SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
AMERICAN UNITED GLOBAL, INC.
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(Name of Registrant as specified in its charter)
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(Name of Person(s) Filing Proxy Statement), if other than Registrant
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] $125 per Exchange Act Rules 0-11(c)(l)(ii), 14a-6(I)(l) or
14a-6(I)(2).
[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(I)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(I)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies: __________________________________________________
(2) Aggregate number of securities to which transaction
applies: __________________________________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: ___________ (A)
(4) Proposed maximum aggregate value of transaction: ___________
(5) Total fee paid: __________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
(1) Amount Previously Paid: ____________________________________
(2) Form, Schedule or Registration Statement No.: ______________
(3) Filing Party: ______________________________________________
(4) Date Filed: ________________________________________________
<PAGE>
AMERICAN UNITED GLOBAL, INC.
BUILDING 17
2495 152ND AVENUE NE
REDMOND, WASHINGTON 98052
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 15, 2000
------------------------
To the Stockholders of
AMERICAN UNITED GLOBAL, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Annual Meeting") of
Stockholders of American United Global, Inc. a Delaware corporation (the
"Company" or the "Corporation") will be held at the offices of Gersten, Savage &
Kaplowitz, LLP, 101 East 52nd Street, New York, New York 10022 on Friday,
September 15, 2000, at 10:00 a.m. local time for the following purposes:
I. To elect eight (8) directors to hold office until the next
Annual Meeting;
II. To authorize an amendment to the Company's Certificate of
Incorporation changing the Company's name to:
INTERTECH CAPITAL, INC.
III. To authorize and ratify the adoption of the Company's 2000
Employee Stock Option Plan (the "2000 Plan"), which contains
6,000,000 shares of Common Stock, $.01 par value (the "Common
Stock") available to be issued upon the exercise of options
granted under such plan;
IV. To authorize and ratify the sale of all of the assets of the
Company's Manufacturing Business (as defined herein) to
subsidiaries of Hutchinson Corporation (such sale, the
"Hutchinson Transaction"), effective January 19, 1996;
V. To authorize and ratify the issuance of 976,539 shares of the
Company's Series B-1 Convertible Preferred Stock (the "Series
B-1 Preferred Stock") issued in connection with the
acquisition of all the capital stock of ConnectSoft, Inc., a
Washington corporation ("Old Connectsoft"), effective July 31,
1996;
VI. To authorize and ratify the issuance of 400,000 shares of the
Company's Series B-2 Convertible Preferred Stock issued in
connection with a $10,000,000 private placement completed in
January 1997;
VII. To authorize and ratify the amendment and restatement of an
employment agreement between the Company and Robert M. Rubin;
VIII. To authorize and ratify an amendment to the Company's
Certificate of Incorporation reducing the Company's authorized
capital stock from 67,700,000 to 42,700,000 shares, reducing
the authorized Common Stock from 65,000,000 to 40,000,000
shares and removing all classifications of the Common Stock.
IX. To authorize and ratify the selection of
PricewaterhouseCoopers as auditors of the Company for the
fiscal year ending July 31, 1999 ("Fiscal 1999"); and
X. To transact such business as may properly come before the
meeting or any adjournment or adjournments thereof.
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The Board of Directors has fixed Monday, July 31, 2000 as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting or any adjournment thereof. The stock transfer books of the Company will
not be closed, but only stockholders of record at the close of business on
Monday, July 31, 2000 will be entitled to vote at the meeting or any adjournment
or adjournments thereof. The approximate mailing date for proxy materials will
be Monday, July 31, 2000.
By Order of the Board of Directors
Robert M. Rubin
CHAIRMAN OF THE BOARD
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE, SIGN AND RETURN YOUR
PROXY CARD PROMPTLY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE PROVIDED FOR
YOUR USE.
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AMERICAN UNITED GLOBAL, INC.
BUILDING 17
2495 152ND AVENUE NE
REDMOND, WASHINGTON 98052
GENERAL INFORMATION CONCERNING SOLICITATION
This proxy statement (the "Proxy Statement") is furnished in connection
with the solicitation of proxies by and on behalf of the Board of Directors of
American United Global, Inc. (hereinafter referred to as the "Company" or the
"Corporation"), for its Annual Meeting of Stockholders (the "Meeting") to be
held at 10:00 A.M. on September 15, 2000, or any adjournments thereof, at the
offices of Gersten, Savage & Kaplowitz, LLP, 101 East 52nd Street, New York, New
York 10022. Shares cannot be voted at the meeting unless their owner is present
in person or represented by proxy. Copies of the Notice of Annual Meeting, this
Proxy Statement and the accompanying form of proxy shall be mailed to the
stockholders of the Company on or about Monday, July 31, 2000, accompanied by a
copy of the Annual Report of the Company containing audited financial statements
as of and for the Fiscal Years ended July 31, 1999 ("Fiscal 1999") July 31, 1998
("Fiscal 1998"), and July 31, 1997 ("Fiscal 1997"), the Quarterly Reports of the
Company for all fiscal quarters subsequent to July 31, 1999, and other
information regarding the Company.
A quorum consisting of a simple majority of outstanding voting shares of
the Company as of July 31, 2000, the Record Date, must be present at the Annual
Meeting, whether in person or by proxy, for proposals to be voted on and
business to be transacted. Approval of Proposals I, III, VII and IX requires the
affirmative vote of a majority of the voting shares that are present, whether in
person or by proxy, and voting at the Meeting. Approval of Proposals II, IV, V,
VI and VIII requires the affirmative vote of a majority of outstanding voting
shares as of the Record Date. The Company has a total of 12,347,148 outstanding
voting shares as of June 9, 2000, which shares consist of 11,921,528.5 shares of
Common Stock and 425,619.5 shares of Series B-1 Preferred Stock. Each share of
Series B-1 Preferred Stock is convertible into, and votes as, one share of
Common Stock. All voting shares will be voted together and not by class of
stock. Abstentions and broker non-votes are each included in the determination
of the number of shares present and voting, for purposes of determining the
presence or absence of a quorum for the transaction of business. Neither
abstentions nor broker non-votes are counted as votes either for or against a
proposal.
If a proxy is properly executed and returned, the shares represented
thereby will be voted in accordance with the specifications made, or if no
specification is made the shares will be voted to approve each proposal and to
elect each nominee for director identified on the proxy. Any shareholder giving
a proxy has the power to revoke it at any time before it is voted by filing with
the Secretary of the Company a notice in writing revoking it. The mere presence
at the Meeting of the person appointing a proxy does not revoke the appointment.
In order to revoke a properly executed and returned proxy, the Company must
receive a duly executed written revocation of that proxy before it is voted. A
proxy received after a vote is taken at the Meeting will not revoke a proxy
received prior to the Meeting. A subsequently dated proxy received prior to the
vote will revoke a previously dated proxy.
All expenses in connection with the solicitation of proxies, including the
engagement
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<PAGE>
of a proxy solicitation firm and the cost of preparing, handling, printing and
mailing the Notice of Annual Meeting, proxies and Proxy Statements will be borne
by the Company. The Company has retained D.F. King & Co., Inc. ("DF King"), to
provide certain solicitation and advisory services in connection with such
solicitation, for which DF King will receive a fee of between approximately
$7,500 and $12,500, together with reimbursement for its reasonable out-of-pocket
expenses. Directors, officers and regular employees of the Company, who will
receive no additional compensation therefor, may solicit proxies by telephone or
personal call, the cost of which is expected to be nominal and will be borne by
the Company. In addition, the Company will reimburse brokerage houses and other
institutions and fiduciaries for their expenses in forwarding proxies and proxy
soliciting materials to their principals.
This meeting is the Company's 1999 Annual Meeting. The Company did not
hold its 1998 Annual Meeting of Stockholders (the "1998 Meeting"). The Company
held its 1997 Annual Meeting of Stockholders ("1997 Meeting") on February 24,
1998. Proposals IV, V and VI to be voted upon at this Meeting were previously
presented to stockholders for approval at the 1997 Meeting, but none of such
proposals received sufficient votes to be approved. Proposal III is
substantially similar to a proposal to approve the Company's 1996 Stock Option
Plan, which was substantially similar to the 2000 Plan, and which earlier
proposal was presented for approval at the 1997 Meeting but did not receive
sufficient votes for approval. In addition, Proposal IV was also presented to
stockholders for approval at the Company's 1996 Annual Meeting of Stockholders,
where it did not receive sufficient votes for approval.
THE DERIVATIVE ACTION
In May 1998 a purported derivative lawsuit (the "Derivative Action") was
brought on behalf of the Company against the Company's directors and officers
who served between November 1996 and February 1998. The Derivative Action
alleged breaches of fiduciary duty. Final judicial approval of a settlement was
received in August 1999. Final judicial approval of the most recent amendment
was received in June 2000, and pursuant to this amended settlement Mr. Rubin
will pay to the Company approximately $2,800,000 in cash or securities. Mr.
Rubin has already paid to the Company (all such payments, whether made or still
owed, are referred to collectively as the "Rubin Payment") (a) an account
containing both cash and unrestricted common stock of various publicly-traded
companies, which account was found by order of the Superior Court of Washington
to have a value of approximately $596,224, and (b) common stock of Response USA,
Inc. and Etravnet.com, Inc., valued at $264,841 and $594,540, respectively by
such court. Mr. Rubin has agreed to make additional payments, plus interest, of
approximately $1,400,000 by September 30, 2000. Mr. Rubin has pledged certain
common stock and options to purchase common stock in a publicly-traded company
as collateral for these additional payments, and since July 15, 2000 any portion
of the Rubin Payment not paid by such date is accruing interest thereafter at
12% annually.
The remainder of the Rubin Payment 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, and
which Mr. Rubin believes will be immediately available upon stockholder
ratification of the Hutchinson Transaction; and (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.
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<PAGE>
Hutchinson has withheld payments under the Consulting Agreement and
Non-Competition Agreement pending stockholder ratification of the Hutchinson
Transaction, pursuant to Proposal IV made hereby, and has conditioned its
payments to the Company upon such stockholder ratification. The payments by
Hutchinson are expected to constitute a significant portion of the Rubin
Payment.
If the Hutchinson Transaction is ratified by the Company's stockholders
(see Proposal IV), the Company will release Mr. Rubin, the Company's Chairman
and Chief Executive Officer, from the obligation to repay a $1,200,000 principal
amount promissory note (the "Note") issued by Mr. Rubin to the Company. In
return for such release, Mr. Rubin has assigned to the Company his rights to
receive payments under the Non-Competition Agreement and Consulting Agreement
with Hutchinson. 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.
Hutchinson has conditioned its payments under the Consulting Agreement and
Non-Competition Agreement on stockholder ratification of the Hutchinson
Transaction. A majority of the Company's outstanding voting shares, whether or
not present at the Meeting, must approve this Proposal IV.
In the event the Company stockholders do not ratify the Hutchinson
Transaction, and Hutchinson does not make its payments as owed under the
Non-Competition Agreement and the Consulting Agreement, Mr. Rubin will remain
responsible for payment of $1,100,000 under the settlement. This amount
represents the Hutchinson payments as to which the right to receive such
payments had been assigned to the Company. Pursuant to the settlement agreement
for the Derivative Action, Mr. Rubin is obligated to pay approximately
$1,400,000 in cash to the Company, whether or not Hutchinson makes any payments
to Mr. Rubin, no later than September 30, 2000. These obligations are
collateralized by other specific assets of Mr. Rubin. Furthermore, Mr. Rubin has
agreed to pay interest of $55,000 to the Company in consideration for being
allowed until at least July 15, 2000 to make these payments. Any payments not
made by July 15, 2000 have accrued 12% annual interest thereafter.
In connection with the settlement of the Derivative Action, the Company
has agreed to (a) appoint two new independent directors to the Board of
Directors, pending stockholder approval hereby (see Proposal I), (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.
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 a letter of credit
guarantee by the Company for ERD Waste Corp.
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("ERD") and the delisting of the Company's Common Stock and publicly-traded
warrants from NASDAQ in February 1998. During Fiscal 1997 the Company 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 was received in August 1999, pursuant to
which the Company will pay $2,500,000 (the "Class Payment") to members of the
stockholder class.
The Class Payment was paid in the form of $600,000 in cash (consisting of
proceeds from the Company's directors' and officers' liability insurance policy)
and $1,900,000 in the form of 777,414 shares of common stock (valued at
approximately $2.44 per share) of Western Power & Equipment Corp. ("Western")
owned by the Company. Pursuant to a proposed amendment to the settlement of the
Class Action, the Company and Western have agreed to file a registration
statement with the Securities and Exchange Commission by September 30, 2000
covering these 777,414 shares. These shares will be distributed once a
registration statement covering such shares filed by Western is declared
effective by the Securities and Exchange Commission. The Company presently owns
approximately 60.6% of the outstanding common stock of Western and, after the
Class Payment is made, will own approximately 35% of the Western common stock.
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 shareholders of Western on
matters before its board of directors and shareholders even after the Class
Payment is made. In addition, Mr. Rubin and Western have contemplated an
acquisition by Mr. Rubin of the assets of Western. At the present time there is
no agreement regarding such an acquisition.
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OWNERSHIP OF SECURITIES
Only stockholders of record holding voting shares at the close of business
on the Record Date of July 20, 2000, the date fixed by the Board of Directors in
accordance with the Company's by-laws, are entitled to vote at the Meeting. As
of June 9, 2000, there were issued and outstanding a total of 12,347,148 voting
shares of the Company, consisting of 11,921,528.5 shares of Common Stock and
425,619.5 shares of Series B-1 Preferred Stock. Each share of the Series B-1
Preferred Stock is convertible into, and shall vote as, one share of Common
Stock. The Series B-1 Preferred Stock and Common Stock vote together as a class
and all shares thereof have one vote.
Each outstanding voting share is entitled to one vote on all matters
properly coming before the Meeting. A total of one-half of the outstanding
voting shares, plus one (or approximately 6,173,575 shares, based upon the
number of outstanding voting shares as of June 9, 2000) as of the Record Date
must be present, in person or by proxy, to establish a quorum for the meeting.
The following table sets forth certain information as of June 9, 2000 with
respect to each beneficial owner of five percent (5%) or more of the outstanding
voting shares of the Company, each officer and director of the Company and all
officers and directors as a group. 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>
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NAME AND ADDRESS* OFFICE(S) NUMBER OF VOTING SHARES PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) VOTING SHARES
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert M. Rubin Director, President, Chief 1,062,798 (2)(6) 7.9
Executive Officer and Chairman
of the Board
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C. Dean McLain Director, Executive 300,000 (3) 2.4
4601 N.E. 77TH Avenue Vice-President and
Suite 200 President of Western
Vancouver, WA 98662 Power and Equipment Corp.
("Western")
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Howard Katz Director 350,000 (4) 2.8
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David M. Barnes Chief Financial Officer, 300,000 (5) 2.4
Vice President of Finance
and Director
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Rubin Family Irrevocable 1,025,000 (6) 8.3
Stock Trust
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Jeffrey Berman Director 1,650,000 (7) 11.8
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Stephen Byers Nominee for Director 250,000 (8) 2.0
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Seymour Kessler Nominee for Director 250,000 (9) 2.0
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Allen Perres Nominee for Director 250,000 (9) 2.0
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All Directors and Executive 2,012,798 (11) 14.2
Officers as a Group (5 persons) (10)
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</TABLE>
* UNLESS OTHERWISE INDICATED, THE ADDRESS OF EACH SUCH BENEFICIAL OWNER IS
BUILDING 17, 2495 152ND AVENUE N.E., REDMOND, WASHINGTON 98052.
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(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 (a) 222,798 shares of Common Stock, and (b) incentive stock
options issued to Mr. Rubin under the 2000 Plan as of December 7, 1999 to
acquire 840,000 shares for five years after issuance at an exercise price
of $0.21 per share, or approximately 110% of the fair market value of the
Common Stock as of December 7, 1999. All of the outstanding options are
incentive stock options and are presently exercisable. Excludes options
issued to Mr. Rubin under the 1996 Plan during 1996 to purchase an
aggregate of 383,450 shares of Common Stock at exercise prices between
$3.78125 and $5.125 per share, all of the options issued to Mr. Rubin
under the Company's 1991 Stock Option Plan (the "1991 Plan") to purchase
80,000 shares of Common Stock at an exercise price of $3.125 per share and
126,550 shares at an exercise price of $5.125 per share, which options
were cancelled on December 7, 1999.
(3) Includes incentive stock options to acquire 300,000 shares of Common Stock
granted to Mr. McLain under the 2000 Plan as of December 7, 1999 for five
years after issuance at an exercise price of $0.21 per share, or
approximately 110% of the closing sale price of the Common Stock as of
such date. Excludes (a) options under the 1991 Plan to purchase 36,000
shares of Common Stock at $3.125 per share, 45,000 shares of Common Stock
at $4.875 per share, and 12,500 shares of Common Stock at $3.875 per
share, and extended for an additional five years and repriced at $0.19 per
share as of December 7, 1999 and (b) non-qualified options to acquire
150,000 shares of Common Stock granted under the 1996 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 grant, all of which options were cancelled
on December 7, 1999. Mr. McLain's continuing employment by the Company is
governed by the terms of his employment agreement.
(4) Includes incentive stock options granted to Mr. Katz under the 2000 Plan
as of December 7, 1999 to purchase 350,000 shares of Common Stock for five
years after issuance at an exercise price of $0.21 per share, or
approximately 110% of the closing sale price of the Common Stock as of
such date. Excludes options under the 1996 Plan to purchase 100,000 shares
at an exercise price of $5.125 per share, 100,000 shares at an exercise
price of $4.375 per share and 150,000 shares granted at an exercise price
of $3.78125, all of which were cancelled as of December 7, 1999.
(5) Includes incentive stock options granted to Mr. Barnes under the 2000 Plan
as of December 7, 1999 to purchase 300,000 shares of Common Stock for five
years after issuance at an exercise price of $0.21 per share, or
approximately 110% of the closing sale price of the Common Stock as of
such date. Excludes options under the 1996 Plan to purchase 50,000 shares
at an exercise price of $4.375 per share, 100,000 shares at an exercise
price of $5.25 per share and 50,000 shares at an exercise price of $5.125
per share, all of which were cancelled as of December 7, 1999.
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(6) Robert M. Rubin, a grantor of the Rubin Family Irrevocable Stock Trust
(the "Trust"), disclaims beneficial ownership of the shares of Common
Stock 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."
(7) Includes 25,000 non-qualified options to purchase Common Stock granted to
Mr. Berman under the 2000 Plan as of April 27, 2000 in consideration of
past and anticipated consulting services, which options are exercisable
for five years at $0.3485 per share and of which one-third vested at
issuance and one-third will vest on the dates one year and two years after
issuance.
(8) Includes 250,000 non-qualified options to purchase Common Stock granted
under the 2000 Plan as of April 27, 2000 to Mr. Byers in consideration for
his anticipated services as a director of the Company. These options shall
be exercisable at $0.3485 per share only upon, and for five years after,
his election to the Board of Directors.
(9) Includes 250,000 non-qualified options to purchase Common Stock granted
under the 2000 Plan as of December 7, 1999 to each of Dr. Kessler and Mr.
Perres in consideration for their anticipated services as directors of the
Company, which options shall be exercisable at $0.21 per share only upon,
and for five years after, their election to the Board of Directors.
(10) Excludes Dr. Kessler and Mr. Perres and Mr. Byers, who are nominees for
Director.
(11) See Notes (2) through (7).
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MANAGEMENT
DIRECTORS, NOMINEES FOR DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information with respect to directors,
nominees for directors, executive officers and key employees of the Company as
of June 15, 2000. 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 60 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
David M. Barnes 57 Vice President of Finance, Chief Financial
Officer and Director
Howard Katz 57 Director
Jeffrey Berman 38 Director
Stephen Byers 46 Nominee for Director (1)
Seymour Kessler 68 Nominee for Director (1)
Allen Perres 48 Nominee for Director (1)
-----------------
(1) Nominee for election as a director at the Company's 1999 Annual Meeting.
ROBERT M. RUBIN. Mr. Rubin has served as the Chairman of the Board of Directors
of the Company since May 1991, and has been its Chief Executive Officer since
January 1996 to the present. 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. 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 a subsidiary of 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 and 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 Western. 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 of Western (the Company's 60.6%-owned subsidiary), StyleSite Marketing,
Inc., a public company principally engaged in the women's apparel catalog
retailing business and which has filed for protection from creditors under the
federal bankruptcy laws, Help at Home, Inc. and Med-Emerg, Inc., a
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publicly-held Canadian management company for hospital emergency rooms and
out-patient facilities. Mr. Rubin devotes a substantial amount, but not a
majority, of his professional time to the Company.
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 as President of Western ( A 60.6%-owned subsidiary of the Company 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. Mr. McLain devotes his full
professional time to Western and included in such time is time spent on the
Company's business.
DAVID M. BARNES. Mr. Barnes has served as the Chief Financial Officer of
the Company since May 15, 1996, and has been a director since November 8, 1996.
Mr. Barnes is presently the chief financial officer of EGOMagazine.com, Inc. a
privately-held Internet and diversified media company based in Beverly Hills,
CA. Mr. Barnes has been a director, the President and a minority stockholder of
ACC from October 1994 to the present. In April 1995, ACC's operating
subsidiaries made assignments of their assets for the benefit of creditors
without resort to bankruptcy proceedings. Mr. Barnes devotes a majority of his
professional time to the business of the Company.
HOWARD KATZ. Mr. Katz was Executive Vice President of the Company from
April 15, 1996 through July 31, 1998, and has been a director of the Company
since April 15, 1996. Since January 1999 to the present Mr. Katz has been the
Chief Executive Officer of Imagine Networks, LLC, which engages in advanced
technology and software development. 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).
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<PAGE>
JEFFREY BERMAN. Mr. Berman has been a Director of the Company since June
2000. Mr. Berman has been a consultant to the Company since April 2000. Between
January 1998 and April 2000 Mr. Berman was the Director of Investment Banking
for Gruntal & Co., and prior thereto had held the same position since 1994 for
Hampshire Securities, Inc. Mr. Berman has been involved in investment banking
since 1991.
STEPHEN BYERS. Mr. Byers is a nominee for Director of the Company. Since
January 2000 Mr. Byers has been the Director of the Investment Division of The
Dreyfus Corporation, the investment management company. Between May 1997 and
November 1999 Mr. Byers was the Executive Vice President of Capital Markets,
Chief Financial Officer and Treasurer of Gruntal & Co., LLC, a registered
broker-dealer. Prior to May 1997 Mr. Byers had been a managing director of
PaineWebber, Inc.
SEYMOUR KESSLER. Dr. Kessler is a nominee for Director of the Company.
From January 1999 to the present Dr. Kessler has been co-Managing Director of
RKP Capital Partners, a holding company for publicly and privately-held
companies. Between 1996 and the present Dr. Kessler has been an active investor
in various publicly and privately-held companies. From 1992 through 1996 Dr.
Kessler was a founder, Chief Executive Officer and a director of Princeton
Dental Management Corporation. Between 1982 and 1997 Dr. Kessler served on the
Board of Trustees of University of Health Science Center, in Des Moines, IA. Dr.
Kessler also has been a director of four nationally-chartered banks, including
serving as Vice Chairman of the Board of Directors of Peterson Bank. Dr. Kessler
is a former podiatric surgeon who since 1975 has held majority and minority
interests and actively served in over 85 partnerships, privately-held and
publicly-owned companies and institutions.
ALLEN PERRES. Mr. Perres is a nominee for Director of the Company. From
January 1999 to the present Mr. Perres has been co-Managing Director of RKP
Capital Partners, a holding company for publicly and privately-held companies.
Mr. Perres is a partner in RB Partners, Inc., an investment banking firm for
homebuilders, and has served in such capacity from 1994 to the present. Mr.
Perres co-founded and managed that firm's commercial and residential mortgage
unit, First Dearborn Mortgage Company, Inc., during such period.
13
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company for services rendered during each of Fiscal 1999, Fiscal 1998 and Fiscal
1997 to each of the Company's most highly compensated executive officers and key
employees whose total compensation exceeded $100,000, and to all executive
officers and key employees of the Company as a group.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS
NAME AND FISCAL SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
PRINCIPAL YEAR ($)(1) ANNUAL STOCK UNDER- PAYOUTS COMPEN
POSITION COMPEN- AWARD(S) LYING ($) -SATION
SATION ($) OPTIONS/) ($)
($) SARS(#
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. Rubin
(2) 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
Director 1999 78,000 -0- 13,738 -0- -0- -0- -0-
1998 197,000 -0- -0- -0- -0- -0- -0-
1997 131,968 -0- -0- -0- 200,000 -0- -0-
David M. Barnes,
Chief Financial 1999 125,000 -0- 2,000 -0- -0- -0- -0-
Officer, Vice 1998 156,000 -0- -0- -0- -0- -0- -0-
President of 1997 129,807 -0- -0- -0- 100,000 -0- -0-
Finance and Director
C. Dean McLain
(3) 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) Includes severance payments.
(2) Includes $150,000 paid under Mr. Rubin's Consulting Agreement with Western
during Fiscal 1999, and $150,000 paid under Mr. Rubin's now-expired
employment agreement with Western during Fiscal 1997 and Fiscal 1998. See
"Employment Agreements."
(3) All compensation paid by Western.
14
<PAGE>
STOCK OPTION PLANS
OPTION GRANTS IN FISCAL 2000
Through April 30, 2000, the Company has issued a total of 3,310,00 options
under the 2000 Plan during Fiscal 2000. This amount excludes new incentive stock
options issued as of December 7, 1999 under the 2000 Plan for an identical
number of shares of Common Stock as was issuable upon the exercise of all
outstanding options under the 1991 Plan and 1996 Plan, all of which options were
cancelled as of December 7, 1999. The 2000 Plan was adopted as of December 7,
1999 and also as of such date the 1991 Plan and 1996 Plan were cancelled.
The Board of Directors amended the employment agreement of Robert M. Rubin
as of December 7, 1999, pursuant to which the Company made a one-time grant of
250,000 incentive stock options under the 1996 Plan to Mr. Rubin exercisable for
five years after issuance at $0.21 per share. See "Employment Agreements."
The Company also issued 500,000 non-qualified stock options on April 27,
2000, to Michael Sweeney, 250,000 non-qualified stock options to Stephen Byers
(a nominee for Director) and 100,000 non-qualified stock options to Michael
Metter, all in consideration for services rendered and to be rendered by such
persons who have agreed to be engaged as consultants to the Company, and 250,000
non-qualified stock options to each of Gersten, Savage & Kaplowitz, LLP ("GSK")
and Stephen Berger in consideration for legal services. Except for the options
issued to GSK which vested fully upon issuance and the 100,000 options to Mr.
Metter vesting one-third at issuance and at each of the two years thereafter the
foregoing options vest in one-fifth (20%) increments at issuance and each of the
four years thereafter. The Company also issued 50,000 non-qualified stock
options, on such date and on the same terms, to Bert Gusrae in consideration of
corporate finance consulting services rendered to the Company, which options
vested upon issuance. The Company also issued 1,650,000 incentive stock options
to Jeffrey Berman, which options vest one-half at issuance and the remaining
one-half on the date one year after issuance. All of the foregoing options are
exercisable for five years after issuance at $0.3485 per share (85% of the
closing bid price on such date).
As of December 7, 1999 the Company cancelled all outstanding options
issued under the 1996 Plan and 1991 Plan, adopted the 2000 Plan and issued new
incentive stock options under the 2000 Plan for an identical number of shares of
Common Stock as was issuable upon exercise of all such cancelled options. These
new options are exercisable for five years after the date of issuance at an
exercise price of $0.21 per share, or approximately 110% of the closing sale
price of the Company's Common Stock on December 7, 1999. The Company also issued
as of December 7, 1999 an additional 56,500 incentive stock options and 100,000
incentive stock options to Messrs. McLain and Barnes, respectively, all of which
options are exercisable at $0.21 per share for five years after issuance,
250,000 non-qualified options to each of Dr. Kessler and Mr. Perres, all of
which options are exercisable at $0.21 per share for five years after their
election to the Board of Directors, and 10,000 non-qualified options to Matthew
DeVries, an officer of Western, which options are exercisable at $0.21 per share
for five years after issuance.
OPTION GRANTS IN FISCAL 1999
No options were issued in Fiscal 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 (as of July 31,
1999) of unexercised options held by each such person. None of these options
have been exercised as of June 15, 2000.
AGGREGATED OPTIONS EXERCISED
IN LAST FISCAL YEAR (1999) 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- 590,000 $0
Howard Katz -0- -0- 350,000 $0
David Barnes -0- -0- 200,000 $0
15
<PAGE>
C. Dean McLain -0- -0- 243,500 $0
THE 2000 STOCK OPTION PLAN
The Company's Board of Directors cancelled as of December 7, 1999 all
options outstanding under the Company's 1996 Stock Option Plan, adopted on April
25, 1996 and amended as of July 30, 1996 (the "1996 Plan"), adopted as of such
date the 2000 Plan and issued new incentive stock options under the 2000 Plan
for an identical number of shares of Common Stock as were issuable upon exercise
of the cancelled options. In addition, the Company issued 56,500 and 100,000
additional incentive stock options to Messrs. McLain and Barnes, respectively,
in consideration for their continued service to the Company. These new options
are exercisable for five years after the date of issuance at an exercise price
of $0.21 per share, the closing sale price of the Company's Common Stock on
December 7, 1999. The Company has issued 250,000 non-qualified stock options to
each of Dr. Kessler and Mr. Perres, which options will vest upon their election
to the Board of Directors and will be exercisable for five years thereafter at
an exercise price of $0.21 per share. The Company on April 27, 2000 issued an
additional 2,810,000 non-qualified stock options exercisable at $0.3485 per
share (85% of the closing bid price on such date) for varying terms, to various
individuals or entities. See "Option Grants in Fiscal 2000."
As of June 15, 2000, the directors, executive officers and nominees for
election to the Board of Directors listed below hold outstanding options to
acquire shares of Common Stock granted under the 2000 Plan, as follows:
RECIPIENT DATE OF GRANT NUMBER OF EXERCISE
OPTIONS PRICE
Robert M. Rubin December 7, 1999 840,000 (1) $0.21
C. Dean McLain December 7, 1999 300,000 (1) $0.21
Howard Katz December 7, 1999 350,000 (1) $0.21
David M. Barnes December 7, 1999 300,000 (1) $0.21
Seymour Kessler December 7, 1999 250,000 (2) $0.21
Allen Perres December 7, 1999 250,000 (2) $0.21
Jeffrey Berman April 27, 2000 1,650,000 (3) $0.3485
Stephen Byers April 27, 2000 250,000 (2) $0.3485
(1) These are incentive stock options and are all presently exercisable.
(2) These are non-qualified stock options and will vest only upon their
election to the Board of Directors.
(3) These are incentive stock options of which one-half vested upon issuance
and one-half will vest thirteen months after issuance.
16
<PAGE>
COMPARISON OF THE CUMULATIVE TOTAL RETURN AMONG THE COMPANY'S COMMON
STOCK, THE NASDAQ MARKET INDEX AND A PEER GROUP CONSISTING OF THE S&P MACHINERY
(DIVERSIFIED) INDEX, SINCE JULY 31, 1994
The Company presently engages in only one operating business, which it
does through its subsidiary, Western. The peer group used for purposes of this
comparison is the S&P Machinery (Diversified) Index, whose businesses are
believed to be comparable to that of Western. The companies comprising such
index are: Case Corporation, Caterpillar Inc., Cooper Industries, Inc., Deere &
Co., Dover Corporation, Milacron Inc., Ingersoll Rand Corporation, and Timken
Corporation. This comparison covers the total return (assuming an investment of
$100 in each of the following) among the Company's Common Stock, an index
representing the NASDAQ Stock Market and the S&P Machinery (Diversified) Index
over a five-year period beginning July 31, 1994 and ending May 31, 2000 and
assumes the reinvestment of dividends.
COMPANY NASDAQ S&P MACHINERY
DATE COMMON STOCK MARKET INDEX (DIVERSIFIED) INDEX
7/31/94 $100.00 (1) $ 100.00 $ 100.00
7/31/95 $115.42 (2) $ 122.54 $ 126.08
7/31/96 $163.72 (3) $ 133.59 $ 128.51
7/31/97 $115.65 (4) $ 196.38 $ 208.74
7/31/98 $ 13.60 (5) $ 235.44 $ 172.60
7/31/99 $ 6.47 (6) $ 332.63 $ 202.20
5/31/00 $ 12.76 (7) $ 421.45 $ 174.09
(1) The price for the Company's Common Stock for such date was unavailable. This
comparison calculates a base price of $100 using the average ($4.41) of the high
($4.75) and low ($4.06) sale prices for the Common Stock during the fourth
quarter of the Company's fiscal year ending July 31, 1994.
(2) This comparison uses the average ($5.09) of the high ($5.92) and low ($4.25)
sale prices for the Common Stock during the fourth quarter of the Company's
fiscal year ending July 31, 1995.
17
<PAGE>
(3) This comparison uses the average ($7.22) of the high ($10.25) and low
($4.19) sale prices for the Common Stock during the fourth quarter of the
Company's fiscal year ending July 31, 1996.
(4) This comparison uses the average ($5.10) of the high ($6.00) and low ($4.38)
sale prices for the Common Stock during the fourth quarter of the Company's
fiscal year ending July 31, 1997.
(5) This comparison uses the average ($0.606) of the high ($0.875) and low
($0.33) sale prices for the Common Stock during the fourth quarter of the
Company's fiscal year ending July 31, 1998.
(6) This comparison uses the average ($0.285) of the high ($0.32) and low
($0.25) sale prices for the Common Stock during the fourth quarter of the
Company's fiscal year ending July 31, 1999.
(7) The last sale price of the Company's Common Stock quoted on the OTC Bulletin
Board on May 31, 2000 was $0.5625, meaning that an investment of $100 in the
Company's Common Stock at a purchase price of $4.41 per share would have been,
on May 31, 2000, reduced to approximately $12.76, representing a price decline
of approximately 87.25%.
18
<PAGE>
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 and as amended as of December 7, 1999 (the "Restated Agreement"), with a
five-year term expiring December 7, 2004. The Restated Agreement provides Mr.
Rubin with a $225,000 minimum annual base salary, incentive bonuses based upon
the Company's profitability or consummation of any transactions increasing its
value, and 250,000 incentive stock options under the 1996 Plan. The Company's
Board of Directors and its Compensation Committee have ratified and approved the
Restated Agreement.
The Restated Agreement provides for a base salary payable to Mr. Rubin of a
minimum of $225,000 (his base salary for Fiscal 1999) for the fiscal years
ending July 31, 2000 ("Fiscal 2000") and July 31, 2001 ("Fiscal 2001"), which
base salary shall be as determined by the Compensation Committee of the
Company's Board of Directors and ratified by a majority of the entire Board of
Directors of the Company (other than Mr. Rubin). Mr. Rubin's base salary in each
of the fiscal years ending July 31, 2000 and 2001 will be 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. Mr. Rubin will also receive as compensation under the
Restated Agreement a one-time grant of 250,000 incentive stock options under the
1996 Plan which options are immediately exercisable at $0.21 per share
(approximately 110% of the closing sale price of the Company's Common Stock on
the OTCBB on December 7, 1999, the date of grant) for five years after the date
of grant. The Restated Agreement also provides for incentive bonuses consisting
of 10% of the sale price in excess of the Company's basis, up to a maximum
aggregate bonus of $3,000,000, to be paid to Mr. Rubin contingent upon the
Company's ability to dispose of its holdings of the common stock of either
eGlobe, Inc. or Western and receive net aggregate proceeds in excess of
$3,000,000 from the sale of the shares of either eGlobe or Western shares. The
Company presently owns 1,923,000 shares of eGlobe common stock (approximately
2.2% of the outstanding eGlobe shares as of May 30, 2000) and 1,222,586 shares
of Western common stock (approximately 37% of the outstanding shares after
giving effect to the Company's disposition of 777,414 shares pursuant to the
settlement agreement for the Class, which disposition is expected to take place
during Fiscal 2000). The Company presently has no agreements or commitments to
sell part of all of these securities. In addition, Mr. Rubin, Mr. McLain and
Western have contemplated their acquisition of certain of the assets of Western,
but there is no agreement with regards to such acquisition.
Mr. Rubin is also engaged by Western, the Company's 60.5%-owned
subsidiary, pursuant to a two-year Consulting Agreement, effective August 1,
1998 and expiring August 1, 2000 under which he is paid $150,000 annually plus
reimbursed for his business expenses.
19
<PAGE>
C. DEAN MCLAIN
C. Dean McLain serves as the President and Chief Executive Officer of
Western, the Company's 60.6%-owned subsidiary, 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.
Under the terms of his amended employment agreement, the 150,000 stock
options exercisable at $6.50 per share, which were awarded in March 1995 to Mr.
McLain under Western's 1995 Stock Option Plan, were cancelled 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 Western'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 Western operates,
including medical coverage, excess life insurance benefits and use of an
automobile supplied by Western.
Mr. McLain, Mr. Rubin and Western have contemplated their acquisition of
certain of the assets of Western, but there is presently no agreement with
regards to such acquisition.
20
<PAGE>
Prior to the effectiveness of Western's initial public offering, Mr.
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, as of December 7, 1999 Mr. McLain received options to
acquire 300,000 shares of the Company's Common Stock, exercisable for five years
after issuance at $0.21 per share, or approximately 110% of the closing sale
price of the Common Stock on such date. See "Executive Compensation."
HOWARD KATZ
Howard Katz is a director of the Company. Mr. Katz is presently receiving
severance payments of $78,000 per year under a severance agreement which
provides for payments over a three-year period ending in 2001. Mr. Katz received
$91,738 in salary and severance payments and other compensation during Fiscal
1999. 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
for Fiscal 1998. See "Executive Compensation."
DAVID M. BARNES
David M. Barnes is a director and Chief Financial Officer of the Company.
In Fiscal 1999 Mr. Barnes received a base salary of $50,000 plus severance
payments aggregating $75,000 and certain executive benefits which brought his
total annual compensation for Fiscal 1999 to $127,000. In Fiscal 2000 Mr. Barnes
has continued in these capacities with a base salary of $75,000 plus certain
executive benefits. Between May 15, 1996 and July 31, 1998 Mr. Barnes was the
Company's Chief Financial Officer and received an annual salary of approximately
$150,000. In addition, Mr. Barnes received 100,000 options under the 2000 Plan
on December 7, 1999. See "Executive Compensation."
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. The Compensation Committee has met in June 2000 to
discuss, ratify and approve Mr. Rubin's employment agreement, and discuss other
matters.
Mr. Rubin's annual compensation, identified in the Summary Compensation
Table, has been determined by his employment agreements with the Company, which
have been approved by the Board of Directors. Mr. Rubin's agreement was amended
in December 1999 (such agreement is also referred to herein as the "Restated
Agreement") and now is for a five-year term expiring December 7, 2004.
21
<PAGE>
For information concerning Mr. Rubin's Restated 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."
No director of the Company is paid to attend Board meetings, although they
are reimbursed for their actual expenses. During the first nine months of Fiscal
2000 the Company has held two meetings of the Board of Directors at which all
directors were present telephonically. During Fiscal 1999 there were no meetings
of the Board of Directors and actions of the Board were taken pursuant to
resolutions approved by the unanimous written consent of the directors (not
counting abstentions). During Fiscal 1999, there were no meetings of the
Compensation Committee and all matters regarding compensation were resolved or
handled by the entire Board of Directors. During Fiscal 2000, the Compensation
Committee has only met once in June 2000 to discuss, ratify and approve Mr.
Rubin's employment agreement and the 2000 Plan, and other matters. 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 Compensation Committee
reviews the compensation for all employees and the granting of options under all
of the Company's employee stock option plans that may exist and be in effect
from time to time, and presently consists of Messrs. McLain, Berman and Katz. If
Mr. Byers is elected to the Board, it is anticipated that he will replace Mr.
McLain on the Compensation Committee.
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 was to receive payments aggregating $200,000 over a seven
year period. In addition, at the closing of the Hutchinson Transaction
Hutchinson engaged Mr. Rubin under a seven-year Consulting Agreement pursuant to
which Mr. Rubin was to receive payments aggregating $1,000,000. All payments
under the Non-Competition Agreement and Consulting Agreement, aggregating
$1,200,000 (and as to which the net present value of such payments is
approximately $1,100,000), were assigned to the Company by Mr. Rubin as at July
31, 1998 as repayment for his $1,200,000 loan. No payments have or will be made
to the Company from Hutchinson, unless and until the Hutchinson Transaction is
ratified by the Company's stockholders at this Meeting or any subsequent special
or annual meeting of Company stockholders. Hutchinson has conditioned its
payments under those agreements on stockholder ratification of the Hutchinson
Transaction. Pursuant to the amended settlement agreement for the Derivative
Action, Mr. Rubin was obligated to make an approximately $1,400,000 cash payment
to the Company by July 15, 2000 irrespective of whether Hutchinson makes any
payments to Mr. Rubin. Interest on such amount has accrued at 12% annually
since July 15, 2000.
BOARD OF DIRECTORS' REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has been largely responsible for the Company's
policy on executive compensation as the Board's Compensation Committee did not
meet during Fiscal 1999 and has only met once in June 2000 to discuss, ratify
and approve Mr. Rubin's employment agreement and the 2000 Plan, and other
matters. The Board believes that offering the Company's 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. Presently, the Company has
only engaged Mr. Rubin pursuant to an employment agreement (which was amended
and restated as of December 7, 1999). Mr. McLain is under contract with the
Company's 60.6%-owned subsidiary, Western. The Company believes that its
compensation levels as to all of its employees were and are comparable to
industry standards. See "Executive Compensation-Employment, Incentive
Compensation and Termination Agreements."
In setting levels of compensation under such employment contracts and in
approving the compensation of all other Company employees, the Board of
Directors evaluates the Company's
22
<PAGE>
overall profitability, the contribution of particular individuals to the
Company's performance and industry compensation standards. A significant portion
of the maximum achievable compensation paid to Mr. Rubin under his Restated
Agreement is contingent upon the Company's profitability or consummation of any
transactions increasing its value. See "Employment, Incentive Compensation and
Termination Agreements," above.
TRANSACTIONS WITH ERD WASTE CORP.
The Company 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
during 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.
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 a $4,400,000 standby letter of credit (the "Letter of Credit")
originally issued by Citibank, N.A. and later assumed by North Fork Bank in
favor of Chase Bank on behalf of ERD, 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
23
<PAGE>
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.
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 the fact that Mr. Rubin has been or is an officer
of each company. 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
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for the first $1,600,000 of such loss. See "The Class Action."
TRANSACTIONS WITH OTHER AFFILIATES
During Fiscal 1999, the Company provided approximately $992,000 in
financing to IDF, International, Inc. ("IDF") a 40%-owned subsidiary. These
funds were used for working capital, the payment of certain delinquent taxes and
other liabilities of Hayden/Wegman, Inc., an IDF subsidiary, and costs related
to the discontinuation of operations of TechStar (also a subsidiary of IDF). The
Company has now taken a full reserve against the $992,000 in advances to IDF
made prior to Fiscal 2000 due to a significant decrease in revenue sustained by
IDF and IDF's inability to obtain further financing, which have made recovery
uncertain. Subsequently, the Company loaned IDF an additional $188,000 during
the second and third quarters of Fiscal 2000, and has not taken a reserve
against these latter advances.
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.
Mr. Rubin was until August 1999 a director of IDF and owned 874,659 shares
of IDF common stock, representing approximately 13.0% of the currently
outstanding IDF common stock after giving effect to a merger involving IDF and
Mr. Rubin's conversion of an $800,000 loan previously made to IDF into preferred
stock in turn convertible into an additional 400,000 shares of IDF common stock,
prior to his transfer of such shares to the Rubin Family Irrevocable Stock
Trust. Subsequent to such merger, Mr. Rubin had served as Chairman of the Board
of Directors of IDF and received a three year employment agreement from IDF at
an annual salary of $75,000. However, Mr. Rubin has not received payments
thereunder since IDF's fiscal year ended July 31, 1998.
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 Fiscal 1999, or the
current Fiscal 2000 to date.
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ACTIONS TO BE TAKEN UNDER THE PROXY
Unless otherwise directed by the grantor of the proxy, the persons acting
under the accompanying proxy will vote the shares represented thereby: (a) for
the election of the persons named in the next succeeding table as nominees to
the Board of Directors of the Company; (b) to amend the Company's Certificate of
Incorporation to change the Company's name to "Intertech Capital, Inc."; (c) to
authorize and ratify the adoption of the Company's 2000 Plan; (d) to ratify the
Hutchinson Transaction; (e) to authorize and ratify the issuance of 976,539
shares of the Company's Series B-1 Convertible Preferred Stock in connection
with the Old ConnectSoft acquisition; (f) to authorize and ratify the issuance
of 400,000 shares of the Company's Series B-2 Convertible Preferred Stock; (g)
to authorize and ratify an amended and restated employment agreement between the
Company and Robert M. Rubin, its Chief Executive Officer, (h) to authorize and
ratify an amendment to the Company's Certificate of Incorporation reducing the
Company's authorized capital stock from 67,700,000 to 42,700,000 shares, and
reducing the authorized Common Stock from 65,000,000 to 40,000,000 shares, and
removing any classifications in the Common Stock; (i) to authorize and ratify
the appointment of PricewaterhouseCoopers as the Company's auditors for Fiscal
1999; and (j) in connection with the transaction of such other business that may
be brought before the Meeting, in accordance with the judgment of the person or
persons voting the proxy.
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PROPOSAL I. TO ELECT EIGHT (8) DIRECTORS TO THE BOARD OF DIRECTORS, TO HOLD
OFFICE UNTIL THE NEXT ANNUAL MEETING
NOMINEES
At the Annual Meeting eight directors are to be elected to the Board of
Directors. Each director shall hold office until the next Annual Meeting of
Stockholders or until his successor is elected. The names of the nominees for
election as directors, all of whom other than Messrs. Byers and Perres and Dr.
Kessler are incumbent directors of the Company, are set forth below.
Biographical information on each of the candidates for election is included in
"Management." Unless authority to vote for one or more nominees is withheld, it
is intended that shares represented by proxies in the accompanying form will be
voted for the election of the following nominees. With respect to any such
nominee who may become unable or unwilling to accept nomination or election, it
is intended that the proxies will be voted for the election in his stead of such
person as the Board of Directors may recommend, but the Board does not know of
any reason why any nominee will be unable or unwilling to serve if elected.
NAME AGE POSITIONS HELD
President, Chief Executive Officer and
Robert M. Rubin............ 60 Chairman of the Board
C. Dean McLain............. 44 Executive Vice President and Director
David M. Barnes............ 57 Chief Financial Officer, Vice President
of Finance and Director
Howard Katz................ 57 Director
Jeffrey Berman............. 38 Director
Stephen Byers ............. 46 Nominee
Seymour Kessler............ 68 Nominee
Allen Perres .............. 48 Nominee
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
At present the Board of Directors has three committees, the Compensation
Committee, the Audit Committee, and the Corporate Governance Committee. The
Compensation Committee reviews the compensation for all employees and the
granting of options under all of the Company's employee stock option plans that
may exist and be in effect from time to time. The Compensation Committee
presently consists of Messrs. McLain, Katz and Berman. The Audit Committee's
duties include the review of the Company's financing arrangements and a review
of its internal financial controls, and consists of Messrs. Barnes and Katz. The
Corporate Governance Committee's duties will include the review of corporate
governance matters including proposed amendments to the Certificate of
Incorporation and bylaws and the conduct of meetings of directors, committees of
the Board of Directors and of stockholders. During Fiscal 1999, the Board of
Directors did not meet and only took actions pursuant to the unanimous written
consent of the directors without a meeting. Neither the Compensation Committee
nor the Audit Committee met during Fiscal 1998 or Fiscal 1999 and during Fiscal
2000 the Compensation Committee has only met once in June 2000. The Corporate
Governance Committee was recently formed in December 1999.
No director of the Company is paid to attend Board meetings, although they
are reimbursed for actual expenses related to such attendance.
Approval of Proposal I requires the affirmative vote of a majority of the
voting shares that are present, whether in person or by proxy, and voting at the
Meeting.
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THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT YOU VOTE "FOR" ALL
SIX (6) NOMINEES FOR DIRECTOR AND APPROVE PROPOSAL I.
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PROPOSAL II. TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO CHANGE THE
COMPANY'S NAME TO "INTERTECH CAPITAL, INC."
At the Annual Meeting a vote will be taken on a proposal to amend the
Company's Certificate of Incorporation to change its corporate name to
"Intertech Capital, Inc." Management believes that the Company's current name is
no longer reflective of the Company's business direction or emphasis. Management
intends that the Company will, in the future, engage in businesses different
from its present business, including an Internet business segment, and that this
proposed new corporate name will more accurately reflect the different
businesses and the changing business strategy, direction and emphasis of the
Company. However, the Company is not presently engaged in and does not presently
operate as an Internet business. The Company does intend to create an Internet
business segment, including at least one website, during Fiscal 2000 or Fiscal
2001. In March 2000 the Company purchased 20% of the outstanding common stock of
EGO Magazine.com, Inc. ("EGO Magazine") a start-up diversified media business
including an Internet website and magazine targeted for a sophisticated
audience, in consideration for a $175,000 principal amount 10% promissory note
payable on the earlier to occur of the first anniversary of such loan or EGO
Magazine's receipt of gross proceeds of at least $2,000,000 in financing. In
addition, Robert M. Rubin beneficially owns another 20% of the outstanding
common stock of EGO Magazine. The Company has not determined what other actions
it will take to establish its Internet business segment. There can be no
assurance that the Company will be able to engage in the Internet or other
businesses. The Company has not entered into any agreements to acquire, commence
or otherwise engage or participate in the Internet or such other businesses.
Approval of Proposal II requires the affirmative vote of a majority of
outstanding voting shares as of the Record Date.
MANAGEMENT BELIEVES THAT THE PROPOSED CHANGE OF THE COMPANY'S CORPORATE NAME IS
IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL II AND APPROVE THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION EFFECTING THE CHANGE OF
THE COMPANY'S CORPORATE NAME TO "INTERTECH CAPITAL, INC."
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PROPOSAL III. TO AUTHORIZE AND APPROVE THE CORPORATION'S 2000 EMPLOYEE
STOCK OPTION PLAN, UNDER WHICH STOCK OPTIONS FOR THE PURCHASE OF UP TO 6,000,000
SHARES OF COMMON STOCK WILL BE AVAILABLE.
At the Annual Meeting a vote will be taken on a proposal to ratify and
approve the creation of the Company's 2000 Employee Stock Option Plan (the "2000
Plan"). Under the 1996 Plan stock options for the purchase of up to 6,000,000
shares of Common Stock will be available for grant. The 2000 Plan was adopted by
the Board of Directors as of December 7, 1999, and replaces the 1996 Stock
Option Plan which had been adopted by the Board of Directors on April 25, 1996,
amended on July 10, 1996 and further amended as of December 7, 1999. A COPY OF
THE 2000 PLAN, AS AMENDED, IS INCLUDED HEREWITH AS EXHIBIT 4.1. As of June 15,
2000, options to purchase 5,150,000 shares of Common Stock in the aggregate, of
which 2,040,000 are incentive stock options, have been granted to the Company's
employees, directors and outside consultants under the 2000 Plan. See "Stock
Option Plans--Option Grants in Fiscal 2000."
The purpose of the 2000 Plan is to provide additional incentive to the
directors, officers, employees and consultants of the Company who are primarily
responsible for the management and growth of the Company. Each option shall be
designated at the time of grant as either an incentive stock option (an "ISO")
or a non-qualified stock option (a "NQSO").
The Company previously had two other employee stock option plans, the 1991
Stock Option Plan and the 1996 Stock Option Plan. All options issued under these
plans were cancelled prior to or as of December 7, 1999. See "Stock Option
Plans" for information with respect to options granted under the 2000 Plan to
the Company's current directors, nominees for director and current executive
officers. Management deemed it necessary to authorize the 2000 Plan in order to
create and preserve incentives for management and employees of the Company who
are responsible for the Company's future growth and business performance.
As of December 7, 1999 the Company cancelled all options previously
outstanding under the 1996 Plan and the 1991 Plan, and subsequently authorized
the 2000 Plan and issued an identical number of new options under the 2000 Plan,
all of which are exercisable for five years after issuance at an exercise price
of $0.21 per share, which was approximately 110% of the closing sale price of
the underlying Common Stock on the OTCBB on such date. The 2000 Plan permits the
issuance of up to 6,000,000 options. The Company's Board of Directors decided to
take this action in order to restore the value to the options which had been
lost since their granting as a result of the steep decline in the price of the
Company's Common Stock, preserve the original function of the option grants as a
means of recognizing and rewarding those individuals whose service had been
determined to be of considerable value to the Company and preserve the favorable
tax treatment of gains realized upon the exercise of the incentive stock
options, provide the Company with the ability and flexibility to continue to
reward key employees, and recognize their contributions and encourage their
continued service to the Company, by issuing options. The Board of Directors
determined that the replacement of these options would encourage continued
diligence and dedication on behalf of the Company, and would help the Company
attract and retain highly capable employees, and motivate them to perform at
increasing levels of effectiveness and use their best efforts to promote the
growth and profitability of the Company.
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Management believes that it is in the best interests of the Company to
obtain shareholder approval of the 2000 Plan at this time in order to (i)
provide recipients of plan options with certain benefits available under
Securities and Exchange Commission regulations (e.g., option grants are not
considered purchases of securities for purposes of determining whether certain
profits are "short swing" profits under Section 16(b) of the Exchange Act which
must be returned to the Company by corporate insiders, and (ii) provide
employees with the beneficial tax treatment accorded ISOs, which can only be
granted under the 2000 Plan if it is approved by Company stockholders. Although
other factors, principally regarding plan administration, are required for
holders of options granted under the 2000 Plan to enjoy such benefits (e.g.,
restrictions under Section 16(b) of the Exchange Act on certain purchases and
sales of securities by management personnel are relaxed), having a
shareholder-authorized stock option plan is the first requirement which must be
met. For information concerning the beneficial tax treatment accorded ISOs, see
"Tax Treatment of Options," below.
ADMINISTRATION OF THE PLAN. The 2000 Plan is administered by the full
Board of Directors or by the Compensation Committee, which determines which
eligible persons will be granted options, when options will be granted, the
number of shares to be subject to options, the durations of options, any
conditions to the exercise of options and the manner in and price at which
options may be exercised. The Compensation Committee is authorized to amend,
suspend or terminate the 2000 Plan. However, except for adjustments resulting
from changes in capitalization, the Compensation Committee requires shareholder
approval to (i) increase the maximum number of shares that may be issued
pursuant to the exercise of options granted under the 2000 Plan; (ii) grant an
option with an exercise price less than 85% of the fair market value of the
underlying Common Stock at the time of grant; (iii) change the eligibility
requirements for participation in the 2000 Plan; (iv) extend the term of any
option or the period during which any option may be granted under the 1996 Plan;
or (v) decrease an option exercise price (although an option may be cancelled
and a new option granted at a lower exercise price).
SHARES SUBJECT TO THE PLAN. The 2000 Plan currently provides that options
may be granted to purchase up to 6,000,000 shares of Common Stock, subject to
adjustment upon certain changes in capitalization without receipt of
consideration by the Company. In addition, if the Company is involved in a
merger, consolidation, dissolution or liquidation, the options granted under the
2000 Plan will be adjusted or, under certain conditions, will terminate, subject
to the right of the option holder to exercise his option or a comparable option
substituted at the discretion of the Company prior to such event. If any
unexercised option expires or terminates for any reason, the non-purchased
shares subject to such unexercised option will be available again for the
purposes of the 2000 Plan.
PARTICIPATION. Any employee, director, consultant, or representative of
the Company is eligible to receive ISOs or NQSOs granted under the 2000 Plan.
Non-employee directors, consultants or representatives may only receive NQSOs.
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OPTION PRICE. The exercise price of each option shall be determined by the
full Board of Directors or by the Compensation Committee. However, the exercise
price of each option on the date the option is granted may not be less than (i)
100% of the fair market value of the Common Stock underlying an incentive stock
option on the date of grant, or (ii) 85% of the fair market value of the Common
Stock underlying a non-qualified stock option on the date of grant. If an
incentive stock option is to be granted to an employee who holds over 10% of the
total combined voting power of all classes of the Company's capital stock, then
the exercise price may not be less than 110% of the fair market value of the
Common Stock covered by the option on the date the option is granted. As of June
15, 2000, a total of 5,150,000 options were outstanding, of which 1,790,000
options qualify as incentive stock options and were issued with an exercise
price of $0.21 per share which was approximately 110% of the closing sale price
of $0.19 of the Common Stock on December 7, 1999, the date as of which such
options were granted, which was approximately 110% of the closing sale price of
the Common Stock on the OTCBB on December 7, 1999, 500,000 non-qualified stock
options were issued on the same date and the same terms as the foregoing
options, and the remaining 2,860,000 options issued on April 27, 2000 have an
exercise price of $0.3485 per share, which was 85% of the closing bid price of
the Company's common stock on the date of issuance, and these latter options are
non-qualified.
TERMS OF OPTIONS. The full Board of Directors or the Compensation
Committee shall, in its discretion, fix the term of each option, provided that
the maximum term of an option shall be 10 years. ISOs granted to an employee who
owns over 10% of the total combined voting power of all classes of capital stock
of the Company shall expire not more than five years after the date of grant.
The 2000 Plan provides for the earlier expiration of options in the event of
certain terminations of employment of the holder.
RESTRICTIONS ON GRANT AND EXERCISE. An option may not be transferred other
than by will or the laws of descent and distribution and, during the lifetime of
the option holder, may be exercised solely by him. The aggregate fair market
value (determined at the time the option is granted) of the shares of Common
Stock as to which an employee may exercise ISOs in any one calendar year may not
exceed $100,000. The full Board of Directors or the Compensation Committee may
impose other conditions to exercise as it deems appropriate.
OPTION GRANTS. The Company has granted an aggregate of 5,150,000 options
under the 2000 Plan as of June 15, 2000, and of such amount a total of 3,281,666
options are presently exercisable.
TERMINATION. The 2000 Plan will terminate on December 7, 2009, unless
terminated earlier by the Board of Directors or the Compensation Committee.
TAX TREATMENT OF OPTIONS. Federal income tax treatment of NQSOs under the
1996 Plan is generally less favorable to employees than the tax treatment
accorded ISOs under the 2000 Plan. Whereas holders of both ISOs and NQSOs
realize taxable income when they sell the shares acquired upon exercise of the
options, holders of NQSOs also realize taxable income when they exercise their
options. However, the Company generally receives more favorable tax treatment
when it issues NQSOs, as it would be entitled to a tax deduction on each NQSO
granted. The Company's tax deductions will be equal to the grantee's realizable
income.
The Company currently has no obligation to grant additional options under
the 2000 Plan to any person, including any members of the Company's management.
The Board of Directors of the Company recommends that you vote to approve
the 2000 Stock Option Plan. The five present directors and three nominees to the
Board have been granted, in the aggregate, a total of 4,290,000 options, at
exercise prices of between $0.21 and $0.3485 per share.
Approval of Proposal III requires the affirmative vote of a majority of
the voting shares that are present, whether in person or by proxy, and voting at
the Meeting.
MANAGEMENT BELIEVES AUTHORIZATION AND RATIFICATION OF THE
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COMPANY'S 1996 STOCK OPTION PLAN IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS, AND RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL III.
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PROPOSAL IV. TO AUTHORIZE AND RATIFY THE SALE IN JANUARY 1996 OF ALL OF THE
ASSETS OF THE COMPANY'S MANUFACTURING BUSINESS TO HUTCHINSON CORPORATION.
At the Annual Meeting a vote will be taken on a proposal to ratify the
sale (the "Hutchinson Transaction") in January 1996 of all of the assets of the
Company's Manufacturing Business (as defined below) to subsidiaries of the
Hutchinson Corporation ("Hutchinson"), a Delaware corporation formed for the
purpose of consummating this transaction. The Manufacturing Business of the
Company consisted of all of the businesses of American United Products, Inc.
("National O-Ring") and American United Seal, Inc. ("Stillman Seal"), which were
both wholly-owned subsidiaries of the Company. The Manufacturing Business was
sold for a purchase price ("Purchase Price") of approximately $24,328,000, of
which $20,825,000 was paid in cash and the remaining balance was paid by
delivery of two 24-month non-interest bearing promissory notes (the "Notes")
made by the Hutchinson subsidiaries that purchased the Manufacturing Business.
The Notes were guaranteed by Total America, Inc., the parent corporation of
Hutchinson whose securities are listed on the New York Stock Exchange and the
note balance of $3,503,000 at July 31, 1997 was paid in January 1998. The terms
of such sale are further discussed below.
THE SALE OF THE MANUFACTURING BUSINESS HAS ALREADY OCCURRED AND THE
COMPANY HAS ALREADY RECEIVED THE PURCHASE PRICE OF APPROXIMATELY $24,328,000. A
VOTE BY STOCKHOLDERS AGAINST RATIFICATION OF THE SALE, THE AGREEMENTS
EFFECTUATING SUCH SALE AND ANY TRANSACTIONS CONTEMPLATED THEREIN WILL NOT AFFECT
THE EFFECTIVENESS OF THE HUTCHINSON TRANSACTION OR OBLIGATE THE COMPANY TO
RETURN ANY PAYMENT OF THE PURCHASE PRICE.
The terms and conditions of the Hutchinson Transaction were set forth in
the Asset Purchase Agreement, dated as of November 22, 1995 (the "Sale
Agreement"), by and among Hutchinson as Purchaser, and the Company and its
wholly-owned subsidiaries AUG-California, Inc., National O-Ring and Stillman
Seal. On January 19, 1996 all of the assets of the National O-Ring and Stillman
Seal businesses (the "Manufacturing Business") were sold to, and substantially
all of the liabilities associated with the operation of the Manufacturing
Business were assumed by, subsidiaries of Hutchinson which were formed for the
purpose of acquiring the Manufacturing Business.
Under the terms of the Sale Agreement, the Company agreed that as soon as
reasonably practicable following the closing of the Hutchinson Transaction (the
"Closing"), it would call a meeting of its stockholders to request that Company
stockholders ratify the Sale Agreement, the exhibits thereto (including the
non-competition agreement and the Consulting Agreement, as herein after
described) and the transactions contemplated thereby. Ratification by
stockholders was not a condition to consummation of the Hutchinson Transaction.
HUTCHINSON HAS CONDITIONED ITS PAYMENTS TO THE COMPANY ON STOCKHOLDER
RATIFICATION OF THE HUTCHINSON TRANSACTION.
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The sole purpose for shareholder ratification of the Hutchinson
Transaction, the Sale Agreement and the Exhibits thereto, and the transactions
contemplated thereby, is to facilitate the Company's receipt of payments from
Hutchinson under the Non-Competition Agreement and Consulting Agreements, which
payments are part of the Rubin Payment.
At 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 Manufacturing
Business acquired in the Hutchinson Transaction, and in return Mr. Rubin was to
receive payments aggregating $200,000 over a seven year period, and to provide
advisory services under the Consulting Agreement relating to the Manufacturing
Business over a seven-year period, for which advisory services Mr. Rubin was to
receive payments aggregating $1,000,000. In connection with the settlement of
the Derivative Action (as to which final judicial approval was received in
August 1999) Mr. Rubin had in July 1998 assigned to the Company his rights to
such payments aggregating $1,200,000 (and as to which the net present value is
approximately $1,100,000). If the Hutchinson Transaction is ratified by the
Company's stockholders, the Company will release Mr. Rubin from the obligation
to repay a $1,200,000 principal amount promissory note (the "Note") issued by
Mr. Rubin to the Company. In return for such release, Mr. Rubin has assigned to
the Company his rights to receive payments under the Non-Competition Agreement
and Consulting Agreement with Hutchinson. In consideration for his assigning to
the Company his rights to receive such payments, the Company has agreed to
reduce Mr. Rubin's indebtedness under the Note by an amount equal to the
payments by Hutchinson to the Company. 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, Hutchinson will not make
payments under the Non-Competition Agreement and the Consulting Agreement, and
Mr. Rubin will remain responsible for the remaining payments not yet made
pursuant to the settlement. Pursuant to the settlement agreement for the
Derivative Action, Mr. Rubin is obligated to pay $1,400,000 in cash to the
Company, regardless of whether he receives any payments from Hutchinson, no
later than September 30, 2000. Mr. Rubin is also obligated to contribute
$245,000 of certain publicly-traded securities to the Company no later than
September 30, 2000. These obligations are collateralized by other specific
assets of Mr. Rubin. Furthermore, Mr. Rubin has agreed to pay interest of
$55,000. For this reason, the Company is soliciting stockholder approval of the
Hutchinson Transaction.
There is no existing or, to the Company's knowledge, threatened claim for
indemnification made by Hutchinson or its affiliates against the Company under
the terms of the Sale Agreement. There is likewise no litigation, or threatened
litigation known to the Company, that is otherwise related to consummation of
the Hutchinson Transaction, including any suits or proceedings by stockholders
which alleges the unfairness of the Hutchinson Transaction to the Company, other
than the Class Action or Derivative Action described herein.
THE COMPANY HAS RECEIVED AN OPINION FROM AN INDEPENDENT THIRD PARTY THAT, BASED
UPON SUCH PARTY'S INVESTIGATION, THE CONSIDERATION TO BE PAID IN CONNECTION WITH
THE HUTCHINSON TRANSACTION WAS FAIR TO BOTH THE COMPANY AND ITS STOCKHOLDERS.
The Company believed that the Purchase Price of the Hutchinson Transaction
was fair for
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several reasons, which are explained below. In addition, the Company received an
opinion dated January 15, 1996 ("Fairness Opinion") from an independent
third-party which confirmed that the consideration to be paid in connection with
the Hutchinson Transaction was fair to both the Company and its stockholders.
The Company negotiated the Purchase Price without the report or opinion of any
outside party on the Manufacturing Business in the Hutchinson Transaction. As a
condition of its purchase, however, Hutchinson required that the Company obtain
such an independent opinion to confirm that the negotiated Purchase Price (as
set forth in the Sale Agreement) was fair to the Company and its stockholders.
The Company's management does not believe that such independent opinion
materially related to the transaction insofar as it merely confirmed the
fairness of the previously established sale price for the Manufacturing Business
and was not used to establish the price for the Manufacturing Business. The
contents of the independent opinion, the investigative process performed in
connection therewith and other matters pertaining to the issuer of the opinion
are discussed below.
The independent opinion was provided by Montauk Consulting, Inc.
("Montauk"). Montauk is a recently formed company with one employee who is its
managing director (the "Managing Director"). Although Montauk itself has limited
experience in valuing the fairness of transactions, the Managing Director is a
certified public accountant who has been engaged in the investment banking
industry for over 30 years and has provided asset valuations and fairness
reviews on numerous occasions, as well as court testimony in more than 70
securities litigation cases in state and federal court in support of such
valuations and reviews for a number of Fortune 500 companies. Montauk was
selected by the Company based upon what it believed to be its Managing
Director's reputation for determining reasonable company valuations and
adequately defending and justifying such valuations even when the valuations
were challenged during litigation.
In the past, Mr. Rubin and such Managing Director have invested together
in public and private companies and other ventures.
In providing its fairness opinion, Montauk did the following: (i) reviewed
the terms of the Hutchinson Transaction, (ii) analyzed published financial
reports, historical earnings and stock price performance and business prospects
of the Company and its affiliates, including its periodic filings under the
federal securities laws, (iii) considered the various characteristics of the
Manufacturing Business, the relative position of the Manufacturing Business in
its industry and the future prospects of the Manufacturing Business (with
attention paid to the impact of technological developments and the potential for
additional capital requirements to support modernization and expansion), (iv)
had contacts and discussions with members of the Board of Directors regarding
the Manufacturing Business and its future, (v) studied other companies engaged
in the automotive parts and equipment business and aerospace/defense business
including competitors of the Manufacturing Business, (vi) examined the record of
trading in the Company's Common Stock, and (vii) analyzed the Company's balance
sheet and income statement ratios and compared them to the ratios of comparable
companies. There were no limitations placed upon Montauk or its Managing
Director in rendering the fairness opinion, including the scope of the
investigation made, nor were special or limiting instructions delivered to
Montauk by the Company or its affiliates with respect to its engagement. Montauk
was simply engaged to render an opinion as to whether or not the Hutchinson
Transaction, as contemplated by the Sale Agreement (including all exhibits
thereto), is fair and reasonable to the Company's stockholders.
36
<PAGE>
Based on its investigation and the processes stated above, and its Managing
Director's experience in financial and business affairs, Montauk concluded that
the terms of the Hutchinson Transaction were fair, from a financial point of
view, to the Company and to the Company's stockholders.
IN ADDITION TO ITS HAVING RECEIVED AN INDEPENDENT FAIRNESS OPINION, THE
COMPANY'S MANAGEMENT BELIEVES THAT THE PURCHASE PRICE PAID IN THE HUTCHINSON
TRANSACTION WAS FAIR TO THE COMPANY AND ITS STOCKHOLDERS FOR SEVERAL REASONS.
1. Purchase price was at a premium to the company's market capitalization.
Without regard to income tax considerations, the cash portion of the
Purchase Price alone exceeded by approximately $890,000 the Company's
total market capitalization as of January 19, 1996, the date of Closing.
On such date, the last reported sale price on NASDAQ for the Common Stock
was $3.75 per share. Based upon this price the Company at such date had an
aggregate market capitalization of approximately $21,369,000. Since the
Closing, the Company's Common Stock and publicly traded warrants were
delisted from NASDAQ on February 4, 1998 for various violations of NASDAQ
rules, including (i) the Company's failure to hold annual stockholders'
meetings, in violation of NASDAQ's requirements, (ii) adopting a stock
option plan without stockholder approval, which approval is required by
NASDAQ, and (iii) the issuance of two series of preferred stock (the
Series B-1 Preferred and Series B-2 Preferred) without shareholder
approval as required for any transactions which involve the actual or
potential issuance of voting securities representing more than 20% of the
voting capital stock outstanding immediately before such transaction. The
Common Stock now trades on the OTC Bulletin Board ("Bulletin Board"). On
June 12, 2000 the last reported sale price per share of the Company's
common stock as reported on the Bulletin Board was $1.00 per share. Based
upon this price, the Company at such date had an aggregate market value
for its outstanding Common Stock of approximately $11,921,528. Therefore,
the premium of the purchase price over the Company's market capitalization
has only increased since the Hutchinson Transaction.
2. Projected Difficulty In Improving Sector Performance.
The Manufacturing Business operated in mature industries. The Company
believed that without significantly increasing its future capital
expenditures it would be difficult to improve upon its operating
performance.
3. Uncertain future revenues from defense industry.
The Manufacturing Business derived a significant amount of revenues from
defense contracts, and the future impact of federal budget constraints
upon governmental programs was uncertain to predict.
4. "Strategic Purchaser" Deemed Likely to be Competitor For Company.
The Company determined that Hutchinson was a "strategic purchaser" intent
on entering the business in which the Company's Manufacturing Business was
a part, whether by starting competing operations or acquiring existing
operations from other companies. The Company believed that Hutchinson
possessed several advantages, including being larger and better financed
than the Company, principally through its
37
<PAGE>
subsidiary relationship with Total, one of the largest petro-chemical
companies in the world. The Company believed that should Hutchinson itself
enter markets in which its subsidiaries in the Manufacturing Business
engaged instead of acquiring the Manufacturing Business itself, it would
constitute a formidable competitor in the industry to the detriment of the
Company's future operations.
5. Hutchinson Transaction Deemed to Be Best Deal Available.
The Company believed in the event it declined the Hutchinson Transaction,
it might not be able to obtain a similarly favorable price for the
Manufacturing Business if it later sought to sell it and a "strategic
purchaser" or other potential acquirer was not available or inclined to
offer an equally favorable price. In short, the Company believed that the
Purchase Price Offered by Hutchinson might constitute the best offer for
the Manufacturing Business from the standpoint of the Company and its
stockholders.
At the time that it negotiated the Purchase Price for the Hutchinson
Transaction, the Company was not actively soliciting, and was not aware of, any
other potential purchasers of the Manufacturing Business. As the Company
believed the Purchase Price offered by Hutchinson was quite favorable to the
Company and its stockholders, the Company did not actively solicit competing
offers for the Manufacturing Business at that time.
The Company entered into and consummated the Hutchinson Transaction
principally to realize additional value for its stockholders through its sale of
the Manufacturing Business for a Purchase Price which was not only mostly in
cash, but was also a premium over the net book value of the disposed assets and
a premium over the Company's market capitalization at closing (which premium has
increased greatly subsequent to the decline in the price of the Common Stock and
the delisting of the Common Stock and publicly traded warrants of the Company
from the NASDAQ National Market. The net book value of the assets sold in the
Hutchinson Transaction was equal to only approximately 87% of the net cash
proceeds constituting the Purchase Price. Management believes that the sale of
the Manufacturing Business increased shareholder value because the significant
amount of cash received therefrom by the Company permitted the acquisition of
businesses which, over the long term, either generated or were at the time of
the acquisitions expected to generate greater net income than that generated by
the Manufacturing Business previously. In addition, it was believed that the
amount of cash resources projected to be available to the Company after the
Hutchinson Transaction could enable the Company to obtain favorable pricing for
any businesses that it decided to acquire in the future. Finally, it was the
Company's intent at that time to acquire businesses that operate in industries
whose equity interests trade at higher multiples of net income per share in the
public securities market than the Company's securities traded historically prior
to the Hutchinson Transaction. These proposed acquisitions were viewed as
holding potential for increased shareholder value. The net proceeds from the
Hutchinson Transaction were used to acquire and provide working capital to
Exodus and InterGlobe which are technology companies. These acquired companies
have since been discontinued or disposed of.
As a result of all of these factors regarding the Hutchinson Transaction
as well as the potential increased shareholder value from possible acquisitions
which could have been financed with the sale proceeds, management believed the
Hutchinson Transaction to be in the best interests of the Company and its
stockholders.
The sale of the assets comprising the Manufacturing Business has been
accounted for as discontinued operations.
The Board of Directors recommends that you approve this Proposal IV.
Stockholders are advised that there may be a potential conflict of interest in
such recommendation by the Board of Directors, including Robert M. Rubin,
arising from his involvement in certain transactions with Hutchinson as
mentioned earlier. The failure by Company stockholders to ratify the Hutchinson
Transaction will neither cause the Hutchinson Transaction to be rescinded nor
affect the effectiveness of the Hutchinson Transaction in any way.
Approval of this Proposal IV requires the affirmative vote of a majority
of outstanding voting shares as of the Record Date.
MANAGEMENT BELIEVES THE SALE OF THE COMPANY'S MANUFACTURING BUSINESS TO
HUTCHINSON CORPORATION WAS, AND REMAINS, IN THE BEST INTERESTS OF THE COMPANY
AND ITS STOCKHOLDERS. MANAGEMENT STRONGLY RECOMMENDS THAT YOU APPROVE THIS
PROPOSAL IV RATIFYING THE HUTCHINSON TRANSACTION.
QQQ 38
<PAGE>
PROPOSAL V. TO RATIFY THE ISSUANCE OF SHARES OF THE COMPANY'S SERIES B-1
CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION WITH THE ACQUISITION OF OLD
CONNECTSOFT, EFFECTIVE AS OF JULY 31, 1996.
At the Annual Meeting a vote will be taken on a proposal to ratify the
issuance of Series B-1 Preferred Stock in connection with the Company's
acquisition of Old ConnectSoft, in order to obtain compliance with certain rules
governing the requirements for maintaining a listing upon NASDAQ. The Company's
acquisition of Old Connectsoft occurred prior to the Company's delisting from
NASDAQ in February 1998. The Company's Common Stock is currently quoted on the
OTC Bulletin Board. Ratification of this Proposal V may facilitate the Company's
ability to have its Common Stock be eligible for quotation on NASDAQ; however,
the Company has not taken any steps to reapply for quotation on NASDAQ, and
there can be no assurance that the Company will reapply for quotation or that
such application will be approved and that the Company will be quoted thereupon.
BACKGROUND
Effective July 31, 1996, the Company acquired, through a merger with an
acquisition subsidiary of the Company (the "Merger"), all of the outstanding
capital stock of Old ConnectSoft and Old ConnectSoft stockholders received, on a
pro rata basis, an aggregate of approximately 976,539 shares of the Company's
Series B-1 Preferred Stock (the "Preferred Stock"). The Company believes that
the Preferred Stock was issued below the greater of book or market value. At the
Meeting, this Proposal V to ratify the issuance of 976,539 shares of the
Company's Series B-1 Convertible Preferred Stock issued in connection with the
acquisition of Old ConnectSoft, effective as of July 31, 1996, will be presented
to stockholders for a vote. As of June 15, 2000, approximately 425,619.5 shares
of the Preferred Stock remain outstanding. The terms of such issuance and the
nature of the business of Old ConnectSoft, as of the date of the Merger, are
discussed below.
OLD CONNECTSOFT BUSINESS
Prior to its acquisition by the Company, Old ConnectSoft was a provider of
communications software applications and services in the Internet industry.
Serving both businesses and consumers, Old ConnectSoft provided an integrated
array of commercial software development services, easy-to-use retail Internet
software applications, and Internet access services to facilitate the use of the
Internet and on-line services for communication and commerce. Founded in 1988,
Old ConnectSoft provided Microsoft Windows-based, enterprise-wide, connectivity
software development to some of the largest corporations in the U.S., including
MCI Communications Corporation ("MCI"), United Parcel Service of America, Inc.
("UPS"), Microsoft Corporation ("Microsoft"), International Business Machines,
Inc. ("IBM"), and Adobe Systems, Inc. ("Adobe"). In connection with such
projects, Old ConnectSoft had developed a core expertise in communications and
commerce software engineering that it had incorporated into a line of Internet
software products. E-Mail Connection, which had been Old ConnectSoft's
best-selling retail product, had its technology incorporated into proprietary
products for MCI, America Online, Prodigy, and CompuServe.
ACQUISITION TERMS
In May 1996, the Company and Old ConnectSoft executed a letter of intent
expressing the proposed terms of acquisition of Old ConnectSoft by the Company.
At this time, Old ConnectSoft was judged to be in significant financial
distress. Under the proposed terms, the Company would
39
<PAGE>
provide Old ConnectSoft prior to acquisition with an immediate working
capital infusion in the form of a $1,000,000 line of credit and up to
$5,000,000 of post-acquisition working capital financing and to support
Old ConnectSoft. At the time of consummation of the Merger, effective July
31, 1996, Old ConnectSoft received under these lines of credit
approximately $3,400,000, and the Company acquired all of the outstanding
capital stock of Old ConnectSoft and Old ConnectSoft stockholders
received, on a pro rata basis, an aggregate of approximately 976,539
shares of the Company's Series B-1 Preferred Stock. Such Preferred Stock
does not pay a dividend, is not subject to redemption, has a liquidation
preference of $3.50 per share over the Company's common stock, $.01 par
value (the "Company Common Stock"), and votes together with the Common
Stock as a single class on the basis of one vote per share. Each share of
Preferred Stock was convertible, at the holder's option, into a minimum of
one share and a maximum of three shares of Common Stock, based upon
certain criteria, as follows:
(i) Each share of Preferred Stock may be converted, at any time, into
one (1) share of Common Stock;
(ii) In the event that the "Combined Pre-Tax Income" (as defined) of any
or all of the "Subject Entities" (as defined) in any one of the
three fiscal years ending July 31, 1997, July 31, 1998 or July 31,
1999 (each a "Measuring Fiscal Year" and collectively, the
"Measuring Fiscal Years"):
(a) shall equal or exceed $3,000,000, each share of Preferred
Stock may be converted into two shares of Common Stock; or
(b) shall equal or exceed $5,000,000, each share of Preferred
Stock may be converted into three shares of Common Stock.
After issuance and until Old ConnectSoft discontinued operations on April
15, 1998, the Combined Pre-Tax Income threshold required for an increase in the
conversion ratio was not met. Accordingly, all conversions were on the original
one-for-one ratio. The "Subject Entities" include Old ConnectSoft and its
consolidated subsidiaries (if any) and Exodus Technologies, Inc., a direct
majority-owned subsidiary of the Company, which has developed certain remote
access computer software originated by Old ConnectSoft. The conversion ratio of
the Preferred Stock was to have been adjusted, such that each share of Preferred
Stock would be converted into three shares of Common Stock, notwithstanding the
levels of Combined Pre-Tax Income achieved, in the event that (i) the Company
sells the assets or securities of any of the Subject Entities for an aggregate
consideration of at least $5,000,000 (ii) the Company consummates an initial
public offering of the securities of any of the Subject Entities (an "IPO")
resulting in gross proceeds in excess of $10,000,000, or subsequent to such IPO
the Company's total market capitalization equals at least $50,000,000, or (iii)
a transaction occurs with any third party (whether tender offer, merger,
consolidation or other combination) after which no shares of Common Stock are
publicly traded on any national securities exchange or quoted on NASDAQ.
Following consummation of the Merger, the Company increased its aggregate
funding commitments to ConnectSoft and its related companies to a minimum of
$5,000,000.
SUBSEQUENT DEVELOPMENTS
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<PAGE>
In April 1998, the Company approved a formal plan to dispose of or close
down the remaining operations of its subsidiaries constituting its "Technology
Group", including that of Old ConnectSoft. Pursuant to an agreement dated July
10, 1998 the Company agreed to sell substantially all of the assets of its
network operations center owned by Old ConnectSoft and all of the assets of its
subsidiary ConnectSoft Communications Corp. ("CCC") to eGlobe, Inc. (the "eGlobe
Acquisition"). Effective June 15, 1999, the eGlobe acquisition had been
effected. In consideration for such sale, and pursuant to amended terms of the
acquisition as of September 1999, the Company received twenty-four (24) shares
of Series K convertible preferred stock of eGlobe, Inc. ("eGlobe Preferred"),
aggregate stated value $3,000,000, and which became convertible in September
1999 into approximately 1,923,000 shares of common stock of eGlobe, Inc. The
Company believes, based upon certain information contained in eGlobe's Form 8-K
(File No. 1-10210), that the acquisition terms were amended in consideration for
the Company's accommodation of certain objectives of eGlobe wholly unrelated to,
and not in any way detrimental to, the Company. In connection with the eGlobe
Acquisition, CCC received approximately $1,850,000 in advances for working
capital and eGlobe assumed approximately $4,700,000 of CCC's liabilities and
leases, most of which had been guaranteed by the Company. The Company has
realized a net gain on the eGlobe Acquisition (gain on sale less total costs,
expenses and closure costs) of approximately $1,989,000.
Furthermore, as of November 1999 the Company sold one patent acquired as
part of the Merger to GraphOn Corporation (OTCBB:GOJO) ("GraphOn") in exchange
for 58,000 shares of restricted common stock of GraphOn. The Company has valued
the GraphOn stock at 60% of the last trading price on the closing date of the
sale of the patent, or approximately $240,000.
REASONS WHY THE BOARD BELIEVES YOU SHOULD APPROVE PROPOSAL V.
The Company seeks shareholder ratification of the issuance of the
Preferred Stock in order to comply with certain Rules of Conduct of the National
Association of Securities Dealers, Inc. ("NASD") which impose certain
requirements on companies with securities quoted on NASDAQ. NASD Rule 4460 (g)
requires that such companies solicit proxies and provide proxy statements for
all stockholders' meetings such as this Meeting. NASD Rule 4460 (i)(1)(C)(ii)(a)
requires that such companies receive shareholder approval for the acquisition of
the stock of another company if, due to the issuance of the Preferred Stock
convertible into Common Stock, such Common Stock has or will potentially have
upon issuance voting power equal to or in excess of 20% of the voting power
outstanding prior to the issuance of the Preferred Stock ("the 20% rule"). If
the Preferred Stock was converted into Common Stock at its maximum three-to-one
ratio, the holders of the Preferred Stock would have been able to vote an
aggregate of up to 2,929,617 shares of Common Stock, which constituted more than
20% of the pre-acquisition outstanding voting power of the Common Stock.
As of June 15, 2000, approximately 550,000 shares of Common Stock have
been issued pursuant to any conversion of Preferred Stock, and all remaining
approximately 425,619.5 shares of outstanding Preferred Stock may only be
converted on a one-to-one basis because the Combined Pre-Tax Income thresholds
for increasing the conversion ratio were not met. Although the aggregate of the
Common Stock issued upon previous conversions of the Preferred Stock and Common
Stock issuable upon conversion of remaining Preferred Stock will be less than
20% of the pre-acquisition outstanding voting power of the Common Stock, the
potential three-for-one conversion ratio triggered the requirement to comply
with the 20% rule.
The Company's Common Stock is currently quoted on the OTC Bulletin Board.
The Common Stock previously was quoted on the NASDAQ National Market prior to
its delisting in February 1998 due to (i) the Company's failure to hold
regularly scheduled stockholders' meetings in violation of NASDAQ's
requirements, (ii) adopting a stock option plan without stockholder approval as
required by NASDAQ, and (iii) the issuance of two series of preferred
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<PAGE>
stock (the Series B-1 Preferred Stock and Series B-2 Preferred Stock) without
shareholder approval as requi red for any transactions which involve the actual
or potential issuance of voting securities representing more than 20% of the
voting capital stock outstanding immediately before such transaction. Compliance
with the 20% rule may assist the Company in obtaining listing on NASDAQ in the
future if the Company pursues such listing (and meets various other
requirements). However, the Company has not taken any steps to reapply for
quotation on NASDAQ, and there can be no assurance that the Company will reapply
for quotation or that such application will be approved and that the Company
will be quoted thereupon.
THE FAILURE OF COMPANY STOCKHOLDERS TO RATIFY THE ISSUANCE OF COMPANY
SERIES B-1 PREFERRED STOCK TO OLD CONNECTSOFT STOCKHOLDERS IN CONNECTION WITH
THE MERGER WILL NEITHER CAUSE THE OLD CONNECTSOFT MERGER TO BE RESCINDED NOR
AFFECT THE EFFECTIVENESS OF THE OLD CONNECTSOFT MERGER IN ANY WAY.
THE SOLE PURPOSE FOR SHAREHOLDER RATIFICATION OF THE ISSUANCE OF SERIES
B-1 PREFERRED STOCK TO OLD CONNECTSOFT STOCKHOLDERS IS TO COMPLY WITH THE NASD
MARKETPLACE RULES 4460(G) AND 4460(I) IN THE EVENT THE COMPANY APPLIES TO LIST
ITS SECURITIES ON NASDAQ. THOSE RULES REQUIRE THE COMPANY TO MAKE ANNUAL
SOLICITATIONS OF PROXIES FOR VOTING AT ANNUAL SHAREHOLDER MEETINGS, AND TO SEEK
SHAREHOLDER APPROVAL OF COMPANY ISSUANCES IN ANY SINGLE TRANSACTION OF VOTING
SECURITIES WHICH ENTITLE THE HOLDERS THEREOF TO CAST TWENTY PERCENT (20%) OR
MORE OF THE VOTES AT A MEETING OF STOCKHOLDERS.
The failure by Company stockholders to ratify the issuance of Series B-1
Preferred Stock to Old ConnectSoft stockholders will not cause the Old
ConnectSoft Merger to be rescinded, affect the effectiveness of the Old
ConnectSoft Merger, or otherwise affect any subsequent action taken with regard
to Old ConnectSoft (including the "eGlobe Acquisition") in any way. However, as
the Company was in violation of the NASD's Marketplace Rules at the time the
Preferred Stock was issued, the failure to ratify the issuance of the Preferred
Stock now may affect the Company's ability to have its securities quoted on
NASDAQ if the Company so applies in the future, of which there can be no
assurance. The Board of Directors has no plans to change any of its prior
actions with respect to Old ConnectSoft should Company stockholders fail to
ratify the issuance of Series B-1 Preferred Stock to Old ConnectSoft
stockholders.
There is or has been no pending or threatened litigation, known to the
Company, that is in any way related to consummation of the Old ConnectSoft
Merger, other than an action commenced in the United States District Court for
the Western District of Washington by Prudential Securities Incorporated
("Prudential") seeking an investment banking fee of approximately $550,000 in
connection with the Old ConnectSoft Merger, and which was subsequently settled
for approximately $325,000 during Fiscal 1998.
Approval of Proposal V requires the affirmative vote of a majority of
outstanding voting shares as of the Record Date.
MANAGEMENT BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY AND
ITS STOCKHOLDERS THAT STOCKHOLDERS RATIFY THE
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<PAGE>
ISSUANCE OF SERIES B-1 PREFERRED STOCK TO OLD CONNECTSOFT STOCKHOLDERS, AND
RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL V .
43
<PAGE>
FINANCIAL INFORMATION CONCERNING OLD CONNECTSOFT ACQUISITION
CONNECTSOFT, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF DECEMBER 31, 1995
AND 1994 AND FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors ConnectSoft, Inc.
We have audited the accompanying balance sheets of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ConnectSoft, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years ended December 31, 1995 in conformity with generally
accepted accounting principles. As discussed in Note 12 to the financial
statements, in 1996 the Company was acquired by American United Global, Inc.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
October 19, 1996
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<PAGE>
CONNECTSOFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS: 1995 1994
<S> <C> <C>
Current assets:
Cash ......................................................... $ 68,623 $ --
RESTRICTED CASH .............................................. -- 105,683
Accounts receivable, net of allowance for doubtful accounts of
$134,279 and $4,000, respectively ........................... 303,281 1,796,633
Inventories, net ............................................. 135,325 210,757
Prepaid Expenses ............................................. 34,246 35,056
--------- ---------
Total current assets .................................... 541,475 2,148,129
Property and equipment, net .................................. 2,340,550 881,805
Restricted cash .............................................. -- 881,805
Capitalized software costs, net of accumulated amortization of
$979,221 and $213,180, respectively .......................... 926,690 1,390,173
Operating lease deposits ..................................... 153,793 132,459
Other assets ................................................. 514,277 30,367
--------- ---------
Total assets ............................................ 4,476,785 5,013,745
========= =========
LIABILITIES AND Stockholders= EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................. 2,413,665 1,699,490
Billings in excess of revenues earned ........................ 412,288 588,810
Accrued liabilities .......................................... 485,967 278,748
Current portion, capital lease obligations ................... 825,844 196,960
Current portion, long-term debt .............................. -- 108,052
Line of credit ............................................... 4,109,122 --
--------- ---------
Total current liabilities ............................... 8,246,886 2,872,060
Long-term debt, less current portion ......................... -- 400,000
Capital lease obligations, less current portion .............. 1,279,033 352,586
--------- ---------
Total long-term obligations ............................. 1,279,033 752,586
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Total liabilities ....................................... 9,525,919 3,624,646
Commitments and contingencies
Stockholders= equity (deficit):
Series A, $0.001 par value, 1,796,873 shares authorized,
issued and outstanding ....................................... 1,797 1,797
Series B, $0.001 par value; 600,000 shares authorized; no
shares issued or outstanding ................................. -- --
Series C, $0.001 par value, 2,412,625 shares authorized;
1,832,632 shares issued and outstanding ...................... 1,832 1,832
Series D, $0.001 par value; 5,667,368 shares authorized; no
shares issued or outstanding ................................. -- --
Common stock, no par value; 30,000,000 shares authorized;
6,119,773 and 5,772,895 issued and outstanding at
December 31, 1995 and 1994, respectively ..................... 474,075 453,580
Additional paid-in capital ................................... 2,057,960 2,057,960
Accumulated deficit .......................................... (7,584,798) (1,126,070)
--------- ---------
Total stockholders= equity (deficit) ......................... (5,049,134) 1,389,099
Total liabilities and stockholders= equity (deficit) ......... 4,476,785 5,013,745
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Connectsoft, Inc., previously Adonis Corporation (the "Company") was
founded in 1988. The Company has been engaged in two primary business activities
as follows:
CONTRACT SERVICES: The contract services business was founded in 1988 and
the Company grew to be one of the premier providers of Microsoft Windows-based
contract programming services. These services were marketed directly to the PC
industry, peripheral manufacturers and corporate information services
departments. In 1996, the Company discontinued this business.
RETAIL PRODUCTS: In 1990, the Company expanded the scope of its business
with the publication of Company developed application software. Through retail
products divisions, the Company markets a family of Windows-based
telecommunication programs for accessing on-line information services. Included
in the Company's line of products are E-mail connection software and children's
E-mail and Internet connection products.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives ranging from 3 to 5 years.
Tenant improvements are depreciated over the term of the facility lease or
useful life, whichever is shorter. Expenditures for additions and improvements
are capitalized; expenditures for maintenance and repairs are expensed as
incurred. Gains and losses on assets, retired or otherwise disposed of, are
reflected in operations.
INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost
or market and consist of the following at December 31:
--------------------------------------------------------------------------------
1995 1994
---- ----
--------------------------------------------------------------------------------
Materials ...................................... $ 211,124 $164,914
--------------------------------------------------------------------------------
Finished goods ................................. 14,157 45,843
--------------------------------------------------------------------------------
Obsolescence allowance ......................... (89,956) --
--------------------------------------------------------------------------------
RESTRICTED CASH ................................ $ 135,325 $210,757
========= ========
--------------------------------------------------------------------------------
At December 31, 1994 the Company had a certificate of deposit in the
amount of $500,000
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plus accrued interest which was pledged as collateral on long-term debt. The CD
had an interest rate of 4.75% and it matured on April 10, 1995. At December 31,
1994 the Company also had a certificate of deposit in the amount of $30,812 plus
accrued interest which was pledged as collateral on a capital lease. The CD had
an interest rate of 3.50% for the first three months and was adjusted every
three months thereafter and matured on June 10, 1995. All of the Company's
restricted cash was held at one financial institution.
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in conjunction with product
development are charged to product development expense until technological
feasibility is established. Thereafter, all software product development costs
are capitalized and reported at the lower of unamortized cost or net realizable
value of each product. The establishment of technological feasibility and the
on-going assessment of the recoverability of costs require considerable judgment
by the Company with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic life
and changes in software and hardware technology. After consideration of the
above factors, the Company amortizes capitalized software costs for each
software product using the straight-line method over the estimated economic life
of the software.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
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FINANCIAL INSTRUMENTS
The carrying amounts of cash and accounts receivable approximate fair
value due to their short-term maturities. The carrying value of the Company's
line of credit balance approximates its estimated fair value because the rate of
interest on the line of credit approximates current interest rates for similar
obligations with like maturities.
REVENUE RECOGNITION
CONTRACT SERVICES: During the years ended December 31, 1995, 1994 and
1993, the Company entered into both "Time and Materials" and "Fixed Bid"
contracts with customers. Revenue on these contracts is recognized using the
percentage-of-completion contract accounting method, or on a completed contract
basis, in accordance with the American Institute of Certified Public
Accountant's statement of position SOP 91-1, Software Revenue Recognition ("SOP
91-1").
RETAIL PRODUCTS: Revenue from sales of software products to end-users and
distributors is recognized upon product shipment, net of an allowance for
returns. The Company permits customers to return products within certain
specified periods. The Company also licenses products to original equipment
manufacturers ("OEM") and recognizes royalties in accordance with SOP 91-1.
CONCENTRATION OF CREDIT RISK
The Company provides contract services to PC users and manufacturers, and
corporate information services departments who are located primarily in the
United States. Concentrations of credit risk with respect to trade receivables
are limited to the Company's diverse customer base. The Company closely monitors
extensions of credit and has never experienced significant credit losses.
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRIVATE PLACEMENT AND ACQUISITION COSTS
During 1995 the Company incurred $441,623 associated with certain
abandoned equity offering and financing transactions. Such costs have been
charged to operations. Also, during 1995 the Company incurred $487,726
associated with an abandoned acquisition transaction. Such costs have been
charged to operations.
49
<PAGE>
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic life of the Company's products
used to calculate amortization of software development costs may be reduced
significantly in the near term. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.
RECLASSIFICATIONS
Certain balances in the 1994 financial statements have been reclassified
to conform to the 1995 presentation. These reclassifications had no effect on
the net income (loss) or shareholder's equity (deficit) as previously reported.
2. ACCOUNTS RECEIVABLE:
At December 31, accounts receivable consisted of the following:
--------------------------------------------------------------------------------
1995 1994
---------- ----------
--------------------------------------------------------------------------------
Receivables assigned to factor ................. $ 182,833 $ 769,200
--------------------------------------------------------------------------------
Less advances from factor ...................... (141,391) (399,938)
--------------------------------------------------------------------------------
Funds in excess of reserve requirements ........ 3,125 24,595
---------- ----------
--------------------------------------------------------------------------------
Due from factor ........................... 44,567 393,857
--------------------------------------------------------------------------------
Accounts receivable ............................ 392,993 1,406,776
--------------------------------------------------------------------------------
Allowance doubtful accounts .................... (134,279) (4,000)
---------- ----------
--------------------------------------------------------------------------------
$ 303,281 $1,796,633
========== ==========
--------------------------------------------------------------------------------
In May 1993, the Company entered into an agreement with an investment
company to secure short-term financing by factoring accounts receivable. Under
this agreement, the Company is permitted to receive up to 80% of pre-approved
receivables and 65% of retail product receivables assigned on a recourse basis.
50
<PAGE>
The remaining balances are retained by the investment company as a reserve
against losses and are refunded to the Company following receipt of Company's
payment. Receivables sold are collateralized by all owned assets of the Company
and are personally guaranteed by an officer of the Company.
51
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTS RECEIVABLE: (CONTINUED)
Approximately $2,775,000 and $2,015,000 of accounts receivable were sold
during 1995 and 1994, respectively.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
--------------------------------------------------------------------------------
1995 1994
---------- ----------
--------------------------------------------------------------------------------
Computer equipment .................................. $ 219,820 $ 126,184
--------------------------------------------------------------------------------
Computer and other equipment under capital leases ... 2,586,882 646,930
--------------------------------------------------------------------------------
Furniture and fixtures .............................. 204,253 184,657
--------------------------------------------------------------------------------
Tenant improvements ................................. 144,993 140,128
--------------------------------------------------------------------------------
3,155,948 1,097,899
--------------------------------------------------------------------------------
Less accumulated depreciation and amortization
(includes accumulated amortization of capital
leases of $565,153 and $115,212 for 1995 and
1994, respectively) ................................. (815,398) (216,094)
--------------------------------------------------------------------------------
$2,340,550 $ 881,805
========== ==========
--------------------------------------------------------------------------------
4. OTHER ASSETS:
During 1995 the Company entered into software license agreements with two
software development companies to use their software in products the Company
develops. The license fees under the agreements were $510,000 and are amortized
on a straight-line method over the estimated economic life of the software
products. The Company is also required to pay certain other license and
maintenance fees under the agreements which are expenses when incurred.
5. LINE OF CREDIT:
On September 20, 1995, the Company entered into a $3,000,000 line of
credit agreement with a major customer, with interest at 17% and principal and
accrued interest due on December 31, 1995. At December 31, 1995, the Company had
borrowed $3,000,000 under this loan agreement.
52
<PAGE>
On November 1, 1995, the Company entered into another loan agreement with
the major customer for additional borrowing up to a maximum of $3,000,000 with
interest at 17% and principal and accrued interest due January 1996. The note
was personally guaranteed by the President and majority shareholder of the
Company and collateralized by a first lien on all of the capital stock of the
Company owned by the President and majority shareholder. At December 31, 1995,
the Company had borrowed $1,109,122 under this loan agreement.
In connection with the acquisition of the Company discussed in Note 12,
the line of credit debt was settled for $2,000,000 which resulted in debt and
interests forgiveness of $2,558,246.
53
<PAGE>
CONNECTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
At December 31, 1994 long-term debt was as follows:
--------------------------------------------------------------------------------
Term loan payable to bank, monthly interest only payments
bearing interest at the CD rate plus 2% (6.75% at
December 31, 1994) .................................................. $ 500,000
--------------------------------------------------------------------------------
Notes payable to employees, bi-weekly principal and interest
payments, bearing interest at 18%, due in June 1995 ................. 8,052
--------------------------------------------------------------------------------
508,052
---------
--------------------------------------------------------------------------------
Less current portion ................................................ (108,052)
--------------------------------------------------------------------------------
$ 400,000
=========
--------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES:
LEASE OBLIGATIONS
At December 31, 1995, the Company was obligated under capital leases for
computer hardware and other capital equipment and furniture utilized in its
operations. The Company also is obligated under operating leases for its office
space. Subsequent to December 31, 1995, the Company entered into new operating
lease agreements and modified the terms on other operating leases. Future
minimum lease payments under capital and operating leases, including the new and
revised leases, are as follows:
--------------------------------------------------------------------------------
CAPITAL OPERATING
LEASES LEASES
--------------------------------------------------------------------------------
1996 ........................................... $1,068,865 $ 668,289
--------------------------------------------------------------------------------
1997 ........................................... 971,018 661,720
--------------------------------------------------------------------------------
1998 ........................................... 454,279 525,198
--------------------------------------------------------------------------------
1999 ........................................... 15,204 394,564
--------------------------------------------------------------------------------
2000 ........................................... -- 400,143
--------------------------------------------------------------------------------
Thereafter ..................................... -- 349,492
---------- -----------
--------------------------------------------------------------------------------
Total minimum lease payments ................... $2,509,366 $ 2,999,406
---------- -----------
--------------------------------------------------------------------------------
Lease amount representing interest ............. (404,489)
-----------
--------------------------------------------------------------------------------
54
<PAGE>
Present value of net minimum lease payment ..... $ 2,104,877
-----------
--------------------------------------------------------------------------------
Rent expense for 1995, 1994 and 1993 was $615,143, $299,537 and $139,820,
respectively.
CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business. Although the outcome of these matters is not determinable at
this time, management believes that the ultimate outcomes will not have a
material adverse effect on the Company's financial position or results of
operations.
8. INCOME TAXES:
Due to net taxable losses incurred, the Company did not record any Federal
income tax expense or benefit for 1995, 1994 or 1993. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
The significant components of the Company's deferred income tax assets and
liabilities are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994
----------- ---------
--------------------------------------------------------------------------------
Deferred Income tax assets:
--------------------------------------------------------------------------------
Tax loss carry forwards ....................... $ 2,177,727 $ 754,988
--------------------------------------------------------------------------------
Capitalized software costs .................... 276,045 --
--------------------------------------------------------------------------------
Accrued liabilities ........................... 47,413 36,818
--------------------------------------------------------------------------------
Allowance for doubtful accounts receivable .... 45,655 --
--------------------------------------------------------------------------------
Inventory ..................................... 42,779 46,880
--------------------------------------------------------------------------------
Other ......................................... 8,290 5,938
----------- ---------
--------------------------------------------------------------------------------
Deferred income tax assets ....................... 2,597,909 844,624
=========== =========
--------------------------------------------------------------------------------
Deferred income tax liability:
--------------------------------------------------------------------------------
Depreciation .................................. (48,332) (5,400)
--------------------------------------------------------------------------------
Capitalized software costs .................... -- (454,859)
----------- ---------
--------------------------------------------------------------------------------
Deferred income tax liability ................. (48,332) (460,259)
--------------------------------------------------------------------------------
Valuation allowance ........................... (2,549,577) (384,365)
----------- ---------
--------------------------------------------------------------------------------
55
<PAGE>
Net deferred income tax assets ................... $-- $--
=========== =========
--------------------------------------------------------------------------------
As a result of the acquisition of the Company by American United Global,
Inc. in 1996 (see Note 12), here is a limitation of use on the Company's tax
loss carry forward. Because of the limitation and because of the Company's prior
operating results, full valuation allowances have been recorded at December 31,
1995 and 1994. The net deferred tax asset will be realized when future taxable
income is earned.
The Company has net operating loss carry forward of approximately
$6,406,000 with expiration dates through fiscal year 2010.
9. CAPITAL STOCK:
RECAPITALIZATION: Effective September 23, 1993, the stockholders approved
a recapitalization of the Company's capital structure and increased authorized
shares of common stock to 30,000,000 shares. In addition, a 15-for-1 stock split
was authorized for all outstanding securities. The recapitalization resulted in
the conversion of 50,000 shares of Class A preferred stock into common stock on
a one-for-one basis and authorized payment of dividends totaling $11,640 to the
preferred stockholders.
PREFERRED STOCK: On November 12, 1993, the shareholder's authorized
1,796,873 shares of Series A Convertible Preferred Stock and 600,000 shares of
Series B Convertible Preferred Stock. A shareholder has an option to purchase
the 600,000 shares of Series B Convertible Preferred Stock at approximately
$0.83 per share for a total investment of $500,000.
On December 14, 1993, the Company issued 1,347,655 shares of Series A
Convertible Preferred Stock to a corporate investor at approximately $0.55 per
Share.
On August 9, 1994, the stockholders authorized 2,412,625 shares of Series
C Convertible Preferred Stock and 5,667,368 shares of Series D Convertible
Preferred Stock. On August 9, 1994, a corporate investor purchased 1,832,632
shares of Series C Convertible Preferred Stock at approximately $0.67 per share.
In connection with the Series C Convertible Preferred Stock financing, the
Company issued 579,993 options to acquire Series C Preferred Stock at $.67 per
share to an existing shareholder, and extended the expiration date of the
600,000 Series B options from June 30, 1994 to 60 days after the delivery of the
1994 financial statements. The Series C options expire 60 days after the
delivery of the 1995 financial statements. The Board of Directors has the
authority to issue Series D stock without the consent of Series A and B
stockholders. The Series D stock must be issued for consideration of not less
than $0.8333 per share, and is convertible into not more than 5,667,368 shares
of common stock as determined by the Board of Directors.
The Preferred Series A, B and C Shares are convertible at the holders'
option any time up to December 31, 1999 into common stock of the Company on a
1-to-1 basis. The conversion ratio will be adjusted under certain circumstances,
as defined by the agreements. Terms of the Preferred
56
<PAGE>
Stock Purchase Agreement limit dividend payments, provide anti-dilution
protection, provide right of first negotiation on proposed equity and debt
financing and prohibit authorization of any senior class of equity instrument
without approval. Series A and B have the right, voting as a class separate from
the holders of common stock, to elect a director. The holders of Series C,
voting as a class, have the right to elect a director. Series A, B and C have
equal rights and rights ahead of Series D Preferred Stock with respect to
liquidation. In the event of liquidation, Series A, B and C preferred
stockholders will be entitled to receive an amount equal to the purchase price
for each share owned, dividends declared but unpaid, and a premium amount equal
to 12%, compounded annually, from date of issuance on the purchase price of the
preferred shares. Any assets remaining after payment of the preferred
liquidation preference, if any, will be distributed to the holders of the
preferred and common stock in proportion to the number of common shares held
after conversion adjustments.
On January 13, 1994, the same corporate investor purchased an additional
449,218 shares of Series A Convertible Preferred Stock at approximately $0.55
per share.
EMPLOYEE STOCK OPTION PLAN
The Company has stock option plans that provide for non-qualified and
incentive stock options for officers, employees, directors and consultants.
Shares of common stock reserved for the plan total 5,750,000. Options granted
under the plan generally become exercisable, at a rate of 33% per year from the
date of grant, are dependent on the optionee's continuous employment, and expire
10 years from the date of grant or three months subsequent to termination. Stock
options are issued at prices equal to the estimated fair market value at the
date of grant. Proceeds received upon the exercise of stock options are credited
to the common stock account.
Stock option activity and option price information for the years ended
December 31, 1995, 1994 and 1993, is summarized as follows:
--------------------------------------------------------------------------------
OUTSTANDING STOCK
OPTIONS
--------------------------------------------------------------------------------
OPTION
NUMBER OF PRICE
SHARES RANGE
--------------------------------------------------------------------------------
Balance, January 1, 1993 ..................... 2,449,875 $0.01-0.18
--------------------------------------------------------------------------------
Granted ................................. 710,125 $0.20-0.67
--------------------------------------------------------------------------------
Exercised ............................... (646,695) $0.01-0.20
--------------------------------------------------------------------------------
Cancelled ............................... (265,500) $0.13-0.27
---------- ----------
--------------------------------------------------------------------------------
Balance, December 31, 1993 ................... 2,247,805 $0.01-0.67
--------------------------------------------------------------------------------
Granted ................................. 195,000 $0.67-0.83
--------------------------------------------------------------------------------
Exercised ............................... (176,447) $0.67-0.83
--------------------------------------------------------------------------------
57
<PAGE>
--------------------------------------------------------------------------------
Cancelled ............................... (152,708) $0.13-0.67
---------- ----------
--------------------------------------------------------------------------------
Balance, December 31, 1994 ................... 2,113,650 $0.01-0.83
--------------------------------------------------------------------------------
Granted ................................. 563,350 $ 2.80
--------------------------------------------------------------------------------
Exercised ............................... (346,878) $0.01-0.83
--------------------------------------------------------------------------------
Cancelled ............................... (364,652) $0.20-2.80
---------- ----------
--------------------------------------------------------------------------------
Balance, December 31, 1995 ................... 1,965,470 $0.01-2.80
--------------------------------------------------------------------------------
At December 31, 1995 and 1994, 1,860,097 and 58,795 shares are available
for future grant. Total shares exercisable at December 31, 1995 and 1994 are
1,796,062 and 1,815,395, respectively.
10. 401(K) PROFIT SHARING PLAN:
Effective May 1, 1994, the Company adopted a 401(k) Retirement and Profit
Sharing Plan (the "Plan"). The Plan covers all full time employees who have
completed three consecutive months of service and are at least 18 years of age.
Under the terms of the Plan, participants may contribute up to 15% of gross
wages up to the statutory limits. The Company made no contributions to the Plan
during 1995 and 1994.
11. MAJOR CUSTOMERS:
The Company's largest contract services customer accounted for
approximately 23% and 55% of total revenues in 1995 and 1994, respectively. The
Company's largest retail products customer accounted for approximately 63% and
29% of total revenues during 1995 and 1994, respectively. Revenues from three
principal customers from contract services in 1993 accounted for 16.1%, 17.2%,
and 20% of total revenues.
12. SUBSEQUENT EVENTS:
In April 1996, the Company entered into a letter of intent agreement and
plan of merger with American United Global, Inc., a Delaware corporation
("AUGI"). The merger was completed with a final merger agreement dated June 28,
1996 and approved by the Company's stockholders on July 31, 1996. Under the
merger agreement, the record owners of all outstanding fully diluted equity of
the Company will receive a proportional amount of 1,000,000 shares of Series B
Convertible Preferred stock of AUGI. The record owners of all outstanding fully
diluted equity of the Company prior to the merger will be all stockholders of
the Company after giving effect to the conversion and exercises of warrants and
vested stock options. The AUGI preferred shares have a par value of $.01, do not
pay a dividend, are not subject to redemption, have a liquidation preference
over AUGI's common stock of $3.50 per share, vote together with AUGI common
stock and are convertible into AUGI common stock at a variable conversion rate
depending upon future income earned by AUGI from business operations engaged in
by the Company at the time of acquisition. The conversion rate can vary from
one-to-one to one-to-three.
58
<PAGE>
In connection with the acquisition, AUGI paid certain debt of the Company
and agreed to make advances to the Company totaling $5 million including amounts
advanced at the time of the acquisition.
59
<PAGE>
AMERICAN UNITED GLOBAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The Unaudited Pro Forma Combined Statement of Operations of American
United Global, Inc. for the year ended July 31, 1996 gives effect to the
acquisition by the Company of the business of ConnectSoft, Inc. as if such
business were acquired on August 1, 1995. The Unaudited Pro Forma Combined
Statement of Operations does not give effect to any changes in the operations of
ConnectSoft, Inc. following such acquisition.
The Unaudited Pro Forma Combined Statement of Operations is presented for
informational purposes only and does not purport to represent what the Company's
results of operations for the year ended July 31, 1996 would actually have been
had the applicable acquisition, in fact, occurred on August 1, 1995, or the
Company's results of operations for any future period.
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
PRO FORMA
---------------------------------------------------------------------------------------------------------
CONNEC ADJUST-
AUGI TSOFT MENTS COMBINED
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ........................... $ 106,555,000 $ 6,723,000 $113,278,000
---------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD .................. 93,906,000 2,492,000 96,398,000
------------- ----------- ------------
---------------------------------------------------------------------------------------------------------
Gross profit ........................ 12,649,000 4,231,000 16,880,000
---------------------------------------------------------------------------------------------------------
Selling, general and administrative . 7,864,000 6,007,000 146,000 14,017,000
---------------------------------------------------------------------------------------------------------
Stock option compensation ........... 1,671,000 1,671,000
---------------------------------------------------------------------------------------------------------
Research and development ............ 10,295,000 3,914,000 657,000 14,866,000
---------------------------------------------------------------------------------------------------------
Operating (loss) .................... (7,181,000) (5,690,000) (803,000) (13,674,000)
---------------------------------------------------------------------------------------------------------
Interest expense, net ............... 1,137,000 1,277,000 2,414,000
------------- ----------- ------------
---------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(Loss) from continuing operations
before income taxes and
minority interest ................... (8,318,000) (6,967,000) (803,000) (16,088,000)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes .......... 890,000 890,000
------------- ------------
---------------------------------------------------------------------------------------------------------
(9,208,000) (6,967,000) (803,000) 16,978,000
---------------------------------------------------------------------------------------------------------
Minority interest in earnings of
consolidated subsidiaries ........... 402,000 402,000
---------------------------------------------------------------------------------------------------------
(Loss) from continuing operations ... (9,610,000) (6,967,000) (803,000) (13,674,000)
---------------------------------------------------------------------------------------------------------
Discontinued operations, net of taxes
Income from operations, net of tax .. 315,000 315,000
---------------------------------------------------------------------------------------------------------
Gain on disposal (net of tax of
$5,042,000) ......................... 7,460,000 7,460,000
---------------------------------------------------------------------------------------------------------
7,775,000 7,775,000
------------- ------------
---------------------------------------------------------------------------------------------------------
Net (loss) .......................... $ (1,835,000) $(6,967,000) $ (803,000) $ (9,605,000)
---------------------------------------------------------------------------------------------------------
(Loss) earnings per common and
common equivalent share:
---------------------------------------------------------------------------------------------------------
(Loss) from continuing operations ... $ (1.66) $ (2.99)
---------------------------------------------------------------------------------------------------------
Discontinued operations ............. 1.34 1.34
---------------------------------------------------------------------------------------------------------
$ (0.32) $ (1.65)
---------------------------------------------------------------------------------------------------------
Pro forma weighted average number
of shares outstanding ............... 5,810,526 5,810,526
---------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
NOTES TO UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
(1) BASIS OF PRESENTATION
The pro forma statement of operations gives effect to the acquisition of
ConnectSoft, Inc. which aggregate the results of operations of American United
Global, Inc. (the Company) and ConnectSoft for the year ended July 31, 1996 as
if ConnectSoft had been acquired as of August 1, 1995. ConnectSoft's results of
operations for the day ended July 31, 1996 have been included in the
consolidated results of operations of the Company for the year ended July 31,
1996. Accordingly, the ConnectSoft results of operations included in the pro
forma statement of operations reflect the results of operations of ConnectSoft
for the period August 1, 1995 to July 30, 1996 prior to the acquisition. A
nonrecurring expense of approximately $1,200,000 related to the repricing of
certain ConnectSoft warrants and options in connection with the acquisition by
the Company has not been included in the results of operations of ConnectSoft.
The pro forma financial statements are presented for illustrative purposes
only and should not be construed to be indicative of the actual combined results
of operations as may exist in the future. The pro form adjustments are based on
the consideration exchanged, including the fair value of the assets acquired,
liabilities assumed and preferred stock issued.
The Company accounted for the acquisition of ConnectSoft using the
purchase method of accounting, wherein the purchase price was allocated to the
assets acquired and liabilities assumed based upon their relative fair values.
(2) PRO FORMA ADJUSTMENT
The pro forma adjustment of $803,000 represents the amortization of the
non-compete agreement, goodwill and capitalized software costs acquired for the
period August 1, 1995 to July 30, 1996. The purchased research and development
costs of $10,033,000 was charged to research and development expense in the July
31, 1996 statement of operations of the Company.
62
<PAGE>
PROPOSAL VI. TO RATIFY THE ISSUANCE OF 400,000 SHARES OF THE COMPANY'S SERIES
B-2 CONVERTIBLE PREFERRED STOCK ISSUED IN CONNECTION WITH A $10,000,000 PRIVATE
PLACEMENT COMPLETED IN JANUARY 1997.
At the Annual Meeting a vote will be taken on a proposal to ratify the
issuance of Series B-2 Convertible Preferred Stock in connection with a private
placement of the Company in January 1997. The Company seeks to obtain
shareholder ratification of this issuance in order to ensure the Company's
compliance with the NASD's 20% rule (as defined in Proposal V). The Company's
Common Stock is currently quoted on the OTC Bulletin Board. Ratification of this
Proposal V may facilitate the Company's ability to have its Common Stock be
eligible for quotation on NASDAQ; however, the Company has not taken any steps
to reapply for quotation on NASDAQ, and there can be no assurance that the
Company will reapply for quotation or that such application will be approved and
that the Company will be quoted thereupon.
On January 8, 1997, the Company completed a private placement (the "Series
B-2 Placement") of 400,000 shares of Series B-2 Preferred Stock, paying a 7%
cumulative quarterly dividend with a liquidation preference of $25.00 per share
over the common stock (the "Series B-2 Preferred Stock"), to eleven (11)
unaffiliated purchasers for an aggregate purchase price of $10,000,000. The
Company realized net proceeds of approximately $9,200,000 from the Series B-2
Placement. Investors in the Series B-2 Placement also received an aggregate of
350,000 warrants (the "Private Placement Warrants") to purchase Common Stock at
an exercise price of $8.58 per share for five years after issuance. The exercise
price was determined by the average daily closing bid price for the Common Stock
on NASDAQ for the ten (10) trading days immediately preceding the closing date
for subscriptions in the Series B-2 Placement (the "Closing Date Average
Price"). The Company believes that the Series B-2 Preferred Stock was issued
below the greater of book or market value. The Company engaged in the Series B-2
Placement in order to raise additional capital with which to finance its
acquisition program and the ongoing operations and capital requirements of Old
ConnectSoft and Exodus, which were acquired by the Company in July 1996.
The Series B-2 Preferred Stock provided for a discount conversion feature
which was accounted for as an imputed dividend to holders. All dividends were
paid as a total of 12,221 additional shares of Series B-2 Preferred Stock. All
Series B-2 Preferred Stock was converted into approximately 2,616,000 shares of
Common Stock at conversion prices between $3.31 and $5.37 per share by September
1997. There are presently, and since September 1997 have been, no outstanding
shares of Series B-2 Preferred Stock.
Shares of the Series B-2 Preferred Stock were initially convertible by the
holders into an aggregate of 1,165,501 shares of Company Common Stock, subject
to adjustment, at various times during the three-year period ending January 8,
2000 at prices equal to the lesser of (i) the Closing Date Average Price of
$8.58 per share, (ii) 105% of the Anniversary Average Price (which Anniversary
Average Price shall be the Average Price (defined below) on the date immediately
preceding the first anniversary of the Closing Date), but only if the
Anniversary Average Price is less than the Closing Date Average Price, or (iii)
82.5% of the Conversion Date Average Price. For purposes of determining the
Series B-2 Preferred Stock conversion rate, the Average Price
63
<PAGE>
equals the average daily closing bid price of the Company's Common Stock as
reported on NASDAQ or other national securities exchange for the ten (10)
trading days immediately preceding the date of sale of such Series B-2 Preferred
Stock, the anniversary of such sale, or the conversion date, as the case may be.
At the Company's option, dividends on the Series B-2 Preferred Stock could be
paid in cash or in additional shares of Series B-2 Preferred Stock. The Company
declared and paid dividends by distributing 12,221 additional shares of Series
B-2 Preferred Stock in the aggregate to holders of the Series B-2 Preferred
Stock.
Pursuant to the terms of the 1997 Private Placement, the Company filed a
registration statement with the Securities and Exchange Commission (the
"Commission") to register the shares of Common Stock issuable upon exercise of
the Private Placement Warrants and upon conversion of the Series B-2 Preferred
Stock. Such registration statement was declared effective by the Commission on
May 7, 1997. Subsequent to such date, there was a significant decline in the per
share trading price of the Common Stock. All 412,221 shares of the Series B-2
Preferred Stock issued in the 1997 Private Placement, including shares issued as
dividends, were converted into an aggregate of 2,631,125 shares of Common Stock.
REASONS WHY THE BOARD OF DIRECTORS ADVISES THAT YOU APPROVE PROPOSAL VI.
The Company seeks to obtain shareholder ratification of the issuance of
Series B-2 Preferred Stock in order to ensure the Company's compliance with the
NASD's 20% rule (as defined in Proposal V). Such compliance may facilitate the
Company's potential future efforts to obtain approval for its securities to be
quoted on NASDAQ, but as to such approval or efforts there can be no assurance.
Those rules require the Company to make annual solicitations of proxies for
voting at annual stockholder meetings, and to seek stockholder approval of any
company issuance in any single transaction of voting securities which entitle or
have the potential to entitle the holders thereof to vote at least twenty
percent (20%) of the voting shares outstanding prior to such issuance at a
meeting of stockholders. There can be no assurance, however, that the Company
will seek or obtain such approval.
Stockholder ratification of the issuance of Series B-2 Preferred Stock in
connection with the 1997 Private Placement is not necessary to ensure the
effectiveness of that issuance or of any transactions subsequent thereto
involving the Series B-2 Preferred Stock. If this issuance is not ratified,
neither the Series B-2 Preferred Stock nor the Common Stock issued upon the
conversion thereof will be subject to rescission.
Approval of Proposal VI requires the affirmative vote of a majority of
outstanding voting shares as of the Record Date.
MANAGEMENT BELIEVES THAT IT IS IN THE BEST INTERESTS OF THE COMPANY AND
ITS STOCKHOLDERS THAT STOCKHOLDERS RATIFY THE ISSUANCE OF SERIES B-2 PREFERRED
STOCK IN CONNECTION WITH THE 1997 PRIVATE PLACEMENT, AND RECOMMENDS THAT YOU
VOTE "FOR" PROPOSAL VI.
64
<PAGE>
PROPOSAL VII. TO RATIFY AND AUTHORIZE THE AMENDMENT AND RESTATEMENT OF AN
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND ITS CHIEF EXECUTIVE OFFICER, ROBERT
M. RUBIN.
At the Annual Meeting a vote will be taken on a proposal to ratify and
authorize an amended and restated employment agreement between the Company and
its Chief Executive Officer, Robert M. Rubin.
The Board of Directors in December 1999 approved a resolution by unanimous
written consent (with Mr. Rubin abstaining) amending the employment agreement
(the agreement as currently in force, the "Restated Agreement") between the
Company and Mr. Rubin. The Compensation Committee has since ratified and
approved the Restated Agreement. The Restated Agreement provides Mr. Rubin with
an annual minimum base salary of $225,000, incentive bonuses and cost-of-living
adjustments, and a one-time grant of 250,000 incentive stock options under the
1996 Plan to purchase Common Stock for five years after issuance (as of December
7, 1999) at $0.21 per share. In addition, Mr. Rubin is eligible under the
Restated Agreement for "earn-out" bonuses contingent upon the Company achieving
certain realized net proceeds from the sale of its holdings of Common Stock of
either eGlobe or Western, up to an aggregate maximum bonus of $3,000,000. See
"Employment Agreements." Since Fiscal 1998 the Board of Directors' Compensation
Committee, which may typically decide such matters, did not meet, and during and
since this time the entire Board of Directors decided all compensation matters
relating to the Company's executive officers.
Under the Restated Agreement Mr. Rubin shall receive a base salary of at
least $225,000 (his base salary for Fiscal 1999) for the fiscal years ending
July 31, 2000 ("Fiscal 2000") and July 31, 2001 ("Fiscal 2001"), which base
salary shall be as determined by the Compensation Committee of the Company's
Board of Directors and ratified by a majority of the entire Board of Directors
of the Company (other than Mr. Rubin). Mr. Rubin's base salary in each of Fiscal
2000 and Fiscal 2001 will be 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. Mr. Rubin
will also receive as compensation under the Restated Agreement incentive bonuses
consisting of ten percent of the sale price in excess of the Company's basis, up
to a maximum aggregate bonus of $3,000,000, realized if and when the Company
disposes of its holdings of the common stock of either eGlobe, Inc. or Western
and receive net aggregate proceeds in excess of $3,000,000 from the sale of the
eGlobe or Western shares, which amounts represent the Company's approximate
basis in such shares of each of eGlobe and Western. The Company presently owns
1,923,000 shares of eGlobe common stock (approximately 2.2% of the outstanding
shares as of May 30, 2000) and 1,222,586 shares of Western common stock
(approximately 37% of the outstanding shares as of May 30, 2000, after giving
effect to the Company's disposition of approximately 777,414 shares of Western
common stock pursuant to the settlement agreement for the Class Action). The
Company presently has no agreements or commitments to sell part of all of these
securities. In addition, Mr. Rubin, Mr. McLain and Western have contemplated
their acquisition of certain of the assets of Western, but there is no agreement
with regards to such acquisition.
Mr. Rubin also received, as of December 7, 1999, 250,000 incentive stock
options under the 1996 Plan to purchase Common Stock which are exercisable for
five years at $0.21 per share.
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
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1999, other than Mr. Rubin, no Compensation Committee member was an officer or
employee of the Company or any of its subsidiaries. The Compensation Committee
reviews the compensation for all employees and the granting of options under all
of the Company's employee stock option plans that may exist and be in effect
from time to time, and presently consists of Messrs. McLain, Katz and Berman.
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. See "Committees And
Meetings Of The Board of Directors."
Mr. Rubin is also engaged by Western, the Company's 60.6%-owned
subsidiary, pursuant to a two-year Consulting Agreement, effective August 1,
1998 and expiring August 1, 2000 under which he is paid $150,000 annually plus
all authorized business expenses. Mr. Rubin and Western have contemplated Mr.
Rubin's acquisition of the assets of Western, although at present there is no
agreement in connection therewith.
REASONS WHY THE BOARD OF DIRECTORS ADVISES THAT YOU APPROVE PROPOSAL VII.
The Board of Directors decided to amend Mr. Rubin's employment agreement
in order to recognize the considerable value, service and dedication of Mr.
Rubin to the Company and to further encourage his continued efforts in
attempting to restore and add value to the Company and to its publicly-traded
securities. The Board of Directors also determined that the amendment of his
agreement would encourage his continued diligence and dedication on behalf of
the Company and would help the Company attract and retain other highly capable
employees as well as motivate them to perform at increasing levels of
effectiveness and use their respective best efforts to promote the growth and
profitability of the Company. The Compensation Committee has also ratified and
approved his employment agreement.
Approval of this Proposal VII requires the affirmative vote of a majority
of the voting shares that are present, whether in person or by proxy, and voting
at the Meeting.
MANAGEMENT BELIEVES THE AMENDMENT OF MR. RUBIN'S EMPLOYMENT AGREEMENT TO
BE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT
YOU VOTE "FOR" PROPOSAL VII.
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PROPOSAL VIII. TO RATIFY AND APPROVE THE AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION TO REDUCE THE COMPANY'S AUTHORIZED CAPITAL STOCK
FROM 67,700,000 TO 42,700,000 SHARES, TO REDUCE THE AUTHORIZED COMMON STOCK FROM
65,000,000 TO 40,000,000 SHARES AND TO REMOVE ANY CLASSIFICATIONS IN THE COMMON
STOCK.
At the Annual Meeting a vote will be taken on a proposal to ratify the
amendment of the Company's Certificate of Incorporation to reduce the Company's
authorized capital stock from 67,700,000 to 42,700,000 shares, to reduce the
authorized Common Stock from 65,000,000 to 40,000,000 shares and to remove any
classifications in the Common Stock. Such amendment was filed in June 2000 with
the State of Delaware. Stockholder approval of such amendment is required under
Delaware law.
Management proposes that the stockholders ratify and approve amendments to
the Company's Certificate of Incorporation effecting a reduction in the
Company's authorized capital stock from 67,700,000 to 42,700,000 shares, and a
reduction in the Company's authorized Common Stock from 65,000,000 to 40,000,000
shares, and the removal of any classifications in the Common Stock. All of the
reductions in the Company's capital stock will represent a share-for-share
reduction in the amount of authorized Common Stock, and will represent all
shares of Class B Common Stock. The Company amended its Certificate of
Incorporation in June 1998 to classify its existing Common Stock as Class A
Common Stock (and to increase the number of shares of such class from 20,000,000
to 40,000,000) and create a new class of common stock, which it designated Class
B Common Stock, containing non-voting shares which were to be issued in
connection with one contemplated transaction which was not consummated. The
Company will not complete or pursue such transaction and believes it has no
other reason to cause Class B Common Stock to remain existing. No shares of
Class B Common Stock are issued and outstanding and there are no outstanding or
authorized securities of the Company convertible into, or which upon exercise
would cause the issuance of, Class B Common Stock. Management also proposes that
all classifications of the Common Stock be removed as it believes that the
Company has no reason to have separate classes of Common Stock. In addition, the
reductions in such authorized capital stock and Common Stock will permit the
Company to reduce its franchise tax liability to the state of Delaware, in which
the Company is incorporated and which assesses a franchise tax based upon the
amount of authorized capital stock. Furthermore, management believes that after
these reductions are effected, the Company will still have sufficient authorized
but unissued and unreserved Common Stock so as to permit the Company to issue
Common Stock in order to raise additional capital through public and private
equity financings, engage in mergers and acquisitions, reward key officers and
employees, and retire certain indebtedness. Management believes that these
reductions will not impair the Company's ability to engage in the foregoing
transactions.
If this proposal is approved, the Company will amend its Certificate of
Incorporation to remove all references to Class B Common Stock. All presently
issued and outstanding shares of Common Stock had previously been designated as
Class A Common Stock pursuant to an amendment to its Certificate of
Incorporation filed in June 1998. THE REMOVAL OF THE CLASSIFICATION WILL MEAN
THAT ALL REFERENCES TO CLASS A COMMON STOCK SHALL THEREAFTER BE DEEMED TO BE
REFERENCES TO COMMON STOCK. The proposed amendment will affect only the
designation name of the outstanding Common Stock and will not impair, affect or
otherwise change the rights, privileges, powers or other aspects of such Common
Stock. All references herein to "Common Stock" are made, except as specifically
mentioned otherwise, to the Company's capital stock designated as Class A Common
Stock subsequent to the June 1998 amendment to its Certificate of Incorporation.
THE AMENDMENT REMOVING THE CLASSIFICATION OF THE COMMON STOCK AND CHANGING
THE NAME OF THE CLASS A COMMON STOCK TO
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"COMMON STOCK" WILL NOT IMPAIR, AFFECT OR OTHERWISE CHANGE THE RIGHTS,
PRIVILEGES, POWERS OR OTHER ASPECTS OF SUCH SHARES OF THE COMMON STOCK.
This amendment will only reduce the number of authorized shares of Common
Stock and declassify the Common Stock, and will not affect the rights, powers
and privileges of the holders of any Common Stock.
Approval of Proposal VIII requires the affirmative vote of a majority of
the voting shares as of the Record Date.
MANAGEMENT BELIEVES THAT THESE REDUCTIONS IN THE COMPANY'S AUTHORIZED CAPITAL
STOCK AND COMMON STOCK, AND THE REMOVAL OF CLASSIFICATIONS OF THE COMMON STOCK,
WILL NOT AFFECT ANY RIGHTS, POWERS OR PRIVILEGES OF ANY OUTSTANDING COMMON STOCK
AND WILL BE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THIS PROPOSAL VIII.
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PROPOSAL IX. TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS FOR THE FISCAL
YEAR ENDING JULY 31, 1999.
At the Annual Meeting a vote will be taken on a proposal to ratify the
appointment by the Board of Directors of PricewaterhouseCoopers, LLP,
independent certified public accountants, as the independent auditors of the
Company for Fiscal 1999. PricewaterhouseCoopers, LLP has no interest in or any
relationship with the Company except as its auditors.
A representative of PricewaterhouseCoopers, LLP, will be present at the
Annual Meeting and will be given an opportunity to make a statement to the
stockholders if he so desires. The representative will also be available to
respond to questions from stockholders at the Annual Meeting.
Approval of this Proposal IX requires the affirmative vote of a majority
of the voting shares that are present, whether in person or by proxy, and voting
at the Meeting.
MANAGEMENT BELIEVES THE APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP, AS THE
COMPANY'S INDEPENDENT AUDITOR TO BE IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL IX.
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OTHER BUSINESS
While management of the Company does not know of any matters which may be
brought before the Meeting other than as set forth in the Notice of Meeting, the
proxy confers discretionary authority with respect to the transaction of any
other business. It is expected that the proxies will be voted in support of
management on any question which may properly be submitted to the meeting.
INCLUSION OF STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT.
If any shareholder desires to put forth a proposal to be voted on at the
2001 Annual Meeting of Stockholders and wishes that proposal to be included in
the Company's Proxy Statement to be delivered to stockholders in connection with
such meeting, that stockholder must cause such proposal to be received by the
Company at its principal executive offices no later than the date approximately
245 days after the date of this Proxy Statement. Any request for such a proposal
should be accompanied by a written representation that the person making the
request is a record or beneficial owner of the lesser of at least one percent
(1%) of the outstanding shares of the Company's Common Stock or $2,000 in market
value of the Company's common shares and has held such shares for a least one
year prior to the date on which you submit your proposal, as required by the
Proxy Rules of the Securities and Exchange Commission.
REPORTS ON FORMS 10-K AND 10-Q ACCOMPANY THIS PROXY STATEMENT.
THE COMPANY HEREBY PROVIDES A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED JULY 31, 1999, ATTACHED HERETO AS ANNEX A AND ALL
QUARTERLY REPORTS ON FORM 10-Q FOR ALL SUBSEQUENT FISCAL QUARTERS, ATTACHED
HERETO AS ANNEXES B, C AND D, EACH AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ADDITIONAL INFORMATION
Representatives of the Company's principal accountants for the current and
most recently completed fiscal years are expected to be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so;
and are expected to be available to respond to appropriate questions.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
IN THE ENVELOPE PROVIDED FOR SUCH PURPOSE.
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Exhibit List
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4.1 2000 Stock Option Plan (1)
10.1 Employment Agreement with Robert M. Rubin, dated as of December 7,
1999 (1)
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(1) Filed herewith
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