's Board of Directors and sole stockholder approving the
transactions contemplated by this Agreement, certified by the Secretary of the
Seller as of the Closing Date;
(ii) a copy of the certificate of incorporation of the
Seller, with all amendments thereto, together with a long form good standing
certificate and tax clearance certificate, certified by the Secretary of State
of the Seller's state of incorporation as of a date no later than five (5) days
before the Closing Date;
(iii) certificate(s) by the Secretaries of the Seller and
of AUGI, dated as of the Closing Date, attesting to the authority and verifying
the signature of each person who signed this Agreement or any other agreement,
instrument or certificate delivered in connection with the transactions
contemplated hereby on behalf of the Seller and AUGI, respectively;
(iv) all agreements, authorizations, exemptions, waivers
and consents of any third persons or entities required to be obtained by the
Seller or AUGI hereunder or generally necessary for the consummation by the
Seller and AUGI of the transactions contemplated by this Agreement;
(v) sufficient, original, executed copies of assignments
of patents, trademarks and/or copyrights, in form and substance
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acceptable to the Buyer, such that there is one original version for each
group of patents, trademarks and copyrights;
(vi) certificate(s), dated the Closing Date, signed by the
chief financial officer of each of the Seller and AUGI that the conditions
specified in Section 10.2(a) and (b) hereof have been fulfilled in all respects;
(vii) assignment of leases for each Lease; and
(viii) such other specific instruments of sale,
conveyance, assignment, transfer, and delivery as are required to vest good and
marketable title to the Assets in the Buyer.
(b) EXTEL and the Buyer will deliver or cause to be
delivered to the Seller and to AUGI:
(i) a copy of the by-laws of the Buyer and resolutions
adopted by the Buyer's Board of Directors and sole stockholder approving the
transactions contemplated by this Agreement, certified by the Secretary of the
Buyer as of the Closing Date;
(ii) a copy of the certificate of incorporation of the
Buyer, with all amendments thereto, together with a long form good standing
certificate and tax clearance certificate, certified by the Secretary of State
of the Buyer's state of incorporation as of a date no later than five (5) days
before the Closing Date;
(iii) certificate(s) by the Secretaries of EXTEL and of
the Buyer, dated as of the Closing Date, attesting to the authority and
verifying the signature of each person who signed this Agreement or any other
agreement, instrument or certificate delivered in connection with the
transactions contemplated hereby on behalf of EXTEL and the Buyer, respectively;
(iv) certificate(s), dated the Closing Date, signed by the
chief financial officer of each of EXTEL and the Buyer that the conditions
specified in Section 10.1(a) and (b) hereof have been fulfilled in all respects;
and
(v) such other specific instruments of conveyance,
assignment, transfer, and delivery as are required to confirm that the Buyer
shall have assumed the payment and performance of the Assumed Liabilities and
the performance of the Material Contracts.
12. TERMINATION OF AGREEMENT.
12.1 General. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the
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Closing: (a) by the mutual written consent of the parties hereto; (b) by EXTEL
and the Buyer, on the one hand, or by the Seller and AUGI, on the other hand,
if: (i) a material breach shall exist with respect to the written
representations and warranties made by the other party or parties, as the case
may be, which breach shall not have been cured within thirty (30) days after
notice thereof to such other party or parties; (ii) the other party or parties,
as the case may be, shall take any action prohibited by this Agreement, if such
actions shall or may have a Material Adverse Effect on the financial condition,
operations, or Businesses of the Seller or on any material portion of the Assets
and/or the consummation of the transactions contemplated hereby, and such breach
shall not have been cured, if the same is capable of cure, within thirty (30)
days after notice thereof to the breaching party, (iii) the other party or
parties, as the case may be, shall not have furnished, upon reasonable notice
therefor, such certificates and documents required in connection with the
transactions contemplated hereby and matters incidental thereto as it or they
shall have agreed to furnish, and it is reasonably unlikely that the other party
or parties will be able to furnish such item(s) prior to the Outside Closing
Date specified below, or (iv) any consent of any third party to the transactions
contemplated hereby (whether or not the necessity of which is disclosed herein
or in any schedule hereto) is reasonably necessary to prevent a default under
any outstanding material obligation of EXTEL, the Buyer, AUGI or the Seller, and
such consent is not obtainable, after good faith efforts to obtain the same,
without material cost or penalty (unless the party or parties not seeking to
terminate this Agreement agrees or agree to pay such cost or penalty); or (c) by
EXTEL or the Buyer, on the one hand, or by the Seller and AUGI, on the other
hand, at any time on or after the Outside Closing Date, if the transactions
contemplated hereby shall not have been consummated prior thereto, and the party
directing termination shall not then be in breach or default of any obligations
imposed upon such party by this Agreement.
12.2 Effect of Termination. In the event of termination by
either party as above provided in this Section 12, prompt written notice shall
be given to the other party. Termination of this Agreement shall not relieve any
party of any of its obligations pursuant to Section 9.1 above, and shall not
relieve any breaching party from liability for any breach of this Agreement.
13. INDEMNIFICATION. It is expressly understood and agreed by and among
all parties to this Agreement that the indemnification provisions set forth in
this Article 13 are in addition to, and not in lieu of, the respective
indemnification obligations of each of EXTEL and AUGI as are set forth in
Article 14 herein. In the event and to the extent that there shall be any
inconsistency between the rights and obligations contained in this Article 13
and to Article 14, the terms and conditions of Article 14, shall, in all
respects, govern.
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13.1 General.
(a) Without prejudice to any rights of contribution as between
the Seller and AUGI, from and after the Closing Date, the Seller and AUGI shall
jointly and severally defend, indemnify and hold harmless the Buyer and its
stockholders, affiliates, officers, directors, employees and agents (each a
"Buyer Indemnified Person") from, against and in respect of any and all claims,
losses, costs, expenses, obligations, liabilities, damages, recoveries and
deficiencies, including costs of investigation, interest, penalties and
reasonable attorneys' fees, that the Buyer may incur, sustain or suffer
("Losses") as a result of (i) any breach of, or failure by the Seller or AUGI to
perform, in any material respect, any of the representations, warranties,
covenants or agreements of the Seller or AUGI contained in this Agreement, or
(ii) any failure by the Seller to pay or perform when due (or any imposition on
the Buyer or EXTEL) any of its retained liabilities (including any liabilities
of the Business or the Seller which are not Assumed Liabilities).
(b) Without prejudice to any rights of contribution as
between the Buyer and EXTEL, from and after the Closing Date, the Buyer and
EXTEL shall jointly and severally defend, indemnify and hold harmless the Seller
and AUGI, and their respective stockholders, affiliates, officers, directors,
employees and agents (each a "Seller Indemnified Person") from, against and in
respect of any and all claims, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including costs of
investigation, interest, penalties and reasonable attorneys' fees, that the
Seller or AUGI may incur, sustain or suffer as a result of (i) any breach of, or
failure by the Buyer or EXTEL to perform, in any material respect, any of the
representations, warranties, covenants or agreements of the Buyer or EXTEL
contained in this Agreement, or (ii) any failure by the Buyer to pay or perform
(or any imposition on the Seller or AUGI) when due any of the Assumed
Liabilities.
13.2 Limitations on Certain Indemnity.
(a) Notwithstanding any other provision of this
Agreement to the contrary, the Seller and AUGI shall not be liable to the Buyer
with respect to Losses unless and until, and then only to the extent that, the
aggregate amount of all Losses incurred by the Buyer shall exceed the sum of
$50,000 (the "Basket"); provided, however, that the Basket shall not be
available with respect to any Losses involving proven fraud by the Seller or
AUGI. The Seller and AUGI shall thereafter be liable for all Losses in excess of
the Basket, provided that the Seller's and AUGI's maximum aggregate liability in
respect of all Losses shall not, in the absence of proven fraud by the Seller or
AUGI in respect of any particular Losses, in any event exceed the limitations
set forth in Section 13.2(b) below.
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(b) Except with respect to any Losses involving proven fraud
by the Seller or AUGI, the Seller and AUGI shall only be required, in the
aggregate, to pay indemnification hereunder, after application of the Basket, up
to a maximum amount equal to the Consideration.
(c) The Buyer shall be entitled to indemnification by the
Seller and AUGI for Losses only in respect of claims for which notice of claim
shall have been given to the Seller and AUGI on or before June 30, 1999, or,
with respect to Losses relating to a breach of any warranties in respect of
taxes, the expiration of the final statute of limitations for those tax returns
covered by the tax warranties contained herein; provided, however, that the
Buyer shall not be entitled to indemnification from the Seller or AUGI in the
event that the subject claim for indemnification relates to a third-party claim
and the Buyer delayed giving notice thereof to the Seller and AUGI to such an
extent as to cause material prejudice to the defense of such third-party claim.
This Section 13.2(c) shall not apply to any failure by the Seller to pay when
due any of its retained liabilities.
13.3 Claims for Indemnity. Whenever a claim shall arise for
which any party shall be entitled to indemnification hereunder, the indemnified
party shall notify the indemnifying party in writing (which may include
facsimile transmission) within three (3) Business days of the indemnified
party's first receipt of notice of, or the indemnified party's obtaining actual
knowledge of, such claim, and in any event within such shorter period as may be
necessary for the indemnifying party or parties to take appropriate action to
resist such claim. Such notice shall specify all facts known to the indemnified
party giving rise to such indemnity rights and shall estimate (to the extent
reasonably possible) the amount of potential liability arising therefrom. If the
indemnifying party shall be duly notified of such dispute, the parties shall
attempt to settle and compromise the same or may agree to submit the same to
arbitration or, if unable or unwilling to do any of the foregoing, such dispute
shall be settled by appropriate litigation, and any rights of indemnification
established by reason of such settlement, compromise, arbitration or litigation
shall promptly thereafter be paid and satisfied by those indemnifying parties
obligated to make indemnification hereunder.
13.4 Right to Defend. If the facts giving rise to any claim for
indemnification shall involve any actual or threatened action or demand by any
third party against the indemnified party or any of its Affiliates, the
indemnifying party or parties shall be entitled (without prejudice to the
indemnified party's right to participate at its own expense through counsel of
its own choosing), at their expense and through counsel of their own choosing,
to defend or prosecute such claim in the name of the indemnifying party or
parties, or any of them, or if necessary, in the name of the indemnified party.
In any event, the indemnified party shall give the indemnifying party advance
written notice of any proposed compromise or settlement of any such claim. If
the remedy sought in any such action or demand is solely money damages, the
indemnifying party shall have five
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(5) Business Days after receipt of such notice of settlement to object to the
proposed compromise or settlement, and if it does so object, the indemnifying
party shall be required to undertake, conduct and control, though counsel of
its own choosing and at its sole expense, the settlement or defense thereof,
and the indemnified party shall cooperate with the indemnifying party in
connection therewith.
14. INDEMNIFICATION - ASSUMED LIABILITIES/MATERIAL CONTRACTS
14.1. Indemnification of the Seller and AUGI. Each of EXTEL and
Buyer does hereby jointly and severally, irrevocably, absolutely and
unconditionally indemnify, defend and hold harmless the Seller and AUGI, and
each of them, individually and severally, to the fullest extent permitted by
law, from and against any claim against the Seller or AUGI in respect of (i) any
act, omission, neglect, breach or failure by EXTEL and/or Buyer, or either of
them, to timely and fully pay and perform each and every one of the Assumed
Liabilities and Material Contracts, when due, and (ii) as a result of, arising
from or in connection with any claim by any taxing authority for Taxes of or
relating to EXTEL or Buyer, including (but not limited to) all Taxes
attributable to the business and operations of any of them after the Closing
Date (all of the foregoing being referred to collectively as the "AUGI Group
Indemnified Amounts"), except to the extent provided in Sections 2.2(b) and
14.2. Each of the Buyer and EXTEL jointly and severally covenants and agrees to
fully pay and reimburse each of the Seller and AUGI, within twenty-four (24)
hours of written demand therefor, for any payments made or amounts which the
Seller or AUGI becomes legally obligated to pay in connection with any of the
AUGI Group Indemnified Amounts, except to the extent provided in Sections 2.2(b)
and 14.2.
14.2 Indemnification of the Buyer and EXTEL. Each of AUGI,
Connectsoft and CCC does hereby jointly and severally, irrevocably, absolutely
and unconditionally indemnify, defend and holds harmless the Buyer and EXTEL,
and each of them, individually and severally, to the fullest extent permitted by
law, from and against any claim against the Buyer or EXTEL in respect of (i) any
act, omission, neglect, breach or failure by AUGI, Connectsoft and/or CCC, or
any of them, to timely and fully pay and perform (a) each and every one of the
Excluded Liabilities, when due, and (b) any of the Assumed Liabilities, but only
to the extent that the aggregate principal amount of all such Assumed
Liabilities shall exceed $4,500,000 and (ii) as a result of, arising from or in
connection with any claim by any taxing authority for Taxes of or relating to
AUGI, Connectsoft or CCC, including (but not limited to) all Taxes attributable
to the business and operations of any of them prior to the Closing Date (all of
the foregoing being referred to collectively as the "EXTEL Group Indemnified
Amount"). For purposes of this Agreement, "Taxes" shall mean all federal, state,
county, local and other taxes, including, without limitation, income taxes,
estimated taxes, withholding taxes, excise taxes, sales taxes, use taxes, gross
receipt taxes, franchise taxes, employment
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and payroll related taxes, property taxes and import duties, whether or not
measured in whole or in part by net income, and all deficiencies or other
additions to tax, interest and penalties owed by it in connection with any such
taxes. Each of AUGI, Connectsoft and CCC jointly and severally covenants and
agrees to fully pay and reimburse each of the Buyer and EXTEL, within
twenty-four (24) hours of written demand therefor, for any payments made or
amounts which the Buyer or EXTEL becomes legally obligated to pay in connection
with any of the EXTEL Group Indemnified Amount.
14.3 Claims for Indemnity. Whenever a claim shall arise for
which any party shall be entitled to indemnification hereunder, the indemnified
party shall promptly notify the indemnifying party in writing (which may include
facsimile transmission) following the indemnified party's receipt of notice of,
or the indemnified party's obtaining actual knowledge of, such claim. Such
notice shall specify all facts known to the indemnified party giving rise to
such indemnity rights and shall estimate (to the extent reasonably possible) the
amount of potential liability arising therefrom.
14.4 Right to Defend. If the facts giving rise to any claim for
indemnification shall involve any actual or threatened action or demand by any
third party against the indemnified party or any of its affiliates, the
indemnifying party or parties shall be entitled (without prejudice to the
indemnified party's right to participate at its own expense through counsel of
its own choosing), at their expense and through counsel of their own choosing,
to defend or prosecute such claim in the name of the indemnifying party or
parties, or any of them, or if necessary, in the name of the indemnified party.
In any event, the indemnified party shall give the indemnifying party advance
written notice of any proposed compromise or settlement of any such claim. If
the remedy sought in any such action or demand is solely money damages, the
indemnifying party shall have three (3) days after receipt of such notice of
settlement to object to the proposed compromise or settlement, and if it does so
object, the indemnifying party shall be required to undertake, conduct and
control, though counsel of its own choosing and at its sole expense, the
settlement or defense thereof, and the indemnified party shall cooperate with
the indemnifying party in connection therewith.
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15. POST-CLOSING EVENTS. The parties hereby further agree
that, from and after the Closing:
15.1 Books and Records. At any time and from time to time from and
after the Closing Date, the Buyer shall permit the Seller and/or AUGI to have
access, during normal business hours and without undue disruption of the Buyer's
Businesses, to those books and records transferred to the Buyer as part of the
Assets, for purposes of preparing any tax filings or any other legitimate
purpose of the Seller and/or AUGI. Such books and records may be made available
at any location where the Buyer maintains same, and all costs and expenses
relating to such access and inspection shall be the responsibility of the Seller
and/or AUGI. In the event that, at any time and from time to time after the
Closing Date, the Buyer shall determine to destroy or dispose of any such books
and records, the Buyer shall give notice thereof to the Seller and/or AUGI not
less than thirty (30) days prior to such disposition, and the Seller and/or AUGI
shall have the right, at their own cost and expense, to take possession of such
books and records prior to their disposition.
15.2 Employees. The Buyer hereby confirms its intention to retain,
as of the Closing Date, the employees of the Businesses identified on Schedule
15.2, provided that the Buyer shall at all times retain the absolute discretion
to terminate, dismiss, reassign or otherwise modify the terms of employment of
any or all of such employees. The Buyer shall retain full discretion as to the
nature and extent of benefits to be provided to employees for periods from and
after the Closing Date.
15.3 Further Assurances. From time to time from and after the
Closing Date, the parties will take any and all such action and execute and
deliver to one another any and all further agreements, instruments, certificates
and other documents, as may reasonably be requested by any other party in order
more fully to consummate the transactions contemplated hereby, and to effect an
orderly transition of the ownership and operations of the Businesses.
16 COSTS.
16.1 Finder's or Broker's Fees. The Buyer and EXTEL (on the one
hand) and the Seller and AUGI (on the other hand) represents and warrants that
neither they nor any of their respective Affiliates have dealt with any broker
or finder in connection with any of the transactions contemplated by this
Agreement, and no broker or other person is entitled to any commission or
finder's fee in connection with any of these transactions.
16.2 Expenses. The Buyer, the Seller and AUGI shall each pay all of
their own respective costs and expenses incurred or to be incurred by them,
respectively, in negotiating and preparing this Agreement and in closing and
carrying out the transactions contemplated by this Agreement.
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17. FORM OF AGREEMENT.
17.1 Effect of Headings. The Section headings used in this
Agreement and the titles of the schedules hereto are included for purposes of
convenience only, and shall not affect the construction or interpretation of any
of the provisions hereof or of the information set forth in such schedules.
17.2 Entire Agreement; Waivers. This Agreement (including the
schedules and exhibits hereto) constitutes the entire agreement between the
parties pertaining to the subject matter hereof, and supersedes all prior
agreements or understandings as to such subject matter. No party hereto has made
any representation or warranty or given any covenant to the other except as set
forth in this Agreement and the schedules and exhibits hereto. No waiver of any
of the provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
17.3 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18. PARTIES.
18.1 Parties in Interest. Nothing in this Agreement, whether
expressed or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective successors and permitted assigns, nor is anything in this Agreement
intended to relieve or discharge the Assumed Liabilities or liability of any
third persons to any party to this Agreement, nor shall any provision give any
third persons any right of subrogation or action over or against any party to
this Agreement.
18.2 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served personally on or
telecopied to the party to whom notice is to be given (telecopy confirmation
received by the transmitting party), one day after being deposited for overnight
delivery with a recognized overnight courier service in a properly addressed
package with all charges prepaid or billed to the account of the sender, or on
the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid, and
properly addressed as follows:
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(a) If to the Seller or AUGI:
Connectsoft, Inc.
c/o American United Global, Inc.
11130 NE 33rd Place, Suite 250
Bellevue, Washington 98004
Attn: Mr. Robert M. Rubin
Fax No.: (425) 822-9095 and (516) 254-2136
with a copy sent concurrently to:
Jay M. Kaplowitz, Esq.
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Fax No.: (212) 980-5192
(b) If to the Buyer:
Executive TeleCard, Ltd.
4260 East Evans Avenue
Denver, Colorado 80222
Attn: Christopher Vizas
Fax No.: (303) 692-0965
with a copy sent concurrently to:
Stephen Kaufman, Esq.
Hogan & Hartson, LLP
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Fax No.: (202) 637-5910
or to such other address or telecopier number as any party shall have specified
by notice in writing given to all other parties.
19. MISCELLANEOUS.
19.1 Amendments and Modifications. No amendment or modification
of this Agreement or any exhibit or schedule hereto shall be valid unless made
in writing and signed by the party to be charged therewith.
19.2 Non-Assignability; Binding Effect. Neither this Agreement,
nor any of the rights or liabilities of the parties hereunder, shall be
assignable by any party hereto without the prior written consent of all other
parties hereto, except that the Buyer may, without requirement of any consent of
AUGI or
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the Seller, assign the Buyer's rights to indemnification hereunder to any
secured lender to the Buyer from time to time. Otherwise, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
19.3 Governing Law; Jurisdiction. This Agreement shall be
construed and interpreted and the rights granted herein governed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed wholly within such State. Except as otherwise provided in Section 13.3
and Section 14.3 above, any claim, dispute or controversy arising under or in
connection with this Agreement or any actual or alleged breach hereof shall be
settled exclusively by arbitration in accordance with the commercial arbitration
rules of the American Arbitration Association then obtaining. As part of his or
her award, the arbitrator shall make a fair allocation of the fee of the
American Arbitration Association, the cost of any transcript, and the parties'
reasonable attorneys' fees, taking into account the merits and good faith of the
parties' claims and defenses. Judgment may be entered on the award so rendered
in any court having jurisdiction. Any process or other papers hereunder may be
served by registered or certified mail, return receipt requested, or by personal
service, provided that a reasonable time for appearance or response is allowed.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties have executed this Agreement
on and as of the date first set forth above.
AMERICAN UNITED GLOBAL, INC.
By:_________________________________________
Name:
Title:
CONNECTSOFT COMMUNICATIONS
CORPORATION
By:_________________________________________
Name:
Title:
CONNECTSOFT HOLDING CORP.
By:_________________________________________
Name:
Title:
C-SOFT ACQUISITION CORP.
By:_______________________________________
Name:
Title
EXECUTIVE TELECARD, LTD.
By:_______________________________________
Name:
Title
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EXHIBIT 10.2
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT
Amendment No. 1 to Asset Purchase Agreement entered into this 30th day
of July, 1998 by and among American United Global, Inc. ("AUGI"), Connectsoft
Communications Corporation ("CCC"), Connectsoft Holding Corp. ("Connectsoft")
and Executive TeleCard, Ltd. ("EXTEL") and C-Soft Acquisition Corp. (the
"Buyer").
WHEREAS, AUGI, CCC, Connectsoft, EXTEL and the Buyer entered into an
Asset Purchase Agreement dated July 10, 1998 (the "Purchase Agreement"); and
WHEREAS, the parties desire to make certain amendments to the Purchase
Agreement.
NOW THEREFORE, the parties hereto do hereby agree as follows:
1. The last sentence of Section 11.1 of the Purchase Agreement shall be
amended to read as follows:
"If, notwithstanding the parties' best efforts, such conditions
shall not have been satisfied by such date, then the Closing Date
shall be extended to the date that is three (3) Business days after
the satisfaction of all such conditions, but which shall not in any
case be later than August 15, 1998 ("Outside Closing Date"), unless
the parties hereto agree in writing otherwise."
2. Capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Purchase Agreement. All other terms and
provisions of the Purchase Agreement shall continue in full force and effect and
unchanged and are hereby confirmed in all respects.
3. This Amendment No. 1 to Purchase Agreement may be executed in
several counterparts, each of which is an original, but all of which together
constitute one and the same agreement. The descriptive headings in this
Amendment No. 1 to Purchase Agreement are for convenience of reference only and
shall not define or limit the provisions hereof.
4. This Amendment No. 1 to Purchase Agreement is governed by, and shall
be construed in accordance with, the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to
Purchase Agreement on and as of the date first set forth above.
AMERICAN UNITED GLOBAL, INC.
By:_________________________________________
Name:
Title:
CONNECTSOFT COMMUNICATIONS
CORPORATION
By:_________________________________________
Name:
Title:
CONNECTSOFT HOLDING CORP.
By:_________________________________________
Name:
Title:
C-SOFT ACQUISITION CORP.
By:_________________________________________
Name:
Title
EXECUTIVE TELECARD, LTD.
By:_________________________________________
Name:
Title
- 2 -
EXHIBIT 10.3
AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT
Amendment No. 2 to Asset Purchase Agreement entered into this __ day of
August, 1998 by and among American United Global, Inc. ("AUGI"), Connectsoft
Communications Corporation ("CCC"), Connectsoft Holding Corp. ("Connectsoft")
and Executive TeleCard, Ltd. ("EXTEL") and C-Soft Acquisition Corp. (the
"Buyer").
WHEREAS, AUGI, CCC, Connectsoft, EXTEL and the Buyer entered into an
Asset Purchase Agreement dated July 10, 1998, which was subsequently amended on
July 30, 1998 (the "Purchase Agreement"); and
WHEREAS, the parties desire to make certain amendments to the Purchase
Agreement.
NOW THEREFORE, the parties hereto do hereby agree as follows:
1. The last sentence of Section 11.1 of the Purchase Agreement shall be
amended to read as follows:
"If, notwithstanding the parties' best efforts, such conditions
shall not have been satisfied by such date, then the Closing Date
shall be extended to the date that is three (3) Business days after
the satisfaction of all such conditions, but which shall not in any
case be later than September 15, 1998 ("Outside Closing Date"),
unless the parties hereto agree in writing otherwise."
2. Capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Purchase Agreement. All other terms and
provisions of the Purchase Agreement shall continue in full force and effect and
unchanged and are hereby confirmed in all respects.
3. This Amendment No. 2 to Purchase Agreement may be executed in
several counterparts, each of which is an original, but all of which together
constitute one and the same agreement. The descriptive headings in this
Amendment No. 2 to Purchase Agreement are for convenience of reference only and
shall not define or limit the provisions hereof.
4. This Amendment No. 2 to Purchase Agreement is governed by, and shall
be construed in accordance with, the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 to
Purchase Agreement on and as of the date first set forth above.
AMERICAN UNITED GLOBAL, INC.
By:_________________________________________
Name:
Title:
CONNECTSOFT COMMUNICATIONS
CORPORATION
By:_________________________________________
Name:
Title:
CONNECTSOFT HOLDING CORP.
By:_________________________________________
Name:
Title:
C-SOFT ACQUISITION CORP.
By:_________________________________________
Name:
Title
EXECUTIVE TELECARD, LTD.
By:_________________________________________
Name:
Title
-2-
EXHIBIT 10.4
AMENDMENT NO. 3 TO ASSET PURCHASE AGREEMENT
Amendment No. 3 to Asset Purchase Agreement (the "Amendment") is
entered into as of this 17th day of June, 1999 by and among American United
Global, Inc. ("AUGI"), Connectsoft Communications Corporation ("CCC"),
Connectsoft Holding Corp. ("Connectsoft"), Executive TeleCard, Ltd., doing
business as eGlobe ("EXTEL"), C-Soft Acquisition Corp. (the "Buyer") and Vogo
Networks, LLC, a Delaware limited liability company of which eGlobe is the only
member ("Vogo LLC").
WHEREAS, AUGI, CCC, Connectsoft, EXTEL and the Buyer entered into an
Asset Purchase Agreement dated July 10, 1998 (the "Purchase Agreement"); and
WHEREAS, the parties desire to make certain amendments to the Purchase
Agreement.
NOW THEREFORE, the parties hereto do hereby agree as follows:
1. Vogo LLC shall be substituted for C-Soft Acquisition Corp. for all
purposes under the Purchase Agreement and shall be the "Buyer" thereunder. All
references in the representations and warranties of Vogo LLC (as the Buyer)
shall be deemed to refer to Vogo LLC being a newly formed (on May 13, 1999)
Delaware limited liability company of which eGlobe is the only member, and of
the Agreement being a valid and binding obligation of Vogo LLC from and after
execution of this Amendment by the parties hereto. The references to the Buyer
and corporate documents and certificates of the Buyer in Section 11.2(b)(i)
through (iv) shall be deleted in their entirety.
2. The Purchase Agreement shall be amended by adding to the definition
of "Assets", as Section 1.1(h) (and moving the "and" from after Section 1.1(f)
to after Section 1.1(g)), the following:
(h) Not less than $300,000 in cash, and a Note in the amount of
$200,000 of which AUGI is the maker, due in full (without interest)
<PAGE>
on July 15, 1999 (the "AUGI Note"), which Note will be in the form
attached hereto as Exhibit C."
3. The Purchase Agreement shall be amended by adding, at the end of
Section 1.2(a), the following:
(other than the $300,000 in cash and AUGI Note referred to in Section
1.1(h))."
4. The Purchase Agreement shall be amended by replacing Schedule 2.1 of
the Purchase Agreement, which refers to (and defines) the Assumed Liabilities,
and Schedule 5.8 of the Purchase Agreement, which refers to Material Contracts,
with the Schedules attached hereto as Schedules A and B. For the avoidance of
doubt, the parties acknowledge and agree that the liabilities listed on Schedule
A shall not include any obligations of AUGI, CCC or Connectsoft to UPS or any of
its affiliates ("UPS Liabilities"), and that such obligations shall not be
Assumed Liabilities for purposes of the Purchase Agreement.
5. Section 2.2 of the Purchase Agreement and Exhibit C referred to
therein shall be amended by deleting all of said section and exhibit in their
entirety.
6. Section 3.1 of the Purchase Agreement shall be amended by deleting
all of said section and replacing the deleted language with a new Section 3.1
that reads as follows:
"3.1 Consideration to the Seller. The entire purchase price for the
Assets (the "Consideration") shall consist of (i) the assumption by the
Buyer of the Assumed Liabilities, and the Buyer's agreement to pay and
perform, when due, all of such Assumed Liabilities; (ii) the issuance
by EXTEL of one (1) share of its 6% Series H Cumulative Convertible
Redeemable Preferred Stock, par value $.001 per share, of EXTEL ("EXTEL
Convertible Preferred Stock"), the terms of which are set forth in the
Certificate of Designations for the EXTEL Convertible Preferred Stock
in the form attached hereto as Exhibit D; and (iii) a Note, in the form
attached hereto as Exhibit E (the "EXTEL Note"), in the amount of
$500,000, of which $200,000 is contingent upon the payment in full by
AUGI under the $200,000 AUGI Note."
7. The Purchase Agreement shall be amended by adding new Sections 6.3,
6.4 and 6.5 that read as follows:
6.3 No Registration Under the Securities Act. AUGI and the Seller
understand that the shares of EXTEL Convertible Preferred Stock and the
EXTEL Note to be issued under this Agreement have not been and will not
be registered under the Securities Act of 1933, as
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<PAGE>
amended (the "Securities Act"), in reliance upon exemptions
contained in the Securities Act or interpretations thereof, and neither
such shares of EXTEL Convertible Preferred Stock, the EXTEL Common
Stock issuable upon conversion thereof, nor the EXTEL Note
(collectively, the "EXTEL Securities"), can be offered for sale, sold
or otherwise transferred unless such shares or note are so registered
or qualify for exemption from registration under the Securities Act.
6.4 Acquisition for Investment. The EXTEL Securities are being (or
will be) acquired in good faith by the Seller and AUGI solely for their
own account, for investment and not with a view toward resale or other
distribution within the meaning of the Securities Act. The EXTEL
Securities will not be offered for sale, sold or otherwise transferred
by the Seller or AUGI without either registration or exemption from
registration under the Securities Act.
6.5 Evaluation of Merits and Risks of Investment. The Seller and
AUGI have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of
their investment in the EXTEL Securities Stock. The Seller and AUGI
understand and are able to bear any economic risks associated with such
investment (including, without limitation, the necessity of holding
such shares for an indefinite period of time). AUGI and the Seller (as
a corporation wholly owned by AUGI) are "accredited investors" as
defined in Regulation D promulgated under the Securities Act. The
Seller and AUGI confirm that EXTEL has made available to them and their
representatives and agents the opportunity to ask questions of the
officers and management employees of EXTEL about the business and
financial condition of EXTEL as the Seller and AUGI or their
representatives have requested.
8. Sections 9.6 and 9.7 of the Purchase Agreement and Exhibits D and E
referred to therein shall be amended by deleting all of said sections and
exhibits in their entirety, and any promissory note delivered to AUGI under
the Purchase Agreement, or the Management Agreement dated as of July 1998 among
certain of the parties hereto (in each case as amended), is hereby superseded
(and canceled) by the transactions contemplated hereby, and shall be marked
"Void" and returned to the maker thereof.
9. Section 13.2(c) of the Purchase Agreement shall be amended by
replacing the reference to June 30, 1999 with the date that is one year from
the date hereof.
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<PAGE>
10. Sections 14.1 and 14.2 of the Purchase Agreement shall be amended
by deleting all of said Sections and replacing the deleted language with new
Sections 14.1, 14.2, 14.3 and 14.4 (and existing Sections 14.3 and 14.4, and
references thereto, shall be renumbered appropriately) that read as follows :
"14.1 Indemnification of the Seller and AUGI for Assumed
Liabilities. The Buyer does hereby irrevocably, absolutely and
unconditionally indemnify, defend and hold harmless the Seller and
AUGI, and each of them, individually and severally, to the fullest
extent permitted by law, from and against any claim against the Seller
or AUGI in respect of any act, omission, neglect, breach or failure by
Buyer to timely and fully pay and perform each and every one of the
Assumed Liabilities and Material Contracts, when due ("AUGI Group
Assumed Liability Indemnified Amounts"). The Buyer covenants and agrees
to fully pay each of the Seller and AUGI, within twenty-four (24) hours
of written demand therefor, for any payments made or amounts which the
Seller or AUGI becomes legally obligated to pay (and reimburse Seller
and AUGI, to the extent payment is made by them) in connection with any
of the AUGI Group Assumed Liability Indemnified Amounts.
"14.2 Indemnification by EXTEL for Certain Assumed Liabilities.
EXTEL does hereby irrevocably, absolutely and unconditionally
indemnify, defend and hold harmless AUGI from and against any claim
against AUGI in respect of any act, omission, neglect, breach or
failure by Buyer to timely and fully pay, when due, those Assumed
Liabilities which consist of liabilities to T&W which are guaranteed by
or primary obligations of AUGI ("AUGI Direct Obligations"). EXTEL
covenants and agrees to fully pay AUGI, within twenty-four (24) hours
of written demand therefor, for any payments made or amounts which AUGI
becomes legally obligated to pay (and reimburse AUGI, to the extent
payment is made by it) in connection with any of the AUGI Direct
Obligations. Notwithstanding the foregoing, the obligations of EXTEL
under this Section 14.2 shall be unsecured and subordinated in all
respects to EXTEL's existing and future obligations to IDT Corporation
and to EXTL Investors.
14.3 Indemnification of the Seller and AUGI for Certain Taxes.
EXTEL does hereby irrevocably, absolutely and unconditionally
indemnify, defend and hold harmless the Seller and AUGI, and each of
them, individually and severally, to the fullest extent permitted by
law, from and against any claim against the Seller or AUGI as a result
of, arising from or in connection with any claim by any taxing
authority for Taxes of or relating to EXTEL, including (but not limited
to) all Taxes attributable to the business and operations of EXTEL
-4-
<PAGE>
prior to the Closing Date (the "AUGI Group Indemnified Tax Amounts").
For purposes of this Agreement, "Taxes" shall mean all federal, state,
county, local and other taxes, including, without limitation, income
taxes, estimated taxes, withholding taxes, excise taxes, sales taxes,
use taxes, gross receipt taxes, franchise taxes, employment and payroll
related taxes, property taxes and import duties, whether or not
measured in whole or in part by net income, and all deficiencies or
other additions to tax, interest and penalties owed by it in connection
with any such taxes. EXTEL covenants and agrees to fully pay and
reimburse each of the Seller and AUGI, within twenty-four (24) hours of
written demand therefor, for any payments made or amounts which the
Seller or AUGI becomes legally obligated to pay in connection with the
AUGI Group Indemnified Tax Amounts.
14.4 Indemnification of the Buyer and EXTEL. Each of AUGI,
Connectsoft and CCC does hereby jointly and severally, irrevocably,
absolutely and unconditionally indemnify, defend and hold harmless the
Buyer and EXTEL from and against (i) any claim against EXTEL as a
result of, arising from or in connection with any claim by any taxing
authority for Taxes of or relating to AUGI, Connectsoft or CCC,
including (but not limited to) all Taxes attributable to the business
and operations of any of them prior to the Closing Date (the "EXTEL
Group Indemnified Tax Amounts"), and (ii) any claim against the Buyer
or EXTEL in respect of any act, omission, neglect, breach or failure by
AUGI, Connectsoft or CCC to timely and fully pay, when due, UPS
Liabilities. Each of AUGI, Connectsoft and CCC jointly and severally
covenants and agrees to fully pay and reimburse the Buyer and EXTEL, as
appropriate, within twenty-four (24) hours of written demand therefor,
for any payments made or amounts which the Buyer or EXTEL becomes
legally obligated to pay in connection with any UPS Liabilities."
11. AUGI and the Seller shall, and shall ensure that their
respective affiliates shall, afford to EXTEL and the Buyer, and their respective
officers, employees, accountants, consultants and legal counsel, access at any
time and from time to time following the date hereof, but during business days
and normal business hours, to the books, records and other information
(including without limitation, operating and financial information), contracts,
facilities and premises relating to the Assets, the Seller and all other
companies, divisions or other entities or portions thereof that EXTEL and Buyer
may reasonably request for purposes of preparing audited financial statements
pursuant to EXTEL's reporting requirements under the Securities Act of 1933 and
the Securities Exchange Act of 1934 (the "Securities Laws"), make available the
personnel, accountants and other representatives having knowledge regarding the
same and cooperate with and furnish assistance to EXTEL and the Buyer (provided
that
-5-
<PAGE>
AUGI and the Seller shall not be obligated to incur any non-minimal cost or
expense), as EXTEL or the Buyer may reasonably request in connection with the
preparation of financial statements with respect to the Assets and Assumed
Liabilities and the business represented thereby being acquired under the
Purchase Agreement. In connection with an audit of such financial statements, if
required, AUGI and its financial and other management agree to provide certain
representations in the form of a representation letter to BDO Seidman, LLP,
independent certified public accountants, in accordance with generally accepted
auditing standards. The provision of such financial statement representations
and information and assistance shall be reasonably prompt. AUGI and the Seller
shall ensure that none of such information is destroyed during the three year
period commencing on the closing date unless EXTEL and the Buyer have been
afforded a reasonable opportunity to obtain and make copies of the information.
Any document or information produced or disclosed pursuant to this Section 11 in
any form is Confidential Information and EXTEL and Buyer shall not permit the
duplication, use, or disclosure of any such Confidential Information by or to
any third party (other than officers, employees, accountants, consultants and
legal counsel) except as required pursuant to the Securities Laws and permitted
hereunder, unless such duplication, use or disclosure is specifically authorized
by AUGI or the Seller in writing prior to any disclosure. EXTEL and Buyer shall
use commercially reasonable diligence, and in no event less than that degree of
care that such party uses in respect to its own confidential information of like
nature, to prevent the unauthorized disclosure or reproduction of such
information.
12. EXTEL and the Buyer have previously delivered to the Seller and
AUGI true and correct copies of its Annual Report on Form 10K, filed April 16,
1999 and Registration Statement on Form S-1 effective May 28, 1999 (the "Recent
Public Filings"). The Recent Public Filings comply as to form with the
disclosure requirements applicable thereto and do not contain any false and
misleading statement or omit any fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. Since the date of the most recent of the Recent Public Filings, (a)
there has been no material change in the capitalization of EXTEL or the Buyer,
(b) the businesses of EXTEL, the Buyer and their respective subsidiaries have
been operated in the normal course, and (c) there has been no material adverse
change in the financial condition, operations or businesses of EXTEL, the Buyer,
and their respective subsidiaries (taken as a consolidated whole) from that
reflected in such report (except as indicated in any later filing with the
Securities and Exchange Commission).
13. Copies of all notices to the Buyer shall be sent to the Buyer at
its principal place of business, attention "President."
14. Capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Purchase Agreement. All terms and provisions
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<PAGE>
of the Purchase Agreement and amendments thereto, as amended hereby, shall
continue in full force and effect, and are hereby confirmed in all respects.
15. This Amendment No. 3 to Asset Purchase Agreement may be executed in
several counterparts, each of which is an original, but all of which together
constitute one and the same agreement. The descriptive headings in this
Amendment No. 3 to Asset Purchase Agreement are for convenience of reference
only and shall not define or limit the provisions hereof.
16. This Amendment No. 3 to Asset Purchase Agreement is governed by,
and shall be construed in accordance with, the laws of the State of Delaware.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first set forth above.
AMERICAN UNITED GLOBAL, INC.
By:__________________________________
Name/Title:__________________________
CONNECTSOFT COMMUNICATIONS
CORPORATION
By:__________________________________
Name/Title:__________________________
CONNECTSOFT HOLDING CORP.
By:__________________________________
Name/Title:__________________________
C-SOFT ACQUISITION CORP.
By:__________________________________
Name/Title:__________________________
EXECUTIVE TELECARD, LTD.
By:__________________________________
Name/Title:__________________________
VOGO NETWORKS, LLC
BY ITS MEMBER:
EXECUTIVE TELECARD, LTD.
By:__________________________________
-8-
EXHIBIT 10.5
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of June 17, 1999, between
VOGO NETWORKS, LLC, a Delaware limited liability company ("Buyer"), and
CONNECTSOFT COMMUNICATIONS CORPORATION, a Delaware corporation, and CONNECTSOFT
HOLDING CORP., a Washington corporation (collectively "Seller").
Buyer, Seller, American United Global, Inc., a Delaware corporation,
and Executive TeleCard Ltd., a Delaware corporation are parties to an Asset
Purchase Agreement dated as of July 10, 1998, as amended, including by Amendment
No. 3 thereto dated June __, 1999 (the "Purchase Agreement"). It is a condition
precedent to Seller's obligations under the Purchase Agreement that Buyer
execute and deliver this Assignment and Assumption Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Buyer hereby agrees as follows:
1. Capitalized terms used herein but not defined herein shall have the
meanings assigned such terms in the Purchase Agreement.
2. Seller hereby assigns to Buyer each of the contracts, agreements and
instruments set forth on Schedule B-1 hereto (the "Seller Contracts") and the
Assumed Liabilities set forth on Schedule B-2 hereto ("Assumed Liabilities").
3. Buyer hereby assumes all liabilities arising (i) under the Seller
Contracts and (ii) under the Assumed Liabilities, in each case from and after
the Closing Date, and hereby assumes, and agrees to be bound by, pay and fully
and faithfully discharge and perform, all obligations of Seller of continued
performance under the Seller Contracts and Assumed Liabilities from and after
the date hereof in accordance with the terms of the Purchase Agreement.
4. Notwithstanding anything contained in Sections 2 or 3 hereof to the
contrary, Buyer does not assume, and shall not be responsible for any
liabilities or obligations of Seller or any affiliate of Seller, whether fixed
or contingent, known or unknown, threatened, pending or unasserted, other than
the Seller Contracts and Assumed Liabilities. Seller does retain and shall
remain responsible for in accordance with the terms and conditions of the
Purchase Agreement, all of Seller's debts, liabilities and obligations of any
nature whatsoever, other than the Assumed Liabilities and Seller Contracts,
whether accrued, absolute or contingent, whether known or unknown, whether due
or to become due and whether related to the Assets or otherwise, and regardless
of when asserted, including, without limitation, the following liabilities or
obligations of Seller (none of which will constitute Assumed Liabilities):
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<PAGE>
(a) all liabilities and obligations of any kind existing as of
the Closing of a nature characterized as an intercompany liability, and any
similar item otherwise owed between Seller and American United Global, Inc. or
any of its affiliates;
(b) any liabilities with respect to any bonus, deferred
compensation, pension, profit sharing, retirement or other such benefit plan;
(c) all liabilities and obligations of Seller for Taxes; and
(d) any of the obligations and claims required to be set forth
in Schedule 5.13 of the Purchase Agreement.
For the avoidance of doubt, the parties acknowledge and agree that the
liabilities listed on Schedule B-1 and B-2 shall not include any obligations of
AUGI, CCC or Connectsoft to UPS or any of its affiliates ("UPS Liabilities"),
and that such obligations shall not be Assumed Liabilities for purposes of the
Purchase Agreement or this Assignment and Assumption Agreement..
5. From time to time after the date hereof, each of Buyer and Seller
will execute and deliver to the other such instruments as may be reasonably
requested by Buyer or its counsel or Seller or its counsel, as the case may be,
in order to carry out the purpose and intent of this Assignment and Assumption
Agreement and the Purchase Agreement.
6. Notwithstanding any other provision of this Assignment and
Assumption Agreement to the contrary, nothing contained in this Assignment and
Assumption Agreement shall in any way supersede, modify, replace, amend, change,
rescind, waive, exceed, expand, enlarge, or in any way affect the provisions,
including the warranties, covenants, agreements, conditions, representations or,
in general any of the rights and remedies, and any of the obligations and
indemnifications of Buyer or Seller set forth in the Purchase Agreement nor
shall this Assignment and Assumption Agreement expand or enlarge any remedies
under the Purchase Agreement including without limitation any limits on
indemnification specified therein. This Assignment and Assumption Agreement is
intended only to effect the transfer of certain liabilities assumed pursuant to
the Purchase Agreement and shall be governed entirely in accordance with the
terms and conditions of the Purchase Agreement.
7. This Assignment and Assumption Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware.
[SIGNATURES ON FOLLOWING PAGE]
-2-
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have caused this Assignment and
Assumption Agreement to be executed and delivered on the date and year first
written above.
CONNECTSOFT COMMUNICATIONS
CORPORATION
By:__________________________________
Name:
Its:
CONNECTSOFT HOLDING CORP.
By:__________________________________
Name:
Its:
VOGO NETWORKS, LLC
By:__________________________________
Name:
Its:
-3-
EXHIBIT 10.6
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 6% SERIES G CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
eGLOBE, INC.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
6% SERIES G CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of eGlobe, Inc. (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware ("DGCL"), DO HEREBY CERTIFY
that, pursuant to authority conferred upon the Board of Directors by the
Restated Certificate of Incorporation, as amended, of the Corporation (the
"Certificate of Incorporation"), the Board of Directors, in accordance with the
provisions of Section 151 of the DGCL, adopted the following resolution,
effective as of June 8, 1999 providing for the creation of the 6% Series G
Cumulative Convertible Redeemable Preferred Stock:
RESOLVED that, pursuant to Article IV of the Certificate of
Incorporation of the Corporation, there be and hereby is authorized and created
a series of Cumulative Convertible Redeemable Preferred Stock consisting of 1
share having a par value of $.001 per share, which series shall be titled "6%
Series G Cumulative Convertible Redeemable Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 6% Series G Cumulative Convertible Redeemable Preferred Stock shall be made
as follows:
1. Designation and Amount. This series of Preferred Stock shall be
designated and known as "6% Series G Cumulative Convertible Redeemable Preferred
Stock" (the "Series G Preferred Stock") and shall consist of 1 share. The par
value of the Series G Preferred Stock shall be $.001 per share. Certain defined
terms used herein are defined in paragraph 10 below.
2. Voting. 2(a) Except as may be otherwise provided by these terms of
the Series G Preferred Stock or by law, the holders of Series G Preferred Stock
shall have no voting rights unless dividends payable on the shares of Series G
Preferred Stock are in arrears for six quarterly periods, in which case the
holders of Series G
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<PAGE>
Preferred Stock voting separately as a class with the shares of any other
Preferred Stock having similar voting rights, will be entitled at the next
regular or special meeting of stockholders of the Corporation to elect one
director (such voting rights will continue until such time as the dividend
arrearage on Series G Preferred Stock has been paid in full).
2(b) The affirmative vote or consent of holders of at least 66 2/3% of
the outstanding shares of Series G Preferred Stock will be required for the
issuance of any class or series of stock of the Corporation after the date
hereof ranking senior to or pari passu with the shares of Series G Convertible
Preferred Stock (other than the series of Preferred Stock authorized as of the
date hereof and other than the Series G Preferred Stock, which is presently
proposed to be authorized) as to dividends or rights on liquidation, winding up
and dissolution. Whenever holders of Series G Preferred Stock are required or
permitted to take any action by vote as a single class or series, such action
may be taken without a meeting by written consent, setting forth the action so
taken and signed by the holders of the Series G Preferred Stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
3. Dividends. 3(a) The holders of the Series G Preferred Stock shall be
entitled to receive, out of funds legally available therefor, when, as and if
declared by the Board of Directors, cumulative annual dividends of 6.0%
(computed on a simple basis, without compounding) of the Liquidation Amount (as
defined below) per share of Series G Preferred Stock outstanding (the "Accruing
Dividends"). Accruing Dividends shall accrue from the Issue Date (whether or not
the Corporation has earnings, there are funds legally available therefor or such
dividends are declared) and shall be fully cumulative. Accruing Dividends shall
be payable annually out of assets legally available therefor on June 30 (each of
such dates being hereinafter referred to as a "Dividend Payment Date"),
commencing June 30, 2000, when, as and if declared by the Board of Directors.
3(b) On each Dividend Payment Date commencing June 30, 2000, or upon
conversion of Series G Preferred Stock, Accruing Dividends, may at the option of
the Corporation, be payable (i) in cash, (ii) in kind in fully paid
nonassessable shares of Common Stock (including fractional shares, as necessary)
valued at the Market Price, or (iii) a combination thereof; provided, however
that the Corporation may pay Accruing Dividends in kind only to the extent that
such payment would not require shareholder approvals (including under rules of
the Nasdaq Stock Market) or such shareholder approvals shall have been obtained.
3(c) All shares of Series G Preferred Stock which may be issued as a
dividend will thereupon be duly authorized, validly issued, fully paid and
nonassessable.
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3(d) The record date for the payment of Accruing Dividends shall,
unless otherwise altered by the Corporation's Board of Directors, be the
fifteenth day of the month immediately preceding the month in which the Dividend
Payment Date occurs, but in no event more than sixty (60) days nor less than ten
(10) days prior to the Dividend Payment Date
3(e) No dividends shall be granted on any Common Stock or other Junior
Stock unless and until all accrued but unpaid dividends with respect to the
Series G Preferred Stock have been paid in full. Accruing Dividends shall not be
payable unless and until all accrued but unpaid dividends with respect to any
Senior Stock then outstanding have been paid in full. All dividends with respect
to the Series G Preferred Stock shall be payable on a parity basis with
dividends (including accrued but unpaid dividends) on Parity Stock.
4. Liquidation. 4(a) (i) Upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the holder(s) of each
outstanding share of Series G Preferred Stock shall first be entitled, before
any distribution or payment is made upon any Junior Stock but after the full
liquidation preference has been paid with respect to all Senior Stock, and on a
parity basis with all Parity Stock, to be paid, in the case of each such share,
an amount equal to $3,000,000 divided by the number of shares of Series G
Preferred Stock then outstanding (the "Liquidation Amount"), plus accrued and
unpaid dividends thereon (collectively, the "Liquidation Preference"). If upon
such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series G Preferred Stock shall be insufficient to permit payment in full to all
holders of Series G Preferred Stock of the aggregate Liquidation Preference and
the amount of any payment to all holders of any other class or series of
Preferred Stock ranking on parity with the Series G Preferred Stock as to
liquidation, then the entire assets of the Corporation to be so distributed
shall be distributed ratably among the holders of Series G Preferred Stock and
the holders of any other class or series of Preferred Stock ranking on parity
with the Series G Preferred Stock as to liquidation, in accordance with the
respective amounts payable on liquidation upon the shares of Series G Preferred
Stock and such Preferred Stock ranking on parity with the Series G Preferred
Stock as to liquidation. After payment in full to the holders of Series G
Preferred Stock of the aggregate Liquidation Preference as aforesaid, holders of
the Series G Preferred Stock shall, as such, have no right or claim to any of
the remaining assets of the Corporation.
(ii) Written notice of any such liquidation, dissolution or winding up,
stating a payment date and the place where said payments shall be made, shall be
given (A) by certified or registered mail, postage prepaid, (B) by a nationally
known overnight delivery service or (C) by hand, not less than 45 days prior to
the payment date stated therein, to each holder of record of Series G Preferred
Stock,
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such notice to be addressed to each such holder at its address as shown
by the records of the Corporation.
4(b) None of the merger or the consolidation of the Corporation, or the
sale, lease or conveyance of all or substantially all of its property and
business as an entirety, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this paragraph 4, unless
such sale, lease, or conveyance shall be in connection with a plan of
liquidation, dissolution or winding up of the Corporation.
5. Conversion. The holders of shares of Series G Preferred Stock shall
have the following conversion rights:
5(a). Right to Convert. (i) Subject to the terms and conditions of
paragraph 5, from and after October 1, 1999, any share or fraction of a share of
Series G Preferred Stock shall be convertible at the option of the holder into
such number of fully paid and nonassessable shares of Common Stock (the
"Conversion Rate") as is obtained by (1) multiplying the number of shares or
fraction of a share of Series G Preferred Stock by the Liquidation Amount and
(2) dividing the result by the price (the "Conversion Price") that equals the
greater of (A) 75% of the Market Price of the Common Stock on the date notice of
conversion is received by the Company and all other conditions to or
requirements for the conversion of the Series G Preferred Stock have been
satisfied, and (B) $3.00 (which $3.00, as it may have last been adjusted
pursuant to the terms hereof, is referred to herein as the "Minimum Conversion
Price").
(ii) A holder's rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares or fraction of a share of Series G Preferred Stock into Common
Stock. Such written notice may be given by telecopying a written and executed
notice of conversion to the Corporation at its main telecopier number at its
principal office and delivering within five (5) business days thereafter, to the
Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Series G Preferred Stock), together with a copy to the Corporation's
transfer agent, the original notice of conversion by express courier, together
with a certificate or certificates for the shares to be so converted, duly
endorsed to the Corporation or in blank, and with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued; provided, however, that the Corporation shall not
be obligated to issue certificates for shares of Common Stock in any name other
than the name or names set forth on the certificates for the shares of Series G
Preferred Stock being converted unless all requirements for transfer of Series G
Preferred Stock have been complied with. Conversion shall be effective upon
receipt by the Corporation and the transfer agent of the telecopied notice
(provided that the
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original notice and the share certificate or certificates are sent to the
Corporation and the transfer agent as contemplated above).
(iii) In case of any liquidation of the Corporation, all rights of
conversion shall cease and terminate at the close of business on the business
day preceding the date fixed for payment of the amount to be distributed to the
holders of the Series G Preferred Stock pursuant to paragraph 4.
5(b). Issuance of Certificates; Time Conversion Effected. (i) Promptly
after the receipt of the written notice referred to in subparagraph 5(a)(ii),
and surrender of the certificate or certificates for the share (or fraction of
share) of Series G Preferred Stock to be converted, the Corporation shall issue
and deliver or cause to be issued and delivered, to such holder of Series G
Preferred Stock or to such holder's nominee or nominees, registered in such name
or names as such holder may direct, a certificate or certificates for the number
of shares of Common Stock, including, subject to subparagraph 5(c) below,
fractional shares, as necessary, issuable upon the conversion of such share (or
fraction of share) of Series G Preferred Stock. Upon the effectiveness of
conversion the rights of the holder of such share or shares of Series G
Preferred Stock being converted shall cease, and the Person or Persons in whose
name or names any certificate or certificates for shares of Common Stock shall
be issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby.
(ii) The Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series G Preferred Stock are either
delivered to the Corporation or its transfer agent as provided herein, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates.
5(c). Fractional Shares; Partial Conversion. In the event that the
computation pursuant to subparagraph 5(a) of the number of shares of Common
Stock issuable upon conversion of shares of Series G Preferred Stock results in
any fractional share of Common Stock, the Corporation may, at its option, issue
fractional shares or scrip representing fractional shares of Common Stock or pay
in cash the value of such fractional shares of Common Stock upon such
conversion, which for this purpose shall be deemed to equal the Market Price as
of the conversion date. In case the number of shares (or fraction of a share) of
Series G Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 5(a) exceeds the number of shares
converted, the Corporation shall, upon such conversion, issue and deliver to the
holder of the Certificate or Certificates so surrendered, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Series G Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted, and which new certificate
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or certificates shall entitle the holder thereof to the rights of the shares (or
fraction of a share) of Series G Preferred Stock represented thereby to the same
extent as if the Certificate theretofore covering such unconverted shares had
not been surrendered for conversion.
5(d). Subdivision or Combination of Common Stock. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Minimum Conversion Price shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Minimum Conversion Price shall be
proportionately increased.
5(e). Reorganization. Reclassification. Merger or Distribution. If any
of the following shall occur: (i) any consolidation or merger to which the
Corporation is a party other than a merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, the outstanding shares of Common Stock, or (ii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then, as a condition of such distribution,
reorganization, classification, consolidation, merger, sale or conveyance,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Series G Preferred Stock shall thereupon have the right to receive,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore receivable upon the
conversion of such share or shares of Series G Preferred Stock, such shares of
stock, securities, evidence of indebtedness or assets as may be issued or
payable in such transaction with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
distribution, reorganization, reclassification, consolidation, merger, sale or
conveyance not already taken place, and in such case appropriate provisions
shall be made with respect to the right and interests of such holder to the end
that the provisions hereof shall thereafter be applicable, as nearly as may be,
in relation to any shares of stock, securities, evidence of indebtedness or
assets thereafter deliverable upon the exercise of such conversion rights.
Anything herein to the contrary notwithstanding, if the provisions of this
subparagraph 5(e) shall be deemed to apply to any distribution, reorganization,
reclassification, consolidation, merger, sale or conveyance in respect of the
Corporation or its capital stock, no duplicative adjustments shall be made
pursuant to subparagraph 5(d) upon the occurrence of such distribution,
reorganization, reclassification, consolidation, merger, sale or conveyance.
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5(f). Notice of Adjustment. Upon any adjustment of the Minimum
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, (i) by certified or registered mail, postage prepaid, (ii) by a
nationally known overnight delivery service or (iii) delivered by hand,
addressed to each holder of shares of Series G Preferred Stock at the address of
such holder as shown on the books of the Corporation, which notice shall state
the Minimum Conversion Price resulting from such adjustment, setting forth in
reasonable detail the method upon which such calculation is based.
5(g). Other Notices. In case at any time:
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any distribution (other than a cash
dividend) on the capital stock of the Corporation or capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into, or a sale of all or substantially all
its assets to, another entity or entities; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give (A) by
certified or registered mail, return receipt requested, postage prepaid, (B) by
a nationally known overnight delivery service or (C) delivered by hand,
addressed to each holder of any shares of Series G Preferred Stock at the
address of such holder as shown on the books of the Corporation at least 30
days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up and the date when the same shall take place. Such
notice in accordance with the foregoing sentence shall also specify, in the case
of any such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
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<PAGE>
5(h). Stock to be Reserved. The Corporation shall at all times, from
and after the date on which the Series G Preferred Stock first becomes
convertible, reserve and keep available out of its authorized but unissued
Common Stock, solely for the purpose of issuance upon the conversion of Series G
Preferred Stock as herein provided, such number of shares of Common Stock as
shall then be issuable upon the conversion of all outstanding shares of Series G
Preferred Stock. The Corporation covenants that all shares of Common Stock which
shall be so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be required to assure that the par value per share of the Common Stock is at all
times equal to or less than the Minimum Conversion Price in effect at the time.
The Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed. The Corporation will not take any
action which results in any adjustment of the Minimum Conversion Price if the
total number of shares of Common Stock issued and issuable after such action
upon conversion of the Series G Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
5(i). Reissuance of Preferred Stock. Shares of Series G Preferred Stock
which are converted into shares of Common Stock as provided herein shall resume
the status of authorized and unissued shares of Preferred Stock without
designation as to series or class until shares are once more designated as part
of a particular series or class by the Board of Directors of the Corporation.
5(j). Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series G Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof; provided. that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the holder of the Series G Preferred Stock which is
being converted.
5(k). Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series G Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series G Preferred Stock in any manner which interferes with the timely
conversion of such Series G Preferred Stock, except as may otherwise be required
to comply with applicable securities laws.
5(l). Limitations on Adjustments. Anything herein to the contrary
notwithstanding, no adjustment in the Minimum Conversion Price shall be required
unless such adjustment, either by itself or with other adjustments not
previously made, would require a change of at least $0.01 (one cent) in such
Minimum
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Conversion Price; provided, that any adjustment which by reason of this
subparagraph 5(l) is not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations of shares of Common
Stock or Series G Preferred Stock under this paragraph 5 shall be rounded to the
nearest three decimal points.
6. Redemption. The shares of Series G Preferred Stock shall be subject
to redemption by delivery, in cash, of a redemption price equal to the
Liquidation Preference (the "Redemption Price") as provided in paragraphs 6(a)
and 6(b).
6(a). Mandatory Redemption. The Corporation shall redeem the Series G
Preferred Stock upon the first to occur of the following dates: (1) on the first
date (subsequent to the Issue Date) on which the Corporation receives in any
transaction or series of transaction any equity financing of at least
twenty-five million dollars ($25,000,000) or (2) the fifth (5th) year
anniversary of the Issue Date.
6(b). Optional Redemption Rights. The Shares of Series G Preferred
Stock shall be subject to redemption at any time at the option of the
Corporation (upon at least thirty days notice as set forth in paragraph 6(c)
below).
6(c). Redemption Mechanics. The Corporation shall give a redemption
notice (the "Redemption Notice") not less than thirty (30) and not more than
sixty (60) days prior to the redemption date (the "Redemption Notice Period")
(i) by certified mail, postage prepaid, (ii) by a nationally known overnight
delivery service or (iii) delivered by hand, addressed to each holder of record
of shares of Series G Preferred Stock, notifying such holder of the redemption
and specifying the Redemption Price applicable to the Series G Preferred Stock,
the redemption date and the place where said Redemption Price shall be payable.
During the Redemption Notice Period the holders of Series G Preferred Stock may
exercise their right to convert pursuant to Paragraph 5. The Redemption Notice
shall be addressed to each holder at his address as shown by the records of the
Corporation. On or after the redemption date fixed in such Redemption Notice,
each holder of shares of Series G Preferred Stock to be so redeemed shall
present and surrender the certificate or certificates for such shares to the
Corporation at the place designated in said notice and thereupon the Redemption
Price of such shares shall be paid to, or to the order of, the Person whose name
appears on such certificate or certificates as the owner thereof. From and after
the close of business on the redemption date, unless there shall have been a
default in the payment of the Redemption Price upon surrender of a certificate
or certificates representing shares of Series G Preferred Stock to be redeemed,
all rights of holders of shares of Series G Preferred Stock subject to
redemption on the redemption date (except the right to receive the Redemption
Price upon surrender of a certificate or certificates representing shares of
Series G Preferred Stock to be redeemed, but without interest) shall cease with
respect to such shares, and such shares shall not
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thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
7. Information Rights. Each holder of Series G Preferred Stock will be
entitled to copies of all material provided to holders of Common Stock and
copies of all filings made with the Securities and Exchange Commission pursuant
to rules and regulations thereof upon request by such holder.
8. Definitions.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Closing Price" of each share of Common Stock or other security means
the composite closing price of the sales of the Common Stock or such other
security on all securities exchanges on which such security may at the time be
listed (as reported in The Wall Street Journal) or, if there has been no sale on
any such exchange on any day, the average of the highest bid and lowest asked
prices of the Common Stock or such other security on all such exchanges at the
end of such day, or, if such security is not so listed, the closing price (or
last price, if applicable) of sales of the Common Stock or such other security
in the Nasdaq National Market (as reported in The Wall Street Journal on such
day, or if such security is not quoted in the Nasdaq National Market but is
traded over-the-counter, the average of the highest bid and lowest asked prices
on such day in the over-the-counter market as reported by the National Quotation
Bureau Incorporated, or any similar successor organization.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation.
"Issue Date" shall mean the date of original issuance of any share of
Series G Preferred Stock.
"Junior Stock" shall mean any class or series of capital stock
(including Common Stock) of the Corporation (other than the series of Preferred
Stock authorized as of the date hereof) which may be issued which, at the time
of issuance, is not declared to be on a parity with or senior to the Series G
Preferred Stock as to dividends and rights upon liquidation (or in the case of
Preferred Stock issued after the date hereof which has not received the consent
required by paragraph 2(b) hereto).
"Market Price" means (i) if the Common Stock is listed on any
securities exchange, quoted in the Nasdaq National Market, or quoted in the
over-the-counter market, the Closing Price of the Common Stock averaged over the
15 consecutive trading days ending on the date immediately prior to the date as
of which the Market Price is to be determined, or (ii) if the Common Stock is
not listed on any
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securities exchange, quoted in the Nasdaq National Market, or quoted in the
over-the-counter market, the fair value of the Common Stock determined by
agreement between the Corporation and the holders of a majority of the
outstanding Series G Preferred Stock or, if they are unable to reach
agreement within a reasonable period of time, the fair value of the Common Stock
as determined by an independent appraiser selected by the Corporation (which
appraiser may be the Corporation's investment banker, and the fees and expenses
of such appraiser shall be borne by the Corporation), which determination shall
be final and binding upon the Corporation and the holders of the outstanding
Series G Preferred Stock.
"Nasdaq" shall mean the Nasdaq Stock Market.
"Parity Stock" shall mean any class or series of Preferred Stock of the
Corporation which, at the time of issuance, is declared to be on a parity with
the Series G Preferred Stock as to dividends and rights upon liquidation and (in
the case of Preferred Stock issued after the date hereof) which has received the
consent required by paragraph 2(b) hereto.
"Person" shall mean an individual, corporation, trust partnership,
limited liability company, joint venture, unincorporated organization,
government agency or any agency or political subdivision thereof, or other
entity.
"Preferred Stock" shall mean any class or series of preferred stock of
the Corporation.
"Senior Stock" shall mean any class or series of Preferred Stock of the
Corporation (including the series of Preferred Stock authorized as of the date
hereof) which, at the time of issuance, is declared to be senior to the Series G
Preferred Stock as to dividends and rights upon liquidation and (in the case of
Preferred Stock issued after the date hereof) which has received the consent
required by paragraph 2(b) hereto.
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IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made herein are true under the penalties of perjury
this 16th day of June, 1999.
-----------------------------------
Christopher J. Vizas
Chairman of the Board and President
[SEAL]
ATTEST:
- - -----------------------------------
Graeme Brown
Assistant Secretary`
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EXHIBIT 10.7
EXECUTIVE TELECARD, LTD.
Promissory Note
New York, New York
June 17, 1999
Executive TeleCard, Ltd., a Delaware corporation (the "Maker"), for
value received, promises to pay, subject to the terms and conditions of this
Note, to American United Global, Inc. (the "Holder"), the principal sum of Five
Hundred Thousand ($500,000) with simple interest on the outstanding unpaid
principal amount accruing from the date hereof until this Note is paid in full,
at the rate of interest for each month equal to the prime rate of interest for
such month at the bank where the Maker maintains its principal bank account, or
if there is no such bank, at the average of the prime rates of the three largest
banks in the United States of America (the "Prime Rate"). All interest payment
calculations required hereunder shall be computed on the basis of the actual
number of days elapsed over a year comprised of 365 days.
1. Payments
1.1 Principal (and any accrued but unpaid interest) shall be due and
payable (1) commencing on September 1, 1999 in twelve (12) equal monthly
installments or (2) in full on the first date (subsequent to the date hereof) on
which (x) the Maker receives in any transaction or series of transaction any
equity or debt financing of at least fifty million dollars ($50,000,000) or (y)
the Vogo Networks LLC subsidiary of the Maker receives in any transaction or
series of transaction any equity or debt financing of at least five million
dollars ($5,000,000)
1.2 Payments of principal and interest of this Note shall be made to
the Holder at American United Global, Inc., c/o Gersten, Savage & Kaplowitz LLP,
101 E. 52nd Street, New York, NY 10022 or such other place or places within the
United States as may be specified by the Holder of this Note in a written notice
to the Maker at least 10 business days before a given payment date.
1.3 Payments of principal and interest on this Note shall be made in
lawful money of the United States of America by mailing the Maker's good check
in the proper amount to such Holder to arrive prior to or on the due date of
such
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payment or otherwise transferring funds so as to be received by such Holder on
the due date of such payment. Interest payment shall be made monthly.
1.4 If any payment on this Note becomes due and payable on a Saturday,
Sunday or other day on which commercial banks in New York City are authorized or
required by law to close, the maturity thereof shall be extended to the next
succeeding business day, and no interest on the principal amount shall be
payable during such extension.
1.5 In no event shall the amount of interest due or payable hereunder
exceed the maximum rate of interest allowable by applicable law, and in the
event any such payment is inadvertently paid by the Maker, or inadvertently
received by the Holder, then such excess shall be credited as a payment of
principal. It is the express intent hereof that the Maker not pay, and the
Holder not receive, directly or indirectly in any manner whatsoever, interest in
excess of that which may be legally paid by the Maker under applicable law.
2. Security.
The principal and interest payments under this Note shall be
secured by, and the Maker will cause Vogo at the Closing (as defined in the
Asset Purchase Agreement dated July 10, 1998, as amended, to which Maker
and the Holder are parties) to grant a security interest in, all chattels,
assets and property being acquired by Vogo Networks LLC ("Vogo") at the
Closing (as generally described in Exhibit A), wherever located, and all
products and proceeds thereof. This security interest will be granted to the
Holder to secure the payment of the indebtedness evidenced by this Note
(including all renewals, extensions and modifications thereof).
3. Subordination of Note
The principal and all interest due under this Note shall be
subordinated in all respects to the debt obligations of the Maker and Vogo set
forth on Exhibit B; provided, however, that such subordination shall not prevent
this Note from becoming fully due and payable under Section 1.1 of this Note.
4. Subordination of Security Interest
The security interest granted under this Note shall not be a first
priority security interest, but shall be (1) subordinated in all respects to
security interests granted (previously or in the future) with respect to (i) the
obligations described in paragraphs 1 and 2 of Exhibit B and (ii) the
obligations being assumed by Vogo at the Closing under the Asset Purchase
Agreement dated July 10, 1998, as amended, to which Maker and the Holder are
parties, and any interest, penalties or
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other amounts which may accrue thereon, and (2) pari passu in all respects with
security interests granted in connection with future indebtedness of Vogo;
provided, however, that such subordination or pari passu treatment shall not
prevent this Note from becoming fully due and payable under Section 1.1 of
this Note.
5. Reduction and Cancellation of Note.
5.1 If the Holder shall fail to make payment under the AUGI Note (as
defined in the Asset Purchase Agreement dated July 10, 1998, as amended) the
principal balance under this Note shall be reduced by $200,000, and all interest
accrued on such $200,000 shall be rescinded and cease to be accrued.
5.2 Upon payment in full in accordance with Section 1 hereof of all
outstanding obligations under this Note, the Maker's obligations in respect of
payment of this Note shall terminate and the Holder shall surrender this Note to
the Maker.
6. Events of Default.
In the event that:
(a) Maker defaults for more than five (5) business days after
receipt of written notice of failure to make any payment required to be made on
this Note or any other note issued by the Maker in favor of the Holder; or
(b) The Maker: (i) commences any case, proceeding or other action
(1) under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to the Maker,
or seeking to adjudicate the Maker a bankrupt or insolvent, or seeking
reorganization, arrangement, composition or other relief with respect to the
Maker or its debts or (2) seeking appointment of a receiver, trustee, custodian
or other similar official for the Maker or for all or any substantial part of
the Maker's assets, or shall make a general assignment for the benefit of its
creditors; or (ii) is the debtor named in any other case, proceeding or other
action of a nature referred to in clause (i) above which (1) results in the
entry of an order for relief or any such adjudication or appointment or (2)
remains undismissed, undischarged or unbonded for a period of thirty (30) days;
or (iii) takes any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the facts set forth in clause (i) or
(ii) above; or (iv) shall generally not, or shall be unable to, or shall admit
in writing its inability to, pay its debts as they become due; then, and in any
such event (an "Event of Default"), and at any time thereafter, the Holder of
this Note may, by written notice to the Maker, declare this Note due and
payable, whereupon this Note shall be due and payable
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<PAGE>
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived.
7. Miscellaneous.
7.1 Upon receipt of evidence reasonably satisfactory to the Maker of
the loss, theft, destruction or mutilation of this Note and of a letter of
indemnity reasonably satisfactory to the Maker and upon surrender or
cancellation of the Note, if mutilated, the Maker will make and deliver a new
Note of like tenor in lieu of such lost, stolen, destroyed or mutilated Note.
7.2 This Note and the rights and obligations of the Maker and any
Holder hereunder shall be construed in accordance with and be governed by the
internal laws of the State of New York.
7.3 Time is of the essence of this Note. If any provisions of this Note
or the application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Note and the application of
such provisions to other persons or circumstances shall not be affected thereby
and shall be enforced to the greatest extent permitted by law.
7.4 All notices to be given under this Note shall be mailed by first
class mail, postage prepaid, or telegraphed or telexed with confirmation of
receipt or delivered by hand or by overnight delivery service:
i. If to the Maker, at:
Executive Telecard, Ltd.
2000 Pennsylvania Avenue, N.W.
Washington, DC 20006
ii. if to the Holder at the address set forth in Section 1.2.
or at such other address as it may have furnished in writing to the other party.
Any notice so addressed, when mailed by registered or certified mail shall be
deemed to be given three days after so mailed, when telegraphed or telexed shall
be deemed to be given when transmitted, or when delivered by hand or overnight
shall be deemed to be given when delivered.
[Signature on next page]
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<PAGE>
IN WITNESS WHEREOF, the Maker has executed this Note as of the day and
year first above written.
EXECUTIVE TELECARD, LTD.
By:______________________________
Name:____________________________
Title:___________________________
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EXHIBIT 10.8
AMERICAN UNITED GLOBAL, INC.
Promissory Note
New York, New York
June ____, 1999
American United Global, Inc., a Delaware corporation (the "Maker"),
for value received, promises to pay, subject to the terms and conditions of this
Note, to Connectsoft Communications Corporation or its permitted assigns (the
"Holder"), the principal sum of Two Hundred Thousand ($200,000), without
interest, on June 15, 1999.
1. Payments
1.1 Payments of principal on this Note shall be made to the Holder
at such place or places within the United States as may be specified by the
Holder of this Note in a written notice to the Maker at least two business days
before the payment date); provided no payment shall be due under this Note if
the Buyer and its Affiliate under the Asset Purchase Agreement dated July 10,
1998, as amended (the "Purchase Agreement") are in breach of any material term
thereof.
1.2 Payments on this Note shall be made in lawful money of the
United States of America by mailing the Maker's good check in the proper amount
to such Holder to arrive prior to or on the due date of such payment or
otherwise transferring funds so as to be received by such Holder on the due date
of payment.
2. Assignment.
The Note may not be assigned, pledged or otherwise transferred
or negotiated by the Holder without the prior written consent of the Maker;
provided, however, that this Note may be assigned pursuant to the Purchase
Agreement to which the Maker and the initial Holder are parties, to the Buyer
thereunder or its affiliate EXTEL, or any affiliate thereof, but may not be
further assigned, pledged or otherwise transferred or negotiated by the Holder
to any non-affiliate of EXTEL without the prior written consent of the Maker.
Any purported transfer of this Note in violation of this provision shall be void
and without effect and the purported transferee shall acquire no rights in the
Note.
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3. Cancellation of Note.
Upon payment in full in accordance with Section 1 hereof of
all outstanding obligations under this Note, the Maker's obligations in respect
of payment of this Note shall terminate and the Holder shall surrender this Note
to the Maker.
4. Miscellaneous.
4.1 Upon receipt of evidence reasonably satisfactory to the Maker
of the loss, theft, destruction or mutilation of this Note and of a letter of
indemnity reasonably satisfactory to the Maker and upon surrender or
cancellation of the Note, if mutilated, the Maker will make and deliver a new
Note of like tenor in lieu of such lost, stolen, destroyed or mutilated Note.
4.2 This Note and the rights and obligations of the Maker and any
Holder hereunder shall be construed in accordance with and be governed by the
internal laws of the State of New York.
4.3 Time is of the essence of this Note. If any provisions of this
Note or the application thereof to any person or circumstance shall be invalid
or unenforceable to any extent, the remainder of this Note and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
[Signature on next page]
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<PAGE>
IN WITNESS WHEREOF, the Maker has executed this Note as of the day and
year first above written.
AMERICAN UNITED GLOBAL, INC.
By:______________________________
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EXHIBIT 10.9
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of June
17, 1999, by and between Executive Telecard, Ltd., a Delaware corporation (the
"Company"), and American United Global, Inc. (the "Holder").
WHEREAS, pursuant to an Asset Purchase Agreement dated July 10, 1998
and amendments (including Amendment No. 3) thereto (the "Asset Purchase
Agreement ") the Company is issuing to the Holder one share of the Company's 6%
Series G Preferred Stock (the "Preferred Stock").
WHEREAS, the Preferred Stock may be converted into the Company's Common
Stock and may receive dividends, at the Company's option in Common Stock. (The
Company's Common Stock issuable upon conversion of the Preferred Stock and any
shares of Common Stock issued as dividend on the Preferred Stock are referred to
collectively as the "Registrable Securities");
WHEREAS, the transfer of the Preferred Stock to Holder is exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"1933 Act").
WHEREAS, pursuant to the terms of the Asset Purchase Agreement and in
order to induce the Holder to accept the Preferred Stock, the Company and the
Holder have agreed to enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and in the Asset Purchase Agreement, the Company
hereby agrees as follows:
1. Registration Rights.
(a) Mandatory Registration. The Company shall file with reasonable
diligence a registration statement covering the Registrable Securities as soon
as reasonably practicable, but in no event later than is reasonably calculated
to ensure such registration statement shall become effective prior to October 1,
1999. The Company shall use its best efforts to effect the registration under
the Securities Act of all the Registrable Securities on or prior to October 1,
1999, for resale under the 1933 Act, unless prior to filing a registration
statement to effect such registration the Company shall receive a written
request from the holder of the Preferred Stock requesting that such registration
be delayed for a specified period. Upon receipt of such a request the Company
shall delay the effective date of the registration required pursuant to this
Section 1(a) to such requested date.
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(b) Demand Registration. If the Company, at any time after October 1,
1999, at a time when no registration statement with respect to Registrable
Securities is then effective (whether due to the suspension of a prior
registration statement or otherwise), receives a written request from the holder
of the Preferred Stock to register the Registrable Securities not then subject
to an effective registration statement, the Company shall use its reasonable
best efforts to effect, as soon as practicable, the registration of such
Registrable Securities for resale under the 1933 Act; provided, however, that
the Company shall not be obligated to file a registration statement with respect
to any Registrable Securities that have been sold pursuant to an effective
registration statement or that may be sold under Rule 144(k) under the 1933 Act.
(c) "Piggyback Registration". If the Company at any time, after October
1, 1999, at a time when no registration statement with respect to Registrable
Securities is then effective (whether due to the suspension of a prior
registration statement or otherwise), proposes to register any of its securities
under the 1933 Act (other than in connection with a merger or pursuant to Form
S-8 or other comparable form), the Company shall give notice to the holder of
the Preferred Stock of such registration. If the holder of the Preferred Stock
requests within fifteen (15) days of such notice that the Registrable Securities
be included in such registration, the Company shall request that the underwriter
or managing underwriter (if any) of an underwritten offering, or if not an
underwritten offering the Company shall include the Registrable Securities in
such registration. If the offering is underwritten and such underwriter or
managing underwriter agrees to include the Registrable Securities in the
underwritten offering the Company shall include the Registrable Securities in
such registration; provided, however, that:
(1) If, at any time after giving such written notice of the
Company's intention to register any of the Holder' Registrable Securities and
prior to the effective date of the registration statement filed in connection
with such registration, the Company shall determine for any reason not to
register or to delay the registration of its securities, at its sole election,
the Company may give written notice of such determination to each Holder and
thereupon shall be relieved of its obligation to register any Registrable
Securities issued or issuable in connection with such registration (but not from
its obligation to pay registration expenses in connection therewith or to
register the Registrable Securities in a subsequent registration) ; and in the
case of a determination to delay a registration shall thereupon be permitted to
delay registering any Registrable Securities for the same period as the delay in
respect of securities being registered for the Company's own account; and
(2) The Company shall not be obligated to file a registration
statement with respect to any Registrable Securities that have been sold
pursuant
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to an effective registration statement or that may be sold under Rule 144(k)
under the 1933 Act.
(d) Cooperation with Company. The Holder will cooperate with the
Company in all respects in connection with this Agreement, including, timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities.
2. Registration Procedures. If and whenever the Company is required by
any of the provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Securities under the 1933 Act, the
Company shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement and shall use its best efforts to cause
such registration statement to become effective and remain effective until all
the Registrable Securities are sold.
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the 1933 Act with
respect to the sale or other disposition of all securities covered by such
registration statement (including prospectus supplements with respect to the
sales of securities or the exercise of Preferred Stock from time to time in
connection with a registration statement pursuant to Rule 415 of the
Commission);
(c) furnish to the Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the 1933 Act, and such other documents, as the Holder may reasonably request
in order to facilitate the public sale or other disposition of the securities
owned by the Holder;
(d) use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or blue sky laws of
such jurisdictions as the Holder shall reasonably request, except that the
Company shall not for any such purpose be required to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(e) use its best efforts to list such securities on any securities
exchange on which any securities of the Company is then listed, if the listing
of such securities is then permitted under the rules of such exchange;
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<PAGE>
(f) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(g) notify the Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the 1933 Act,
of the happening of any (event of which it has knowledge as a result of which
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing; and
(h) take such other actions as shall be reasonably requested by any
Holder to facilitate the registration and sale of the Registrable Securities;
provided, however, that the Company shall not be obligated to take any actions
not specifically required elsewhere herein which in the aggregate would cost in
excess of $5,000.
3. Expenses. All expenses incurred in any registration of the Holder's
Registrable Securities under this Agreement shall be paid by the Company,
including, without limitation, printing expenses, fees and disbursements of
counsel for the Company, expenses of any audits to which the Company shall agree
or which shall be necessary to comply with governmental requirements in
connection with any such registration, all registration and filing fees for the
Holder' Registrable Securities under federal and State securities laws, and
expenses of complying with the securities or blue sky laws of any jurisdictions
pursuant to Section 2 (d); provided, however, the Company shall not be liable
for (a) any discounts or commissions to any underwriter; (b) any stock transfer
taxes incurred with respect to Registrable Securities sold in the Offering or
(c) the fees and expenses of counsel for any Holder, provided that the Company
will pay the costs and expenses of Company counsel when the Company's counsel is
representing any or all selling security holders.
4. Indemnification. In the event any Registrable Securities are
included in a registration statement pursuant to this Agreement:
(a) Company Indemnity. Without limitation of any other indemnity
provided to any Holder, to the extent permitted by law, the Company shall
indemnify and hold harmless each Holder, the affiliates, officers, directors and
partners of each Holder, any underwriter (as defined in the 1933 Act) for such
Holder, and each person, if any, who controls such Holder or underwriter (within
the meaning of the 1933 Act or the Securities Exchange Act of 1934 (the
"Exchange Act") , against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the 1933 Act, the Exchange Act
or other federal or
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state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statements including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or any blue sky filings made
in any jurisdiction, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (iii) any violation or alleged violation by the Company of the 1933
Act, the Exchange Act, or any state securities law or any rule or regulation
promulgated under the 1933 Act, the Exchange Act or any state securities law,
and in each case, the Company shall reimburse the Holder, affiliate, officer or
director or partner, underwriter or controlling person for any legal or other
expenses incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable to any Holder in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
the Holder or any other officer, director or controlling person thereof.
(b) Holder Indemnity. The Holder shall indemnify and hold harmless the
Company, its officers and directors, any underwriter (as defined in the 1933
Act) of such registration statement and each person, if any, who controls the
Company or such underwriter (within the meaning of the 1933 Act or the Exchange
Act) , against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the 1933 Act, the Exchange Act or any state
securities law, and the Holder shall reimburse the Company, officer or director,
underwriter or controlling person for any legal or other expenses incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; insofar as such losses, claims, damages or liabilities (or
actions and respect thereof) arise out of or are based upon any Violation;
provided, however, that the Holder shall not be liable to the Company in any
such case for any such loss, claim, damage, liability or action to the extent
that it arises out of or is based upon a Violation which occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by the Company or any other officer, director
or controlling person thereof.
(c) Notice; Right to Defend. Promptly after receipt by an indemnified
party under this Section 4 of notice of the commencement of any action
(including any governmental action), such indemnified party shall, if a claim in
respect thereof is to be made against any indemnifying party under this Section
4, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in the
defense of such claim, and if the indemnifying party agrees in writing that it
will be responsible for
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any costs, expenses, judgments, damages and losses incurred by the indemnified
party with respect to such claim, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if the indemnified party reasonably believes that
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall relieve such indemnifying party of any liability to the indemnified
party under this Agreement only if and to the extent that such failure is
prejudicial to its ability to defend such action, and the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Agreement.
(d) Contribution. If the indemnification provided for in this Agreement
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the indemnifying party and the indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties, relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount the Holder shall be obligated to
contribute pursuant to the Agreement shall be limited to an amount equal to the
proceeds to the Holder of the Registrable Securities sold pursuant to the
registration statement which gives rise to such obligation to contribute (less
the aggregate amount of any damages which the Holder has otherwise been required
to pay in respect of such loss, claim, damage, liability or action or any
substantially similar loss, claim, damage, liability or action arising from the
sale of such Registrable Securities).
(e) Survival of Indemnity. The indemnification provided by this
Agreement shall be a continuing right to indemnification and shall survive the
registration and sale of any Registrable Securities by any person entitled to
indemnification hereunder and the expiration or termination of this Agreement.
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5. Assignment of Registration Rights. The right to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned by
the Holder to a transferee or assignee of the Preferred Stock.
6. Blackout Periods. On not more than two occasions per year, the
Company may defer the filing of any registration statement or suspend the use of
any registration statement for periods of not more than 45 consecutive days each
(a "Blackout Period"), if there is a possible acquisition or business
combination or other transaction, significant business development or event
involving the Company that, in the opinion of the Company's primary outside
counsel, would require disclosure in the registration statement and the Board of
Directors of the Company determines in the exercise of its reasonable judgment
that such disclosure is not in the best interests of the Company and its
stockholders or obtaining any financial statements relating to an acquisition or
business combination required to be included in the registration statement would
be impracticable.
In such a case, the Company shall promptly notify the holders of
Registrable Securities of the suspension of the use of registration statement
(provided that such notice shall not require the Company to disclose the
possible acquisition or business combination or other transaction, business
development or event if the Board of Directors of the Company determines in good
faith that such acquisition or business combination or other transaction,
business development or event should remain confidential) Promptly after
receiving such notice the holders shall cease disposition of any Registrable
Securities pursuant to the Registration Statement.
Upon the abandonment, consummation, or termination of the possible
acquisition or business combination or other transaction, business development
or event, the availability of the required financial statements with respect to
a possible acquisition or business combination, or the expiration of the 45 day
period, whichever comes first, the suspension of the use of the registration
statement pursuant to this Section 6 shall cease and the Company shall promptly
notify the holders of Registrable Securities that disposition of Registrable
Securities may be resumed. The Company may not defer the filing of any
registration statement or suspend the use of any registration statement within
45 days of the end of a Blackout Period.
7. Limitations on other Registration Rights. Except as otherwise set
forth in this Agreement, the Company shall not, without the prior written
consent of the holder of the Preferred Stock, file any registration statement
under the 1933 Act (other than in connection with a merger or pursuant to Form
S-8 or other comparable form), on behalf of any person, including the Company
(other than for the holder of the Preferred Stock), to become effective during
any period when the Company has failed to effect a registration statement in
breach of the terms of this
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Agreement; provided, however, that nothing in this Agreement shall preclude the
Company from filing a registration statement (i) pursuant to a good faith
contractual obligation with another person or entity not entered into with the
intention of circumventing this Agreement, or (ii) on behalf of the Company if
one of the uses of proceeds is the redemption in full of the Preferred Stock.
8. Remedies.
(a) Time is of the Essence. The Company agrees that time is of the
essence of each of the covenants contained herein and that, in the event of a
dispute hereunder, this Agreement is to be interpreted and construed in a
manner, consistent with the fair meaning of the language of this Agreement, that
will enable the holder to sell its Registrable Securities as quickly as possible
after such holder has given written notice to the Company, pursuant to one of
its rights hereunder to require the Company to register its Registrable
Securities, that the holder desires its Registrable Securities to be registered.
(b) Remedies Upon Default or Delay. The Company acknowledges the breach
of any part of this Agreement may cause irreparable harm to the Holder and that
monetary damages alone may be inadequate. The Company therefore agrees that the
Holder shall be entitled to injunctive relief or such other applicable remedy as
a court of competent jurisdiction may provide. Nothing contained herein will be
construed to limit a Holder's right to any remedies at law, including recovery
of damages for breach of any part of this Agreement.
9. Notices.
(a) All communications under this Agreement shall be in writing and
shall be mailed by first class mail, postage prepaid, or telegraphed or telexed
with confirmation of receipt or delivered by hand or by overnight delivery
service at,
i. If to the Company, at:
Executive Telecard, Ltd.
2000 Pennsylvania Avenue, N.W.
Washington, DC 20006
or at such other address as it may have furnished in writing to the Holder or
ii. if to the Holder at the address of the Holder
as it appears in the stock ledger of the Company.
(b) Any notice so addressed, when mailed by registered or certified
mail shall be deemed to be given three days after so mailed, when telegraphed or
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telexed shall be deemed to be given when transmitted, or when delivered by hand
or overnight shall be deemed to be given when delivered.
11. Successors and Assigns. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the Company and the Holder.
12. Amendment and Waiver. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, but only with the
written consent of the Company and the Holder. No delay on the part of any party
in the exercise of any right, power or remedy shall operate as a waiver thereof,
nor shall any single or partial exercise by any party of any right, power or
remedy preclude any other or further exercise thereof, or the exercise of any
other right, power or remedy.
13. Counterparts. One or more counterparts of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
14. Governing Law. This Agreement shall be construed in accordance with
and governed by the internal laws of the State of New York, without giving
effect to conflicts of law principles.
15. Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected thereby.
16. Headings. The headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect the meaning or
interpretation of any provisions hereof.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
EXECUTIVE TELECARD, LTD. AMERICAN UNITED GLOBAL, INC.
BY:______________________ BY:__________________________
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EXHIBIT 10.10
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of June 17, 1999,
is made and entered into by and among American United Global, Inc. ("AUGI"), and
Vogo Networks, LLC, a Delaware limited liability company of which Executive
TeleCard, Ltd., doing business as eGlobe ("EXTEL"), is the only member (the
"Buyer").
WHEREAS, AUGI, EXTEL and the Buyer are parties to an Asset Purchase
Agreement dated July 10, 1998, as amended, including by Amendment No. 3 dated
June ___, 1999 (the "Purchase Agreement"); and
WHEREAS, as part of the purchase price for the Assets under the
Purchase Agreement EXTEL is issuing to AUGI a Note, in the form attached as
Exhibit E to the Purchase Agreement (the "EXTEL Note"), in the amount of
$500,000, the principal and interest payments under which EXTEL Note are to be
secured by, and the Buyer is to grant a security interest in, all chattels,
assets and property being acquired by the Buyer at the Closing under the
Purchase Agreement, wherever located, and all products and proceeds thereof.
WHEREAS, capitalized terms used in this Agreement and not otherwise
defined herein shall have the meanings given such terms in the Purchase
Agreement; and
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. For the purpose of securing the payment
of the indebtedness evidenced by the EXTEL Note, including all renewals,
extensions and modifications thereof, and any fees and expenses payable
thereunder (collectively, the "Obligations"), the Buyer hereby grants to AUGI
(subject to Section 2 hereof) a security interest in the Assets being acquired
by the Buyer at the Closing under the Purchase Agreement and described in
Section 1.1(a) through (g) of the Purchase Agreement, wherever located, and all
products and proceeds thereof (collectively, the "Collateral").
2. SUBORDINATION OF SECURITY INTEREST. The security interest granted
under this Agreement shall not be a first priority security interest, but shall
be (1) subordinated in all respects to security interests granted (previously or
in the future) with respect to (i) the obligations described in paragraphs 1 and
2 of
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Exhibit B of the EXTEL Note and (ii) the obligations being assumed by the
Buyer at the Closing under the Purchase Agreement, and any interest, penalties
or other amounts which may accrue thereon, and (2) pari passu in all respects
with security interests granted in connection with future indebtedness of the
Buyer.
3. COVENANTS. The Buyer covenants and agrees as follows:
(a) The Buyer will notify AUGI whenever any of the Collateral is
removed from the location in which it is delivered at the Closing, except for
temporary periods in the normal and customary use thereof.
(b) The Buyer will, in all material respects, maintain, preserve
and keep the Collateral which are tangible property (whether owned in fee or a
leasehold interest) in good repair and working order, reasonable wear and tear
excepted, and from time to time will make all necessary repairs, replacements,
renewals and additions so that at all times the economic efficiency thereof will
be maintained and will pay and discharge all taxes, levies and other impositions
levied thereon as well as the cost of repairs to or maintenance of same.
(c) The Buyer will file, and pay all costs of filing, such
financing, continuation and termination statements with respect to the security
interests created hereby as AUGI may reasonably request, and AUGI is authorized
to do all things that it deems necessary to perfect and continue perfection of
the security interests created hereby.
(d) The Buyer shall take or cause to be taken such further actions,
shall execute, deliver, and file or cause to be executed, delivered, and filed
such further documents and instruments, and shall obtain such consents as may be
necessary or as AUGI may reasonably request to effectuate the purposes, terms,
and conditions of this Agreement, whether before, at or after the closing of
transactions contemplated hereby or the occurrence of an Event of Default under
the EXTEL Note.
4. EVENT OF DEFAULT. The occurrence of an Event of Default under the
EXTEL Note shall constitute an Event of Default hereunder.
5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence and during the
continuation of an Event of Default, AUGI may exercise any and all rights and
remedies provided by the Uniform Commercial Code (New York) or other applicable
law, as well as all other rights and remedies possessed by AUGI pursuant to the
Purchase Agreement, all of which shall (to the extent permitted by law) be
cumulative. Any notice of sale, lease or other intended disposition of the
Collateral by AUGI sent to the Buyer at the address hereinafter set forth, at
least
-2-
<PAGE>
ten (10) days prior to such action, shall constitute reasonable notice to
the Buyer. AUGI may waive any Event of Default before or after the same has been
declared without impairing its right to declare a subsequent Event of Default
hereunder.
6. RELEASE OF SECURITY INTEREST. Upon payment in full of all
Obligations, AUGI shall release the security interest created hereby and shall
execute and deliver to the Buyer such termination statements and other
agreements and documents as the Buyer may reasonably request to evidence such
payment and release.
7. NOTICES. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, mailed or transmitted, and shall be effective upon
receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to the Buyer:
Vogo Networks, L.L.C.
2000 Pennsylvania Avenue, NW
Suite 4800
Washington, DC 20006
Telecopier No.: 202-882-8984
Attention: Chairman
(b) If to AUGI:
American United Global, Inc.
c/o Gersten, Savage & Kaplowitz LLP
101 E. 52nd Street
New York, NY 10022
8. HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
9. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon any determination that a term or other provision is
invalid, illegal or incapable of being enforced, the parties shall negotiate in
good faith to modify this
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<PAGE>
Agreement to effect the original intent of the parties as closely as possible so
that transactions contemplated hereby are fulfilled to the extent possible.
10. ENTIRE AGREEMENT. This Agreement (together with the EXTEL Note and
the Purchase Agreement, as referred to or incorporated herein) constitutes the
entire agreement of the parties and supersedes all prior agreements and
undertakings, both written and oral, between the parties, or any of them, with
respect to the subject matter hereof, except as otherwise expressly provided
herein, are not intended to confer upon any other person any rights or remedies
hereunder.
11. SPECIFIC PERFORMANCE. The transactions contemplated by this
Agreement are unique. Accordingly, each of the parties acknowledges and agrees
that, in addition to all other remedies to which it may be entitled, each of the
parties hereto is entitled to a decree of specific performance, provided such
party is not in material default hereunder.
12. ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
13. THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
14. FEES AND EXPENSES. Except as otherwise provided for in this
Agreement, each party hereto shall pay its own fees, costs and expenses incurred
in connection with this Agreement and in the preparation for and consummation of
the transactions provided for herein.
15. AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
16. GOVERNING LAW. All corporate law matters arising under this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York, and all other matters arising under this Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
Notwithstanding the foregoing, it is the intention of the parties that, to the
extent local law would govern with respect to Collateral located in a particular
jurisdiction, this Agreement shall create a security interest or similar grant
of rights under such local law with respect to Collateral located in such
jurisdiction.
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<PAGE>
17. COUNTERPARTS. This Agreement may be executed and delivered in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed and delivered shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the Buyer and AUGI have caused this Agreement to be
executed as of the date first above written.
VOGO NETWORKS, LLC
By:_______________________________
Title:____________________________
AMERICAN UNITED GLOBAL, INC.
By:_______________________________
Title:____________________________
-6-
EXHIBIT 21 - List of Subsidiaries.
Western Power and Equipment, Corp.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000859792
<NAME> AMERICAN UINITED GLOBAL, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1999
<PERIOD-END> JUL-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-CURRENT-ASSETS> 90,988
<TOTAL-DEFERRED-CHARGES> 0
<TOTAL-NET-UTILITY-PLANT> 9,818
<OTHER-PROPERTY-AND-INVEST> 42,103
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 142,909
<COMMON> 119
<CAPITAL-SURPLUS-PAID-IN> 49,954
<RETAINED-EARNINGS> (37,280)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 12,797
0
4
<LONG-TERM-DEBT-NET> 48
<SHORT-TERM-NOTES> 89,511
<LONG-TERM-NOTES-PAYABLE> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 4,772
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 35,781
<TOT-CAPITALIZATION-AND-LIAB> 142,909
<GROSS-OPERATING-REVENUE> 163,650
<INCOME-TAX-EXPENSE> (1,101)
<OTHER-OPERATING-EXPENSES> 164,476
<TOTAL-OPERATING-EXPENSES> 164,476
<OPERATING-INCOME-LOSS> (5,054)
<INCOME-BEFORE-INTEREST-EXPEN> (581)
<OTHER-INCOME-NET> 0
<TOTAL-INTEREST-EXPENSE> 5,329
<NET-INCOME> (3,065)
0
<EARNINGS-AVAILABLE-FOR-COMM> (3,065)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 12,093
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>