-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyoSDMWv8m7RFu7ZH6eLaTM2FTL51WUARPv8kJe/nJdHiV2P+EFi0zpqAkaQamPt rldp+NI3LFjeNXeTn+1mxQ== 0000912057-96-026085.txt : 19961115 0000912057-96-026085.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-026085 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN UNITED GLOBAL INC CENTRAL INDEX KEY: 0000859792 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CONSTRUCTION & MINING (NO PETRO) MACHINERY & EQUIP [5082] IRS NUMBER: 954359228 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19404 FILM NUMBER: 96662122 BUSINESS ADDRESS: STREET 1: 25 HIGHLAND BLVD CITY: DIX HILLS STATE: NY ZIP: 11746 BUSINESS PHONE: 5162542134 MAIL ADDRESS: STREET 1: 25 HIGHLAND BLVD CITY: DIX HILLS STATE: NY ZIP: 11746 FORMER COMPANY: FORMER CONFORMED NAME: ALROM CORP DATE OF NAME CHANGE: 19600201 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________ to_____________ Commission file number 0-19404 AMERICAN UNITED GLOBAL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 95-4359228 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11130 NE 33rd Place, Suite 250 Bellevue, Washington 98004 --------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (206)803-5400 Securities registered pursuant to Section 12(b) of the Exchange Act Title of Each Class Name of Each Exchange of Which Registered - ------------------- ----------------------------------------- None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ----------------------------------------------------------- (Title of Class) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X NO ----- ----- Transitional Small Business Disclosure Format Yes NO X ----- ----- Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- The aggregate market value of the voting stock held by non-affiliates of the issuer as of November 7, 1996 was $48,989,100. ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes NO ----- ----- APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares outstanding of the registrant's Common Stock, $.01 Par Value, on November 6, 1996 was 7,266,382 shares. Documents incorporated by reference: None PART I ITEM 1. DESCRIPTION OF BUSINESS General American United Global, Inc., a Delaware corporation (the "Company"), through its operating subsidiaries, is engaged in two distinct businesses; a technology business and a distribution business. The Company's technology business provides computer software and networking as well as telecommunications products and services. Such products and services currently consist of: (a) a remote access connectivity software protocol, known as Nterprise(TM), which allows users to run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations, X-terminals and other X-compatable devices; (b) an electronic mail communications management software product, marketed as EMail ConnectionR, and an e-mail product and Internet browser designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM); (c) providing network engineering, design and consultation services; network security; remote network management and monitoring as well as Intranet development; and (d) providing a regional Internet/Intranet telecommunication service in the form of high bandwidth Internet connectivity and hosting for businesses in the Pacific Northwest. The Company has also entered into a letter of intent to acquire businesses which provide site acquisition, zoning, architectural and engineering services to the wireless communications industry. The Company's distribution business consists of the sale, service and leasing, as a retail distributor, of light and medium-sized construction equipment, parts and other products manufactured principally by Case Corporation. Such distribution business operates through the Company's 56.6%-owned subsidiary, Western Power & Equipment Corp., a Delaware corporation ("Western"). Western principally operates as an authorized Case Corporation ("Case") dealer through 19 retail distribution facilities located in the States of Washington, Oregon, California and Nevada. The construction equipment distributed by the Company is used in the construction of residential and office buildings, roads, levees, dams, underground power projects, forestry projects, municipal construction and other construction projects. Prior to January 1996, the Company also operated a manufacturing business through two operating subsidiaries: (i) the National O-Ring division of American United Products, Inc., a California corporation ("AUP"), which manufactured and distributed standard-size, low cost synthetic rubber o-ring sealing devices for use in automotive and industrial applications and (ii) the Stillman Seal division of American United Seal, Inc., a California corporation ("AUS"), which specialized in the design, manufacture and distribution of rubber-to-metal bonded sealing devices for use in commercial, aerospace, defense and communications industry applications. 2 On January 19, 1996, the Company sold all of the operating assets of the manufacturing business. See, "History and Recent Acquisitions," below. History and Recent Acquisitions The Company was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("the Company"), and completed an initial public offering of securities in August 1990. Effective on May 21, 1991, the Company acquired by merger American United Global, Inc., a California corporation ("AUG"), and the AUP and AUS wholly-owned operating subsidiaries of AUG (the "AUG Merger"). As a result of the AUG Merger, AUG became the wholly-owned subsidiary of the Company, and the former shareholders of AUG gained control of the Company through the ownership of approximately 78% of the then outstanding Company Common Stock. Prior to the AUG Merger, the Company had no operations. The Company effected a statutory merger in December 1991, pursuant to which the Company was reincorporated in the State of Delaware under the name American United Global, Inc. Effective June 1, 1992, through a wholly-owned subsidiary, the Company acquired substantially all of the assets of Aerodynamic Engineering, Inc. ("Aero") and certain assets owned and used by Aero, a company engaged in the business of precision machining metal parts for the aerospace and defense industries. The Company sold the assets of its AEI subsidiary on April 29, 1994. Effective November 1, 1992, the Company's newly-formed Western subsidiary completed the acquisition from Case of certain assets used in connection with seven separate Case retail construction equipment distribution operations located in the States of Washington and Oregon. Effective September 10, 1994 Western purchased from Case two retail construction equipment distribution outlets located in Sparks, Nevada and Fremont, California. In December 1994 Western relocated the Fremont outlet to Hayward, California. Under the terms of the 1994 Case transaction, Western was obligated to open two additional distribution outlets in Northern California. In March 1995 Western opened a retail store in Santa Rosa, California. In August 1995 Western opened a retail store in Salinas, California. See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Liquidity and Capital Resources--Liquidity and Capital Resources." In June 1995 Western completed an initial public offering of 1,495,000 shares of its common stock. This public offering reduced the Company's interest in Western to 56.6%. In January 1996, the Company and each of its AUG, AUP and AUS subsidiaries, sold all of the assets of the National O-Ring and Stillman Seal businesses comprising the manufacturing business of the Company to, and substantially all of the liabilities associated with operation of such manufacturing business were assumed by, subsidiaries of Hutchinson Corporation ("Hutchinson"). A subsidiary of Total America, Inc., a New York Stock Exchange 3 listed company ("Total"), Hutchinson produces a variety of rubber related products for three market sectors; automotive, consumer and industrial use. The purchase price paid by Hutchinson for the manufacturing business was $24,500,000, $20,825,000 of which was paid in cash and the aggregate $3,675,000 balance was paid by delivery of two 24-month non-interest bearing promissory notes. The Hutchinson notes, which have been discounted for financial statement presentation by $638,000, are guaranteed by Total. Following the sale of its manufacturing business, the Company's Board of Directors and senior management sought to refocus the business direction of the Company and determined that stockholder value could best be enhanced by entering the computing and telecommunications industries. As a result, the Company embarked upon an acquisition program and, between May and November 1996, acquired three companies and contracted to acquire a fourth. The terms of such acquisitions are summarized as follows: Effective as of May 1, 1996, the Company acquired, through a merger with an acquisition subsidiary of the Company consummated in August 1996 (the "ConnectSoft Merger"), all of the outstanding capital stock of ConnectSoft, Inc. ("ConnectSoft"), a private company located in Bellevue, Washington, which provides a variety of computer software products and services. In connection with the ConnectSoft Merger, ConnectSoft shareholders received, on a pro rata basis, an aggregate 972,351 shares of the Company's Series B Preferred Stock (the "Preferred Stock"). Such Preferred Stock does not pay a dividend, is not subject to redemption, has a liquidation preference of $3.50 per share over Company Common Stock and votes together with the Company Common Stock as a single class on a one share for one vote basis. Each share of Preferred Stock is convertible into shares of Company Common Stock at the holder's option into a minimum of 972,351 shares of Company Common Stock and a maximum of 2,917,053 shares of Company Common Stock, based upon certain criteria. The Preferred Stock may be converted into shares of Company Common Stock as follows: (i) Each share of Preferred Stock may be converted, at any time, into one share of Company Common Stock (a minimum of 972,351 shares of such Common Stock if all such shares of Preferred Stock are so converted); (ii) In the event that the "Combined Pre-Tax Income" (as defined) of any or all of the "Subject Entities" (as defined) in any one of the three fiscal years ending July 31, 1997, July 31, 1998, or July 31, 1999 (each a "Measuring Fiscal Year" and collectively, the "Measuring Fiscal Years"): (a) shall equal or exceed $3,000,000, each share of Preferred Stock may be converted into two shares of Company Common Stock (a maximum of 1,944,702 shares of such Common Stock if all such shares of Preferred Stock are so converted); or 4 (b) shall equal or exceed $5,000,000, each share of Preferred Stock may be converted into three shares of Company Common Stock (a maximum of 2,917,053 shares of such Common Stock if all such shares of Preferred Stock are so converted). The "Subject Entities" include ConnectSoft and its consolidated subsidiaries (if any) and eXodus Technologies, Inc., a direct 75%-owned subsidiary of the Company ("eXodus") which has developed and is marketing the Nterprise remote access connectivity software originated by ConnectSoft. The 25% of eXodus not owned by the Company is held by current management and employees of eXodus, some of whom were pre-ConnectSoft Merger shareholders of ConnectSoft. Such persons waived their right to receive shares of Preferred Stock in the ConnectSoft Merger in consideration of their receipt of shares of eXodus. The Company intends to change the name of eXodus to Extare Technologies, Inc. The ConnectSoft Merger Agreement also provides that each share of Preferred Stock may be converted into three shares of Company Common Stock, notwithstanding the levels of Combined Pre-Tax Income achieved, in the event that (i) the Company sells the assets or securities of any of the Subject Entities for consideration aggregating $5,000,000 or more, (ii) the Company consummates an initial public offering of the securities of any of the Subject Entities (an "IPO") resulting in gross proceeds in excess of $10,000,000, or in a market valuation for 100% of the issuer's common stock equaling or exceeding $50,000,000, or (iii) a transaction occurs with any third party (whether tender offer, merger, consolidation or other combination) with the result that no shares of Company common stock will be publicly traded on The NASDAQ Stock Market or any other national securities exchange. Prior to consummation of the ConnectSoft Merger, the Company provided interim working capital financing for ConnectSoft which aggregated approximately $3.4 million, assumed all of ConnectSoft's operating expenses and liabilities, and received proxies to vote approximately 80% of the outstanding ConnectSoft capital stock in favor of the ConnectSoft Merger. The Company also agreed to increase its aggregate funding commitments to ConnectSoft and its related companies to a minimum of $5.0 million. In September 1996, the Company acquired, through a merger with a newly formed acquisition subsidiary of the Company (the "Interglobe Merger"), all of the outstanding capital stock of Interglobe Networks, Inc. ("Interglobe"), a private company providing engineering, design and consulting services for users and providers of telecommunications facilities on the Internet and other media. Pursuant to the terms of the Interglobe Merger, the Interglobe shareholders received the aggregate sum of $400,000 plus an aggregate of 800,000 shares of the Company's Common Stock. The former stockholders of Interglobe also received four-year employment agreements with Interglobe and the Company pursuant to which they received seven-year options to purchase an additional aggregate 800,000 shares of Company Common Stock at an exercise price of $6.00 per share (the "Interglobe Options"). The Interglobe Options shall vest and be exercisable (i) 5 25% on July 31, 1997 in the event that Interglobe achieves at least $250,000 of Pre-Tax Income (as defined) in the year ending July 31, 1997, (ii) 25% on July 31, 1998 in the event that Interglobe achieves at least $1,000,000 of Pre-Tax Income (as defined) in the year ending July 31, 1998, (iii) 25% on July 31, 1999 in the event that Interglobe achieves at least $2,000,000 of Pre-Tax Income in the year ending July 31, 1999, and (iv) the balance of such Interglobe Options in the event that Interglobe achieves at least $4,500,000 of Pre-Tax Income in the year ending July 31, 2000. Alternatively, all 800,000 Interglobe Options shall vest if, during the period commencing upon closing the Merger and terminating on July 31, 2000, the accumulated Pre-Tax Income of Interglobe has equalled or exceeded $7,750,000. In the event that a change in control of the Company occurs, or the Company effects a sale of all or substantially all of the assets of Interglobe, prior to July 31, 2000, all of the Interglobe Options shall immediately vest upon such occurrence. In addition, the Interglobe agreement provides that if the Company effects a public offering of Interglobe or a sale of Interglobe prior to July 31, 2000, the Interglobe stockholders may elect (but shall not be required) to exchange two-thirds of all Company securities received by them in the Interglobe Merger for an aggregate of 25% of the common stock of Interglobe owned by the Company prior to such transaction. Following completion of the Interglobe Merger, Artour Baganov, the President and Chief Executive Officer of Interglobe, was appointed as a member of the Board of Directors of the Company. On November 8, 1996 a newly formed wholly owned subsidiary of the Company, Seattle Online Acquisition Corp. (the "Buyer") acquired the assets of Seattle Online, Inc. (the "Seller"), a privately owned company engaged in providing a local internet service in the Pacific Northwest. The purchase price for the assets was the sum of $300,000 and up to 25,000 shares of the Company's Common Stock for use by the Seller in settlement of its debts. Keith Dieffenbach, the President and principal stockholder of the Seller entered into a three-year employment agreement with the Buyer, providing him an annual salary initially set at $125,000 per year, plus a bonus based upon exceeding certain minimum sales levels. Both Mr. Dieffenbach and the other minority stockholder of Seller also entered into non-competition and non-disclosure agreements for the benefit of the Seller and Buyer. In consideration for their covenants contained in such non-competition and non-disclosure agreements, the Company issued to such individuals three year warrants to purchase an aggregate of 333,333 shares of the Company's Common Stock. Of such warrants, the minority stockholder of Seller received three year warrants to purchase an aggregate of 28,333 shares of the Company's Common Stock at an exercise price of $6.00 per share. The balance of the warrants to purchase 305,000 shares of the Company's Common Stock were issued to Mr. Dieffenbach and are initially exercisable at $8.50 per share, which exercise price drops to $6.00 per share in the event that the Buyer generates net income before taxes of at least $150,000 at the end of either the six month period ending on May 31, 1997 or the fiscal year of Acquisition ending on July 31, 1997. In the event of a public offering of securities of the Buyer, Mr. Dieffenbach is entitled under certain circumstances (but not required) to exchange his Company warrants and the underlying warrant shares (to the extent 6 of prior exercise of such warrants) for shares aggregating up to 9.15% of the common stock of the Buyer immediately prior to such initial public offering. Finally, in the event that the Buyer generates net income before taxes of at least $340,000 and $2,650,000 (such amounts, the "Pre-Tax Income Targets") in the fiscal years ending July 31, 1997 and July 31, 1998 (such years, the "Measuring Years"), respectively (or, under certain circumstances, $2,990,000 of accumulated pre-tax income during both such fiscal years), the Company has agreed to guaranty to Mr. Dieffenbach that, during the 90-day period commencing October 1, 1998 and ending December 31, 1998 the average closing price of the Company's Common Stock, as traded on the Nasdaq National Market or other national securities exchange shall equal or exceed $6.00 per share more than the exercise price for the unexercised warrants; failing which the Company shall either reduce the exercise price of the warrants or repurchase the unexercised warrants at a price to enable the holder of such warrants to make up such difference. The aggregate dollar value of such guaranty is initially $1,830,000, assuming that no warrants have been exercised when the guaranty is applied, but it is subject to pro-rata increase to the extent that the Pre-Tax Income in the two Measuring Years exceeds $2,990,000, provided that in no event shall the guaranty amount exceed $3,660,000 irrespective of the Buyer's accumulated net income before taxes. Conversely, if the net income before taxes of the Buyer in each Measuring Year fails to reach the Pre-Tax Income Targets but (i) does equal or exceed at least 50% of the Pre-Tax Income Targets for each Measuring Year and (ii) the net income before taxes of the Buyer for its fiscal year ending July 31, 1998 is at least 80% of the net income before taxes for its fiscal year ending July 31, 1997, then the guaranty shall still apply but shall be reduced prorata to reflect the shortfall. In October 1996, the Company entered into letters of intent with the stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS Companies"), pursuant to which it is contemplated that the Company will acquire, through a merger transaction (the "BTS Merger") the BTS Companies. The BTS Companies are engaged in providing site acquisition, zoning, architectural and engineering services as well as consulting services, to the wireless telecommunications industry. At the closing of the BTS Merger, it is contemplated that the name of the BTS Companies will be changed. Such new name has not yet been determined. Pursuant to the terms of the proposed BTS Merger, the BTS shareholders will receive an aggregate of 507,246 shares of Company Common Stock, certain of which carry registration provisions, $780,000 in cash and three year Company notes aggregating $600,000, bearing interest at the Citibank NA prime rate and payable in installments of $100,000, $200,000 and $300,000 on each of the three anniversary dates of the closing of the BTS Merger. The closing of the BTS Merger is scheduled for December 1996. In a related transaction, the Company also agreed to acquire 100% of the capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently formed for the purpose of providing consulting services to clients in the wireless telecommunications industry. The Company has agreed to pay a purchase price of $220,000 in cash, plus a combination of shares of Company Common Stock and AUGI notes due March 15, 1998 valued (based on the 7 estimated market price of AUGI Common Stock as traded on Nasdaq on the date of closing of such acquisition) at between approximately $1.3 million and $1.6 million. The closing of the Arcadia acquisition is conditioned upon the Company's acquisition of the BTS Companies, and is scheduled to occur in or about January 1997. Following the Arcadia acquisition, Arcadia will be merged with and into the BTS Companies. Upon closing of the BTS Merger, the former stockholders of the BTS Companies and Arcadia will receive three-year employment agreements with the BTS Companies and the Company pursuant to which they will receive, in addition to their base salaries and annual bonuses based upon performance of the BTS Companies, options exercisable over a five year period entitling the holders to purchase an additional aggregate 300,000 shares of Company Common Stock (the "BTS Options"). The BTS Options shall vest and be exercisable (i) 100,000 options on November 30, 1997 in the event that the BTS Companies achieve at least $1,800,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1997, (ii) 100,000 options on November 30, 1998 in the event that the BTS Companies achieve at least $2,200,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1998, and (iii) 100,000 options on November 30, 1999 in the event that the BTS Companies achieve at least $3,000,000 of Pre-Tax Income in the 12 months ending November 30, 1999. Alternatively, all 300,000 BTS Options shall vest if, during the period commencing upon closing the Merger and terminating on November 30, 1999, the accumulated Pre-Tax Income of the BTS Companies has equalled or exceeded $6,500,000. In the event that a change in control of the Company occurs, or the Company effects a sale of all or substantially all of the assets of the BTS Companies, prior to November 30, 1999, all of the BTS Options shall immediately vest upon such occurrence. In addition, the BTS Merger agreement provides that if the Company effects a public offering of the BTS Companies or a sale of the BTS Companies prior to November 30, 2000, the former BTS Companies and Arcadia stockholders may elect (but shall not be required) to exchange all Company securities received by them in the BTS Merger (the "Exchange Option") for an aggregate of 16.67% of the common stock of the BTS Companies then owned by the Company prior to such transaction. Upon completion of the Arcadia acquisition, Solon L. Kandel, the President and sole stockholder of Arcadia, will be employed by the BTS Companies as its President and Chief Executive Officer, under a three year employment agreement containing terms which are substantially identical to those provided to each of the former stockholders of the BTS Companies, including 100,000 Options and an Exchange Option entitling Mr. Kandel to 8.33% of the common stock of the BTS Companies. In addition, Mr. Kandel will be nominated to serve as a member of the Board of Directors of the Company. 8 THE TECHNOLOGY BUSINESS General The Company's strategy in entering the computing and telecommunications business (the "Technology Business") is to make the Company a significant factor in the rapidly expanding and changing businesses of (i) developing remote access multi-user software and Internet software, (ii) Internet and Intranet engineering, design and consulting services, and (iii) wireless telecommunications services. Through the acquisitions of ConnectSoft, eXodus, Interglobe and Seattle On-Line, the Company is now able to provide: (a) a remote access connectivity software protocol which allows users to run Microsoft Windows(TM) applications, such as Word(TM), Excel(TM) and PowerPoint(TM), on existing UNIX workstations, X-terminals and other X-compatable devices; (b) an electronic mail communications management software product, marketed as EMail ConnectionR, and and an e-mail product and Internet browser designed for children, marketed as E Mail for Kids(TM) and Kids Web(TM); (c) engineering, design and consultation services to users and providers of telecommunications facilities on the Internet and other media; and (d) local Internet telecommunication service in the Pacific Northwest. In the event that it consummates its acquisition of the BTS Companies in December 1996, the Company will also be able to provide site acquisition, zoning, architectural and engineering services to the wireless communications industry. Products and Services Remote Computing for Multi-user Applications New information technologies have enabled businesses to provide their employees with access to business-critical information, such as sales and customer data and financial and technical data. Many of these businesses have made significant investments in information systems infrastructure incorporating a variety of software operating systems, computing platforms and communications protocols. Critical business software applications and personal computing tools have historically been supplied by a variety of different vendors, often resulting in incompatible systems and applications within and among company locations. As a result, demand has increased for computing and telecommunications systems that offer users a number of features, including a standard interface and the ability to integrate enterprise and personal computer applications to local and remote enterprise users. 9 Although a majority of personal productivity software is Microsoft Windows(TM) based, with the introduction of Windows 95 and Windows NT, Microsoft has gained industry acceptance for its 32-bit operating systems as a preferred environment for business and enterprise applications. However, the costs associated with purchasing separate desktop Windows compatable PC's for literally hundreds of workstations or "seats" in a large organization are prohibitive. Accordingly, the challenge has been to perfect a modern client- server technology to provide access to Windows applications in a diverse information systems multi-user business environment, which may include DOS systems, UNIX workstations and X-Terminals, which do not support 32-bit Windows application. The component software solution developed essentially consists of two principal elements: (i) multi-user software which enables the UNIX or X-Terminal file servers to recognize the Windows 95 and Windows NT protocol (the "Multi-user Software"), and (ii) a remote user interface technology coupled with a client/server protocol software, or language transport, which enables the server to communicate the Windows application to the remote workstations (the "Remoting Software"). The principal manufacturers of Multi-user Software are Citrix Systems, Inc. ("Citrix") and Prologue, S.A. of France ("Prologue"), both of whom sell their products, known as WinFrame(TM) and WinTimes(TM), respectively, under licenses from Microsoft. In addition to Citrix (which possesses its own proprietary Remoting Software) and Prologue, the principal producers of Remoting Software are Network Computing Devices, Inc. ("NCD"), Insignia Solutions, Inc. ("Insignia"), Tektronix Inc. ("Tekronix") and the Company through its eXodus subsidiary. Each of NCD, Insignia and Tektronix act as original equipment manufacturers under separate licenses from Citrix and market their solutions under the names WinCenterPro(TM), NTrigue(TM) and WinDD(TM), respectively. The Company licenses the WinTimes(TM) Multi-user Software from Prologue and markets its remoting solution as an OEM under the name NTerprise(TM). Distribution channels include original equipment manufacturers, direct value added resellers ("VARs") and retailers, as well as direct sales to end-users such as major corporations or government agencies. The Company believes that its NTerprise(TM) product possesses certain significant advantages over the Citrix WinFrame(TM) solution and other competing component technology, in that: * NTerprise(TM) resides entirely on the enterprises central file server and does not require desktop client modules to be loaded on the user's machine, thereby permitting the users' terminals to range from sophisticated costly workstations to inexpensive X-Terminals; * unlike competitive products, which provide only one window for all Windows applications, NTerprise(TM) has multi-window capabilities which allow users to run each Windows application in its own window, thus providing a familiar and easy to use working environment; 10 * NTerprise(TM) is not a replacement operating system for Microsoft's Windows NT and, unlike competitive solutions, does not require the customer to purchase a replacement proprietary NT operating system; * NTerprise(TM) runs on different hardware-based server platforms, such as Motorola's Power PC(TM) and Intel's Pentium Pro(TM), and, when commercially available, is anticipated to be compatable with Digital Equipment Corporation's Alpha and IBM's Power PC; * unlike Citrix's propriety client/server protocol software, ICA (Intelligent Console Architecture), which must be used with more costly intelligent desktop computers, NTerprise(TM) uses standard X-Terminal graphic commands for its client/server protocol and is executed in the server only; thereby permitting the customer the luxury of purchasing or continuing to use inexpensive or even outdated desktop technology. The Company is targeting users of UNIX workstations and X-Terminals as the primary market for its NTerprise(TM) product. Its current version supports the Windows NT 3.5 operating system. Subject to Prologue's renewal and expansion of its recently expired license with Microsoft to include the Windows NT 4.0 operating system, the Company anticipates that an NTerprise(TM) version which will support Window NT 4.0 will be available in the near future. In October 1996, Windows NT Magazine, an industry publication (not affiliated with Microsoft Corporation) awarded the Company's NTerprise(TM) product the "UNIX/Windows NT Technical Award" at the UNIX Expo Plus trade show in New York, New York. The Company is in the process of demonstrating its NTerprise(TM) solution to a number of potential end-user and distributors, including Motorola. To date, however, no firm orders have been obtained. Current pricing for a server license is $795, and $195 per terminal or "seat" connected. A complete ten-seat license is $1,995, consisting of a server license and a ten user license. Retail Software Through its ConnectSoft, Inc. subsidiary, the Company develops and sells three retail software products. EMail Connection(R) is an electronic mail communications management package which collects email from commercial online sources, such as Prodigy, America Online and many other Internet access providers. Many computer users have multiple addresses and EMail ConnectionR simplifies collecting electronic mail. In addition, it allows encrypted message transfers, supports SkyTel Pager communications and receives telecopier transmissions. The two other ConnectSoft products are children's applications - an Internet browser product as an email product designed for children between five and 10 years old. The email product, known as EMail for Kids(TM), has similar features as EMail Connection(R) in that it allows access to popular online services and the Internet. KidWeb(TM) allows children access to the 11 various Internet services and provides an easy to understand web brower using animated characters. However, the Company believes that the unique feature of its children's software products are that parents are capable of regulating the content of email messages and restrict which Web pages their child can view. Parents can create a Web "neighborhood" of pre-approved sites, and disallow access to other Web sites deemed by them objectionable or inappropriate for viewing. FIND S.V.P. User's Survey for 1995 calculated that approximately 6.5 million American personal computer family households purchased children's software in 1995 and approximately 41% of all Internet users named e-mail as the principal reason for their access to the Internet. The Company recently began marketing its retail products through distributors, such as Tech Deta, Micro Central and Navarre. Suggested retail prices are EMail Connection(R) - $49.95; KidWeb(TM) - $39.95; and EMail for Kids(TM) - $29.95. Internet Engineering, Design and Consulting Through its acquisition of InterGlobe Networks, Inc.("Interglobe"), the Company provides network system implementation and consulting for corporate Intranet and Internet communications systems. Services and software provided by InterGlobe include: Network Design and Management Services. InterGlobe provides network design and management for businesses and individuals with obsolete or deficient network structures. The rapid advance of network systems necessitates a comprehensive solution to obsolescence which includes evaluation, network design and implementation for functional effectiveness. In addition to managing ConnectSoft's existing Network Operation Center ("NOC") located in Seattle, Washington, InterGlobe has recently commenced providing consulting services for Compuserve Incorporated, which includes building a NOC in Columbus, Ohio and providing ongoing support services for the facility. Compuserve is a major online service providing business network and Internet access to its subscribers. InterGlobe provides ongoing technical support with automatic and remote monitoring for its network design systems. The Company believes that there will be considerable growth in providing ongoing support services for clients networks, as a result of which the Company is in the process of increasing its engineering and support staff. Corporate Intranet Systems and Connectivity Software InterGlobe also develops custom built Intranet systems designed for corporate clients, who desire access to a paperless intra-office and external communications email system. Its current major customer is the Eddie Bauer. Inc, retail chain. 12 Consulting and System Integration In addition to designing networks and managing systems for specific customers, InterGlobe also provides specialized Internet and Intranet consulting services for corporate clients. Its customers include GE Capital Corporation, US West, The American Automobile Association and Hewlett Packard Corporation. Regional Internet Service The Company's subsidiary, Seattle OnLine Corp. ("Seattle OnLine") is engaged in the production of regional web-sites that showcase metropolitan areas. Seattle OnLine is a full solution Internet marketing firm that designs, builds and manages corporate Inter/Intranet sites, including interactive catalogs and databases for businesses in Seattle, Washington and throughout the nation. Seattle Online has formed alliances and teamed with a number of major corporations with a major regional focus to create a comprehensive metropolitan entertainment and resources guide. Clients include the Seattle Space Needle and the Washington State Ferry System. The Company intends to use the Seattle Online concept as a prototype for expansion into other major metropolitan areas, including cities in which Seattle Online is registered to establish regional web-sites showcasing the particular metropolitan area. The Company plans to introduce the marketing program in approximately 18 additional cities in 1997. 13 Proposed Acquisition of the BTS Companies The Company intends to consummate the acquisition of the BTS Companies in December 1996. However, as a definitive BTS Merger Agreement has not, as yet, been executed, there is no assurance that this transaction will be consummated or that the Company will ever provide services to the wireless communications industry. See, "History and Recent Acquisitions," above. The BTS Companies provide consulting services to clients involved in a variety of wireless communications (cellular telephone) applications. The BTS Companies offer a variety of turnkey solutions, including site acquisition, zoning and permitting services to facilitate the location of a wireless network broadcasting system, architectural and engineering services related to the design, development and construction of wireless communcations network facilities, management of wireless network sites, and general management of wireless communications network projects. The BTS Companies locate appropriate sites for the construction of a wireless network broadcasting system, represent the client in negotiations with the owner-landlord; and provide a comprehensive preliminary site report including photographic survey, preliminary zoning analysis and access and service availabilities. Site zoning and permitting services include obtaining FAA clearing filings and preliminary site plans; obtaining zoning and permitting applications and approvals; preparation of supporting materials for presentation at public hearings; preparation of final site plans and obtaining construction permits. Architectural and engineering services provided include the conduct of site feasibility studies; providing preliminary cost estimates; development of architectural, structural, mechanical and other construction site drawings, plans and specifications (including cable and tray routing); determining of electrical requirements; structural analysis of parapets, roofs, towers, watertanks and other structures; design of heating and air conditioning systems; topographic surveys; soil investigation and reports; and furnishing final "as built" drawings and plans. With over 45 architectural, engineering and other professional employees, the BTS Companies have rendered or are rendering continuing services for clients such as American Personal Communications, AT&T Wireless Communications, Bell Atlantic, Bell South Mobility, Shenandoah Mobile Company, Trammel Crow/LCC, dextel Communications and Vanguard Cellular. Sales and Target Markets Remote Computing The Company is targeting large national and world-wide organizations using existing UNIX systems and X-Terminals as the primary customers for its remoting technology. In many large establishments, there is a heterogeneous mix of computing platforms, including DOS systems, Windows 3.x systems, UNIX workstations, X-Terminals and Macintosh computers. 14 In conjunction with its licensed WiNTimes(TM) Multi-User Software, the Company believes that its superior remoting technology will enable it to capture a significant portion of the UNIX workstation and X-Terminal markets. The Company is presently testing the NTerprise(TM) product with Motorola Corporation in connection with the introduction of a Windows NT 4.0 application to enhance access by a European country's government agency to information from police stations throughout such country. In the event that Motorola awards a contract to the Company, management believes that revenues under this agreement could equal $10 million over a period of three years. In addition to Motorola, a number of other potential customers have recently requested the Company to provide demonstrations and quotations for the NTerprise(TM) solution. To date, the Company has not been awarded a contract for NTerprise(TM) by Motorola or any other customer, and there can be no assurance that any such contract will be awarded or, if awarded, that it will prove meaningful and profitable to the Company. In addition, even if Motorola were to elect to order NTerprise(TM), the Company would not be able to fulfill such contract unless it were able to license the right to sell a software package for use with Microsoft's Windows NT 4.0 operating system. At the present time, the Company has no direct license from Microsoft for Windows NT4.0, and licenses the WiNTimes(TM) Multi-user Software from Prologue only in Windows NT 3.5 version. The Company's agreements with Prologue provide that (subject to certain conditions) at such time as Prologue obtains a license from Microsoft to sell software for the Windows NT4.0 operating system, the Company's license with Prologue will be extended to include the Windows NT4.0 version. On November 8, 1996 Prologue notified the Company that it had been granted a license for Microsoft Windows NT 4.0, and management of the Company has made arrangements to meet with Prologue to finalize such a license extension agreement. In the event that Prologue and the Company are not able to reach an agreement in time to enable the Company to fulfill a contract which may be awarded by Motorola or another similar customer, in the absence of the Company's ability to obtain a direct license from Microsoft for Windows NT4.0, or a sublicense from Citrix, the business of the Company could be materially and adversely affected. The Company markets its retail EMail ConnectionR, EMail for Kids(TM) and KidWeb(TM) products through three independent distributors, advertising in magazines and trade journals, and aggressively working on product comparisons in computer magazines. The EMail Connection is also marketed directly to customers via on-line sales through the Worldwide Web and through electronic direct mail campaigns to the registered customer base. EMail for Kids and KidWeb are marketed through direct sales programs aimed at schools. Interglobe markets its Internet engineering, design and consulting services through advertising in trade journals and magazines customarily used by information systems managers. In addition, Interglobe obtains a number of its customer through client referrals. Seattle On-Line advertises its local web site services primarily through advertising in computer publications and trade journals. 15 License Agreement The Company has entered into a three year license with Prologue, effective as of June 1, 1996, pursuant to which the Company was granted: (i) the exclusive right and license to sell, distribute, exploit and demonstrate WiNTimes(TM) within North America, as an original equipment manufacturer in combination with the Company's Remoting Software, for the UNIX and X-Terminal markets; and (ii) a non-exclusive license to sell such products in other markets within such territory. However, such license permits Prologue to license WiNTimes(TM) within the Company's exclusive territory to any other original equipment manufacturer ("OEM") if, after the Company has attempted to sell the WiNTimes(TM)/ NTerprise(TM) combination to a potential OEM customer, a special committee comprised of two Company designees, three Prologue designees and two independent persons shall determine, in good faith, that there is a risk that refusing to grant such a license to the OEM would result in such OEM keeping or acquiring the Citrix NT Multi-user Software in lieu of WiNTimes(TM). Prologue has recently advised the Company that it desires to license WiNTimes(TM) to NCD, a direct competitor of the Company, as NCD allegedly would not acquire the WiNTimes(TM) directly from the Company or combined with the NTerprise(TM) solution. The Company is currently considering such request. Under the terms of the license, if it is determined that Prologue is entitled to license its Multi-user Software to NCD or another OEM, the Company is entitled to receive 30% of all royalties and other payments which Prologue may receive from such OEM licensee for the UNIX and X-Terminal markets. Under the terms of the Prologue license, the Company paid Prologue initial cash payments aggregating $450,000, issued 100,000 shares of Company Common Stock and agreed to pay certain ongoing royalties or floor price payments per "seat" connection in lieu of royalties. The license agreement is currently limited to WiNTimes(TM) software for Windows NT 3.5 version. In October 1996, the Company and Prologue entered into a limited access license, pursuant to which the Company was granted limited access to Windows NT 4.0 source codes, solely for the purpose of developing NTerprise(TM) in Windows NT 4.0 version and testing and demonstrating such software for a potential customer. However, in order for the Company to sell its remoting computer software to the UNIX and X-Terminal markets in Windows NT 4.0 version, Prologue's existing license with Microsoft which expired on October 31, 1996 is required to be renewed to include such upgraded Windows NT 4.0 version. See "Future Performance and Risk Factors" below. Employees At October 31, 1996, ConnectSoft, eXodus, Interglobe and Seattle On-Line employed 84 full-time employees. Of that number, 10 are officers, 9 are involved in administration and clerical activities, 26 are involved in engineering and software development, 18 are involved in sales and marketing, and 21 are involved in customer service and support. None of such employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. 16 Future Performance and Risk Factors The future performance, operating results and financial condition of the Company's Technology Business are subject to various risks and uncertainties, including those described below. Competition The markets in which the Company competes are intensely competitive and are characterized by rapidly changing technology and evolving industry standards. Competitive factors in the remote computing product market include completeness of features, product quality and functionality, marketing and sales resources and customer service and support. The Company faces extensive competition from Citrix and its licensees, including Tektronics, Insignia and NCD; all of whom are significantly larger than the Company and have substantially greater financial resources. In addition, the Company's ability to provide customers with access to the new Windows NT 4.0 operating system will be adversely impacted if Prologue is unable to obtain in the near future a direct license from Microsoft to enable Prologue to provide the Company with Multi-user Software in Windows NT 4.0 version for NTerprise(TM). While the Company believes that the features available on its Remoting Software provides UNIX and X-Terminal users with the maximum flexibility to integrate Windows applications, there can be no assurance that the Company will be able to establish and maintain a market position in the face of increased competition. In addition, alternative products exist for accessing information or databases over the Internet that indirectly compete with the Company's remoting computing products. Existing or new products that extend web site software to provide database access or interactive computing can materially impact the Company's ability to sell its remoting computer products into the UNIX and X-Terminal markets. Potential competitors include all of the makers of Web server and browser software, including Microsoft, Netscape, Quarterdeck, Silicon Graphics and Sun Microsystems. Other key competitors in the multi-user graphical platform market include SunSoft, Hewlett Packard and other manufacturers of UNIX application servers, to the extent that they are able to provide a low-cost graphical computing platform for Microsoft's Windows applications. As is the case with its remoting products, the Company's EMail ConnectionR, KidsWeb(TM) and EMail for Kids(TM) software also face intense competition from other developers and marketers of personal productivity software products sold at retail. There are a number of email and Web browser products on the market, many of which are produced by companies that are significantly larger and better capitalized than the Company. Although the Company believes that its e-mail and web browser products are the only ones currently available which permit parents to monitor the content of programs accessed by their children on the Internet, a number of larger competitors are in the process of introducing a similar technology. There is no assurance that the Company will be able to establish a sufficient customer basis or market presence to withstand 17 a well financed marketing campaign from a more substantial competitor with a competing product for the children's market. The Company's businesses engaged in Internet design, engineering and consulting services, as well as the development of web sites for local advertisers, face competition from numerous regional and national computer and telecommunications consultants, as well as from many of the major software and hardware manufacturers who provide full customer support and service for their products, which often include consulting and advisory services. Significant Investment Since its effective May 1, 1996 acquisition of ConnectSoft, through October 31, 1996, the Company has expended over $6.5 million in personnel, debt and lease payments and settlements and other operating expenses associated with ConnectSoft, eXodus, InterGlobe and Seattle On-Line, exclusive of approximately $400,000 in cash paid to former stockholders of such companies in connection with the acquisition of such companies. It may be anticipated that the ConnectSoft and eXodus operations will continue to lose money and represent a negative cash flow to the Company, at least in the near term. There can be no assurance that these subsidiaries, or the Company's Technology Business as a whole, will not continue to represent a significant drain on cash resources or will ever prove to be profitable. Evolving Network Computing Market The Company's future success in developing and selling multi-user remote solutions will depend in substantial part upon increased acceptance and successful marketing of such products. There can be no assurance that the Company's remoting computer software, whether marketed with WiNTimes(TM) Multi-user Software, or as an alternate solution, will be widely adopted in the rapidly evolving desktop computer market. In addition, it is possible that Microsoft may develop its own Multi-user Software and/or Remoting Software for sale to users of UNIX and X-Terminal workstations. The failure of new markets to develop for the Company's network computing products could have a material adverse effect on the Company's business, operating results and financial condition. New Product Development and Timely Introduction of New and Enhanced Products The markets for the products and services provided by the Company's technology business are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. The Company's future in such businesses will depend to a considerable extent on its ability to continuously develop, introduce and deliver in quantity new software products that offer its customers enhanced performance at competitive prices, and to offer new services at competitive prices that meet the demands of a rapidly changing marketplace. The development and introduction of new products and service is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and 18 timely completion of product development. The inability to finance important software development projects, delays in the introduction of new and enhanced products and services, the failure of such products and services to gain market acceptance, or problems associated with new products could materially and adversely affect the Company's operating results. Proprietary Technology and Dependence on Licenses The Company's success in its Remoting Software is heavily dependent upon proprietary technology. While the Company has filed [one] patent application, to date, the Company has no patents, and existing copyright laws afford only limited protection for the Company's software. Accordingly, the Company relies heavily on trade secret protection and confidentiality and proprietary information agreements to protect its proprietary technology. The loss of any material trade secret could have a material adverse effect on the Company. There can be no assurance that the Company's efforts to protect its proprietary technology rights will be successful. Despite the Company's precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's software or to obtain and use information that the Company regards as proprietary. While the Company's competitive position may be affected by its ability to protect its proprietary information, the Company believes that because of the rapid pace of technological change in the industry, factors such as the technical expertise, knowledge and innovative skill of the Company's management and technical personnel, its strategic relationships, name recognition, the timeliness and quality of support services provided by the Company and its ability to rapidly develop, enhance and market software products may be more significant in maintaining the Company's competitive position. In addition, under the terms of the Company's license with Prologue, under certain conditions Prologue may license Prologue's Multi-user Software to direct competitors of the Company. See "License Agreement" above. Although the Company believes that the key element in providing enterprise customers with access to Windows NT in a UNIX or X-Terminal environment is the reliability and flexibility of the OEM's Remoting Software, as opposed to the Multi-user Software furnished primarily by Citrix and Prologue, to the extent that more well financed competitors are given access to Prologue's WiNTimes(TM) software the Company's marketing efforts could be adversely impacted. Dependence on Key Personnel The Company's success in its technology business depends to a significant degree upon the continuing contributions of its senior management and other key employees. The Company believes that its future success will also depend in large part on its ability to attract and retain highly-skilled programmers, engineers, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, integrating and retaining such personnel. Failure to attract or retain existing and 19 additional key personnel could have a material adverse effect on the Company's technology business, operating results or financial condition. THE DISTRIBUTION BUSINESS The Equipment New Case Construction Equipment. The construction equipment (the "Equipment") sold, rented and serviced by Western generally consists of: backhoes (used to dig large, wide and deep trenches); excavators (used to dig deeply for the construction of foundations, basements, and other projects); log loaders (used to cut, process and load logs); crawler dozers (bulldozers used for earth moving, leveling and shallower digging than excavators); wheel loaders (used for loading trucks and other carriers with excavated dirt, gravel and rock); roller compactors (used to compact roads and other surfaces); trenchers (a small machine that digs trenches for sewer lines, electrical power and other utility pipes and wires); forklifts (used to load and unload pallets of materials); and skid steer loaders (smaller version of a wheel loader, used to load and transport small quantities of material--e.g., dirt and rocks around a job site). The sale prices of this Equipment ranges from $15,000 to $350,000 per piece of equipment. Under the terms of standard Case dealer agreements, Western is an authorized Case dealer for sales of Equipment and related parts and services at locations in the states of Oregon, Washington, Nevada and Northern California (the "Territory"). The dealer agreements have no defined term or duration, but are reviewed on an annual basis by both parties, and can be terminated without cause at any time either by Western on 30 days' notice or by Case on 90 days' notice. Although the dealer agreements do not prevent Case from arbitrarily exercising its right of termination, based upon Case's established history of dealer relationships and industry practice, Western does not believe that Case would terminate its dealer agreement without good cause. The dealer agreements do not contain requirements for specific minimum purchases from Case. In consideration for Western's agreement to act as dealer, Case supplies to Western items of Equipment for sale and lease, parts, cooperative advertising benefits, marketing brochures related to Case products, access to Case product specialists for field support, the ability to use the Case name and logo in connection with the Western's sales of Case products, and access to Case floor plan financing for Equipment purchases. Such floor planning arrangements currently provides Western with interest free credit terms of between six months and nine months on purchases of specified types of Equipment. Principal payments are generally due at the earlier of sale of the equipment or twelve to fifteen months from the invoice date. Other Products. 20 Although the principal products sold, leased and serviced by Western are manufactured by Case, Western also sells, rents and services equipment and sells related parts (e.g., tires, trailers and compaction equipment) manufactured by Hamm and by others. Approximately 25% of Western's net sales for fiscal year 1996 resulted from sales, rental and servicing of products manufactured by companies other than Case. Western's distribution business is generally divided into four categories of activity: (i) New Equipment sales and rentals, (ii) used Equipment sales and rentals, (iii) Equipment servicing, and (iv) parts sales. New Equipment Sales and Rental. At each of its distribution outlets, Western maintains a fleet of various items of Equipment for sale or rental for periods ranging from one week to up to nine months (customarily with purchase options at the end of the rental period). The Equipment purchased for each outlet is selected by Western's marketing staff based upon the types of customers in the geographical areas surrounding each outlet, historical purchases as well as anticipated trends. Each distribution outlet has access to Western's full inventory of Equipment. Western's new Equipment rental business has historically been an adjunct to its new Equipment sales. To assist customers, any new Equipment can be rented generally for periods of up to nine months and a portion of customer rental payments may be applied to the purchase price down payment. Western provides only the standard manufacturer's limited warranty for new equipment, generally a one-year parts and service repair warranty. Customers can purchase extended warranty contracts. Western maintains a separate fleet of new Equipment that it generally holds solely for rental. Such Equipment is generally held in the rental fleet for 12 months and then sold as used Equipment with appropriate discounts reflecting prior rental usage. As rental Equipment is taken out of the rental fleet, Western adds new Equipment to its rental fleet as needed. The rental charges vary, with different rates for different items of Equipment rented. Used Equipment Sales and Rentals. Western sells and rents used Equipment that has been reconditioned in its own service shops. It generally obtains such used Equipment as "trade-ins" from customers who purchase new items of Equipment and from Equipment previously rented and not purchased. Unlike new Equipment, Western's used Equipment is generally sold "as is" and without manufacturer's warranty. Used Equipment is customarily rented only after available new Equipment has been rented. The rental charge for such used Equipment is equal to that of rented new Equipment. Used rental Equipment is first reconditioned by Western prior to being offered for rent, and is typically not more than three years old. 21 Equipment Servicing. Western operates a service center and yard at each retail outlet for the repair and storage of Equipment. Both warranty and non-warranty service work is performed, with the cost of warranty work being reimbursed by the manufacturer following the receipt of invoices from Western. Western employs approximately 100 manufacturer-trained service technicians who perform Equipment repair, preparation for sale and other servicing activities. Equipment servicing is one of the higher profit margin businesses operated by Western. Western has expanded this business by hiring additional personnel and developing extended warranty contracts for Equipment service terms, and independently marketing such contracts to its customers. Western, services items and types of Equipment which include those that are neither sold by Western nor manufactured by Case. Parts Sales. Western purchases a large inventory of parts, principally from Case, for use in its Equipment service business, as well as for sale to other customers who are independent servicers of Case Equipment. Generally, parts purchases are made on standard net 30 days terms. Western employs one or more persons who take orders from customers for parts purchases at each retail distribution outlet, the majority of such orders are placed in person by walk-in customers. Western provides only the standard manufacturer's warranty on the parts that it sells, which is generally a 90-day replacement guaranty. Sales and Marketing. Western's customers are typically residential and commercial building general contractors, road and bridge contractors, sewer and septic contractors, underground power line contractors, persons engaged in the forestry industry, equipment rental companies and state and municipal authorities. Western estimates that it has approximately 16,000 customers, with most being small business owners, alone of which accounted for more than 5% of its total sales in the fiscal year ended July 31, 1996. For the fiscal year ended July 31, 1996, the revenue breakdown by source for the business operated by Western was approximately as follows: New Equipment Sales 58% Used Equipment Sales 12% Rental Revenue 9% Parts Sales 17% Service Revenue 4% ----- 100% ===== 22 Western advertises its products in trade publications and appears at trade shows throughout its territory. It also encourages its salespersons to visit customer sites and offer Equipment demonstrations when requested. Western's sales and marketing activities do not result in an significant backlog of orders. Although Western has commenced acceptance of orders from customers for future delivery following manufacture by Case, during fiscal 1996 substantially all of its sales revenues resulted from products sold directly out of inventory, or the providing of services upon customer request. All of Western's sales personnel are employees of Western and all are under the general supervision of C. Dean McLain, the President and Chief Executive Officer of Western. Each Equipment salesperson is assigned a separate exclusive territory, the size of which varies based upon the number of potential customers and anticipated volume of sales, as well as the geographical characteristics of each area. Western employed 67 Equipment salespersons on July 31, 1996. On July 31, 1996, Western employed 5 product support salespersons who sell Western's parts and repair services to customers in assigned territories. Western has no independent distributors or non-employee sales representatives. Suppliers Western purchases approximately the majority of its inventory of Equipment and parts from Case. No other supplier currently accounts for more than 5% of such inventory purchases in fiscal 1996. While maintaining its commitment to Case to primarily purchase Case Equipment and parts as an authorized Case dealer, in the future Western plans to expand the number of products and increase the aggregate dollar value of those products which Western purchases from manufacturers other than Case. Competition Western competes with distributors of construction equipment and parts manufactured by companies other than Case on the basis of price, the product support (including technical service) that it provides to its customers, brand name recognition for its Case and other products, the accessibility of its distribution outlets, the number of its distribution outlets, and the overall quality of the Case and other products that it sells. Western management believes that it is able to effectively compete with distributors of products produced and distributed by such other manufacturers primarily on the basis of overall Case product quality, and the superior product support and other customer services provided by the Company. Case's two major competitors in the manufacture of a full line of construction equipment of comparable sizes and quality are Caterpillar Corporation and Deere & Company. In addition, other manufacturers produce specific types of equipment which compete with the Case Equipment and other Equipment distributed by Western. These competitors and their product 23 specialties include JCB Corporation--backhoes, Kobelco Corporation--excavators, Dresser Industries--light and medium duty bulldozers, Komatsu Corporation-- wheel loaders and crawler dozers, and Bobcat, Inc.--skid steer loaders. Western is currently the only Case dealer for construction equipment in the states of Washington and Nevada and in the Northern California area (other than Case-owned distribution outlets), and is one of two Case dealers in the State of Oregon. However, Case has the right to establish other dealerships in the future in the same territories in which the Company operates. In order to maintain and improve its competitive position, revenues and profit margins, Western plans to increase its sales of products produced by companies other than Case. Environmental Standards and Government Regulation Western operations are subject to numerous rules and regulations at the federal, state and local levels which are designed to protect the environment and to regulate the discharge of materials into the environment. Based upon current laws and regulations, Western believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the resultant financial liability to Western. No assurance can be given that future changes in such laws, regulations, or interpretations thereof, changes in the nature of Western's operations, or the effects of former occupants' past activities at the various sites at which Western operates, will not have an adverse impact on the Company's operations. Western is subject to federal environmental standards because in connection with its operations it handles and disposes of hazardous materials, and discharges sewer water in its equipment, servicing operations. Western internal staff is trained to keep appropriate records with respect to its handling of hazardous waste, to establish appropriate on-site storage locations for hazardous waste, and to select regulated carriers to transport and dispose of hazardous waste. Local rules and regulations also exist to govern the discharge of waste water into sewer systems. In September 1992, prior to Western becoming an authorized Case dealer, Case received an environmental report indicating certain contamination conditions which were to be rectified by Case in connection with the selling of retail outlets to the Company in connection with the 1992 Case Transaction. In addition, following the 1992 Case Transaction, additional environmental reports were prepared or obtained concerning the progress and cost of remediation projects at those facilities. Western did not assume any of Case's obligations for site remediation when it completed the acquisition from Case of certain assets used in connection with Western's retail facilities, and no accruals for such clean-up costs appear on the Company's financial statements. In July 1994, prior to Western's acquisition of the Sparks, Nevada property, Case received an environmental report indicating certain contamination conditions which were to be rectified by Case in connection with the sale of that retail outlet to Western. Such remediation was completed prior to November 22, 1994. Western did not assume any of Case's obligations for site remediation when it completed the acquisition from Case of certain assets used in 24 connection with Western's retail facilities, and no accruals for such clean-up costs appear on Western's financial statements. Employees At July 31, 1996, Western employed 298 full-time employees. Of that number, 24 are in corporate administration for Western, 17 are involved in administration at the branch locations, 77 are employed in Equipment sales and rental, 63 are employed in parts sales, and 117 are employed in servicing construction equipment. None of Western's employees are covered by a collective bargaining agreement. Western believes that its relations with its employees are satisfactory. Insurance Western currently has product liability insurance policies covering Western with $500,000 limits for each occurrence and $1,000,000 in the aggregate under the general liability and products liability policies. Western also has an umbrella liability insurance policy with an annual aggregate coverage limit of $10,000,000. Western believes that its product liability insurance coverage is reasonable in amount and consists of such terms and conditions as are generally consistent with reasonable business practice, although there is no assurance that such coverage will prove to be adequate in the future. An uninsured or partially insured claim, or a claim for which indemnification is not available, could have a material adverse effect upon Western. 25 ITEM 2. Properties The following table sets forth information as to each of the properties which the Company owns or leases: The Distribution Business:
- ----------------------------------------------------------------------------------------------------------------------- Expiration Annual Size/ Purchase Location and Use Lessor Date Rental Square Feet Options - ----------------------------------------------------------------------------------------------------------------------- 1745 N.E. Columbia Blvd. Carlton O. Fisher, 12/31/2000 $54,000(1) Approx. 4 No Portland, Oregon 97211 Nancy A. Harrison & plus CPI Acres; Building (Retail sales, service, storage Jane G. Whitbread adjustments 17,622 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 1665 Silverton Road, N.E. LaNoel Elston Myers 7/10/98 $27,480(1) Approx. 1 Acre; No Salem, Oregon 97303 Living Trust Buildings 14,860 (Retail sales, service, storage sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 No Springfield, Oregon 97477 Company Acres; Building (Retail sales, service, storage 17,024 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- West 7916 Sunset Hwy. Case Corporation 9/30/98 $58,404(1) Approx. 5 No Spokane, Washington 99204 Acres; Building (Retail sales, service, storage 19,200 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 3217 Hewitt Avenue Dick Calkins 3/31/97 $40,320(1) Approx. 2.5 No Everett, Washington 98201 Acres; Building (Retail sales, service, storage 12,483 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 1901 Frontier Loop The Landon Group Month to $29,625(1) Approx. 7 No Pasco, Washington 99301 Month Acres; Building (Retail sales, service, storage 14,200 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 13184 Wheeler Road, N.E. Maiers Industrial Park Month to $38,400(1) Approx. 10 No Building 4 Month Acres; Building Moses Lake, Washington 13,680 sq. ft. 98837 (Retail sales, service, storage and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 63291 Nels Anderson Road B&K Management 10/31/98 $27,600(1) Approx. 3,600 No Bend, Oregon 97701 Corp. sq. ft. (Retail sales, service, storage and repair facilities) - -----------------------------------------------------------------------------------------------------------------------
- -------- (1) Net lease with payment of insurance, property taxes and maintenance costs by Company. 26
- ----------------------------------------------------------------------------------------------------------------------- Expiration Annual Size/ Purchase Location and Use Lessor Date Rental Square Feet Options - ----------------------------------------------------------------------------------------------------------------------- 4601 N.E. 77th Avenue Parkway Limited 2/15/99 $93,456 6,100 sq. ft. No Suite 200 Partnership Vancouver, Washington 98662 (Executive Offices) - ----------------------------------------------------------------------------------------------------------------------- 2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,0001 Approx. 8 No Auburn, Washington 98001 Acres; Building (Retail sales, service, storage 33,000 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 13 West Washington Avenue Bob and Pat Schneider 1/14/97 $12,0001 Approx. 15,600 No Yakima, Washington 98903 sq. ft.; Building (Retail sales, service, storage 4,320 sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 2112 Wildwood Way James Ghia 5/31/98 $18,720 Approx. 1 Acre; No Elko, Nevada 89431 Building 3,000 (Retail sales, service, storage sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 1455 Glendale Ave. Owned N/A N/A Approx. 5 acres; N/A Sparks, Nevada 89431 Building 22,475 (Retail sales, service, storage sq. ft. and repair facilities) - ----------------------------------------------------------------------------------------------------------------------- 25886 Clawiter Road Fred Kewel II, 11/30/99 $96,000(1) Approx. 2.8 No Hayward, California 94545 Agency acres; Building (Retail sales, service, storage 21,580 sq. ft. and repair facility) - ----------------------------------------------------------------------------------------------------------------------- 3540 D Regional Parkway Soiland 2/28/98 $35,400(1) 5,140 sq. ft. No Santa Rosa, California plus CPI 95403 adjustments (Retail sales, service, storage and repair facility) - ----------------------------------------------------------------------------------------------------------------------- 1751 Bell Avenue McLain-Rubin Realty 3/1/2016 $168,000(2) Approx. 8 No Sacramento, California Company LLC2 Acres; Buildings 95838 35,941 sq. ft. (Retail sales, service, storage and repair facility) - ----------------------------------------------------------------------------------------------------------------------- 1041 S. Pershing Avenue Raymond Investment 3/14/2001 $36,000(1) Approx. 2 No Stockton, California 95206 Corp. Acres; Buildings (Retail sales, service, storage 5,000 sq. ft. and repair facility) - ----------------------------------------------------------------------------------------------------------------------- 1126 E. Truslow Avenue D. June Brecht, Glen 6/30/97 $22,524(1) Building 4,800 No Fullerton, California 92631 Brecht and Marshal sq. ft. (Retail sales, service, storage Brecht and repair facility) - -----------------------------------------------------------------------------------------------------------------------
- -------- (2) C. Dean McLain and Robert M. Rubin are (i) the Executive Vice President and Director of the Company and Chief Executive Officer of Western, and (ii) the President, Chief Executive Officer and Chairman of the Company, respectively. Messrs. Rubin and McLain are the equity owners of McLain-Rubin Realty Company, LLC. The terms of its lease with McLain-Rubin Realty Company LLC is "triple net", under which Western pays, in addition to rent, all insurance, property taxes, maintenance costs and structural and other repairs. 27
- ----------------------------------------------------------------------------------------------------------------------- Expiration Annual Size/ Purchase Location and Use Lessor Date Rental Square Feet Options - ----------------------------------------------------------------------------------------------------------------------- 672 Brunken Avenue R. Jay De Serpa, Ltd. 7/31/98 $28,800(1) 4,000 sq. ft. No Salinas, CA 93301 (Retail sales, service, storage and repair facility) =======================================================================================================================
The Technology Business:
- ----------------------------------------------------------------------------------------------------------------------- Expiration Annual Size/ Purchase Location and Use Lessor Date Rental Square Feet Options - ----------------------------------------------------------------------------------------------------------------------- 11130 NE 33rd Place Koll Management 11/22/01 $350,000(1) 17,200 sq. ft. No Bellevue, Washington 98004 (Principal executive offices, ConnectSoft and eXodus offices and software production facility) - ----------------------------------------------------------------------------------------------------------------------- 1520 Fourth Avenue, Metropolitan Federal 7/31/98 $48,000(1) 4,031 sq. ft. No Suite 200 Savings and Loan Seattle, Washington 98101 Association (InterGlobe Networks offices and operating facilities) - ----------------------------------------------------------------------------------------------------------------------- 6th and Virginia 6th and Virginia 9/30/00 $25,000(1) 1,000 sq. ft. No Seattle, Washington 98121 Properties (Network operations center) - ----------------------------------------------------------------------------------------------------------------------- 1417 Fourth Avenue Collier Management 2/9/00 $54,000(1) 8,000 sq. ft. No Seattle, Washington 98101 (Seattle On-Line offices and operating facilities) - -----------------------------------------------------------------------------------------------------------------------
All of the leased and owned facilities used by the Company are believed to be adequate in all material respects for the needs of the Company's current and anticipated business operations. ITEM 3. LEGAL PROCEEDINGS Except as set forth below, there are no pending material legal proceedings in which the Company or any of its subsidiaries is a party, or to which any of their respective properties are subject, which either individually or in the aggregate may have a material adverse effect on the results of operations or financial position of the Company. On October 18, 1996, the Company was informed by Prudential Securities Incorporated ("Prudential") that they are entitled to an investment banking fee of approximately $550,000 in connection with the Company's acquisition of ConnectSoft. The Company believes that, although Prudential had originally been engaged by ConnectSoft as an investment banker, Prudential did not directly or indirectly introduce the Company to ConnectSoft and abandoned efforts to finance ConnectSoft well prior to the Company's involvement. Accordingly, the Company does not believe that Prudential is entitled to any fee, and if litigation is commenced, will vigorously defend any such action and assert against Prudential what it believes are meritoreous counterclaims on behalf of ConnectSoft. - -------- 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not required. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal market for trading the Company's securities is the NASDAQ National Market System. The following is a table that lists the high and low selling prices for shares of the Company's Common Stock on the Nasdaq National Market System during the periods identified: High Low ---- --- Fiscal year 1995 First Quarter.......................................... $6.58 $3.50 Second Quarter......................................... 5.42 4.00 Third Quarter.......................................... 5.00 3.75 Fourth Quarter......................................... 5.92 4.25 Fiscal year 1996 First Quarter.......................................... 6.58 5.08 Second Quarter......................................... 11.88 6.08 Third Quarter.......................................... 13.25 3.37 Fourth Quarter ........................................ 10.25 4.19 ================= On November 7, 1996, the last sale price of the Common Stock was $9.25 as reported on the Nasdaq National Market System, and the Company estimates that it had over 1,000 beneficial holders of its common stock on that date. Dividend Policy In the foreseeable future, the Company intends to retain earnings to assist in financing the expansion of its business. In the future, the payment of dividends by the Company on its Common Stock will also depend on its financial condition, results of operations and such other factors as the Board of Directors of the Company may consider relevant. The Company does not currently intend to pay dividends on its Common Stock. 29 ITEM 6. SELECTED FINANCIAL DATA AMERICAN UNITED GLOBAL, INC. (in thousands, except per share data) Income statement data: Year ended July 31,(1) 1993(2) 1994 1995 1996(4) ---- ---- ---- ---- Net sales $30,386 $67,370 $86,173 $ 106,831 (Loss) income from continuing operations 417 1,024 1,164 (11,475) Net (loss) income 1,575 2,201 2,268 (3,700)(3) Per share: (Loss) income from continuing operations $ 0.06 $ 0.18 $ 0.20 $ (1.98) Net (loss) income $ 0.34 $ 0.43 $ 0.40 $ (0.64) Balance Sheet data: July 31,(1) 1993 1994 1995 1996 ---- ---- ---- ---- Total assets $42,383 $55,779 $76,829 $115,176 Long-term debt 2,714 3,234 0 2,968 - ---------- (1) No amounts are presented for the years ended July 31, 1992 as the Company consisted solely of the manufacturing business which has been reclassified as a discontinued operation. (2) Represents nine months of Western's results following its Acquisition in November 1992. (3) Reflects the gain on the sale of the manufacturing business of $7.46 million, net of tax. (4) Includes three months of ConnectSoft's results following its acquisiton effective May 1, 1996. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION AND RESULTS OF OPERATIONS This management discussion and analysis of financial conditions and results of operations contains certain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements that involve risks and uncertainties, detailed from time to time in the Company's various Securities and Exchange Commission filings. GENERAL OVERVIEW Management of the Company carefully considered, both prior and immediately subsequent to consummation of the Hutchinson transaction, the best utilization of the cash resources that would result therefrom. It was determined that stockholder value would best be enhanced by directing the Company's future into the computing and telecommunications industries, by acquiring proprietary technologies, unique niche software products and selective expertise that could be marketed on a national scale. The Company acquired ConnectSoft, Inc. on August 8, 1996. However, effective May 1, 1996 the Company assumed financial and operational control of ConnectSoft and the closing of the acquisition was assured by virtue of the Company obtaining proxies voted in favor of the transaction by certain ConnectSoft shareholders owning more than 80 percent of the shares. ConnectSoft provides electronic mail communications management software products and through the eXodus division (now a separate corporation - eXodus Technologies) provides a remote access connectivity software protocol (NTerprise) (TM) which allows users to run Microsoft Windows (TM) applications such as Word (TM), Excel (TM) and Power Point (TM) on existing UNIX workstations, X-Terminals and other X-Compatible devices. The Company has treated ConnectSoft as having been acquired by the Company as of May 1, 1996 for both tax and financial reporting purposes. Effective September 20, 1996, the Company acquired InterGlobe Networks, Inc. InterGlobe provides engineering, design and consulting services for users and providers of telecommunications facilities on the Internet and other media. Effective November 8, 1996, the Company acquired the assets of Seattle Online, Inc. which engages in providing a local Internet service in the Pacific Northwest. As a result of its acquisitions of ConnectSoft, InterGlobe and Seattle Online and the development of the eXodus Remoting Software for Windows applications on UNIX and X-Terminal workstations, the Company believes that it is positioned to participate in the growth in these market segments. 31 RESULTS OF OPERATIONS Years Ended July 31, Fiscal Year 1996, as Compared with Fiscal Year 1995 % of % of 1996 Revenues 1995 Revenues Net Sales $106,831,000 100% $86,173,000 100% Cost of Goods Sold $ 94,095,000 88.1% $76,145,000 88.4% Selling, General and Administrative Expenses $ 9,168,000 8.6% $ 6,228,000 7.2% Research and Development Expenses $ 9,764,000 9.1% -- 0% Interest Expense, Net $ 1,394,000 1.3% $ 1,421,000 1.6% Income (loss) from Continuing Operations Before Taxes and minority interest $ (9,832,000) N/A $ 1,993,000 2.3% Provision for Income Taxes $ 741,000 0.7% $ 711,000 0.8% Income from Discontinued Operations $ 7,775,000 7.3% $ 1,104,000 1.3% Net (loss) income $ (3,700,000) N/A $ 2,268,000 2.6% 32 On a consolidated basis, revenues for fiscal 1996 were up by approximately $20,658,000, or 24.0% over the fiscal 1995. Western reported net sales for the fiscal 1996 of $106,555,000 which is an increase of $20,383,000 or 24% over net sales of $86,172,000 for fiscal 1995. Same store revenues increased 13.8 percent over the prior year results reflecting a continuation of generally good economic conditions, increased market acceptance of Western's products, increased housing starts, as well as revenues realized from the addition of numerous new parts and equipment lines to Western's product offerings. ConnectSoft reported revenue of $276,000 during the three months ended July 31, 1996. Only one of its titles was available for the sale as of May 1, 1996, and a total of three were available subsequent to July 31, 1996. Cost of goods sold as a percentage of Western's sales was 88.1% during fiscal 1996 which is consistent with the prior year results. Western's management has placed a high priority on improving overall gross margins by working to increase higher margin service and parts revenues and by obtaining higher prices for new equipment. Cost of goods sold for ConnectSoft's revenues amounted to $189,000 or 68.5% of its revenues. 33 Selling , general and administrative expenses totaled $9,168,000 or 8.6% of sales for fiscal 1996 compared to $6,228,000 or 7.2% of sales for fiscal 1995. The increase in selling, general and administrative expenses as a percent of sales resulted mainly from administrative costs associated with Western's acquisition and integration of the Sacramento Case operations and the GCS operations and $1,304,000 of selling, general and administrative costs incurred by ConnectSoft during the three months ended July 31, 1996. Included in fiscal 1996 selling, general and administrative expenses are costs associated with the Company's acquisition activity and reorganizing ConnectSoft's operations which management estimates at $1,500,000. The restructuring charge of $571,000 represents the cost of vacating certain leased office space that was previously utilized by ConnectSoft. Stock option compensation expense of $1,671,000 relates to options granted to certain key employees under the Company's 1996 stock option plan. During the three month period ended July 31, 1996 ConnectSoft continued development activities related to its NTerprise software product and to a lesser extent its e-mail software products for the retail market. Research and development expense for fiscal 1996 amounted to $9,764,000 or 9.1% of consolidated revenue. Included in this amount is $8,472,000 representing an allocation of the cost of acquiring ConnectSoft to software development costs for the NTerprise product which were charged to operations because technological feasibility of NTerprise had not been achieved at the effective acquisition date. Subsequent to July 31, 1996 technological feasibility was achieved and future development costs for NTerprise will be capitalized. The $27,000 decrease in net interest expense for fiscal 1996 is primarily attributable to an increasing balance of inventory purchased under Western's various floor plan lines of credit to stock the new outlets, an increase of inventory dedicated to rental from approximately $5,000,000 in fiscal 1995 to more than $12,000,000 in fiscal 1996, as well as changes in floor plan terms by Case. Effective January 1, 1996, Case changed factory to dealer terms in a program they have named "Focus 2000". While interest free floor plan terms for Case's most expensive units--wheel loaders and excavators--remains at six to eight months, the terms on Case's smaller units were shortened from six months to four months interest free. For the first time, Case is also granting a 4% cash discount if the dealer pays for the machine outright rather than utilizing the interest-free floor planning. Western was able to take advantage of the cash discounts for some of its purchases in fiscal 1996, which had an immediate effect on interest expense. The interest free floor planning period was not utilized, however. Nevertheless, management believes that the positive impact of the discounted cost as these units are sold will more than offset the increased interest expense. Additionally, the Company incurred $257,000 of interest costs during the three months ended July 31, 1996 associated with debt assumed in the ConnectSoft acquisition. These increases in expense are offset by increased interest income from investments in cash and marketable debt securities which amounted to $754,000 during fiscal 1996, an increase of $583,000 over fiscal 1995, resulting from a significant increase in investable funds from the proceeds of the sale of the Manufacturing Businesses in January 1996. The provision for income taxes from continuing operations for fiscal 1996 of $741,000 increased $30,000 from fiscal 1995. The increase in the amount and as a percentage of pre tax income from continuing operations resulted primarily from valuation allowances provided for expenses related to purchased software development costs. The Company recognized a gain of $12,502,000 ($7,460,000, net of applicable taxes) in connection with the sale of its Manufacturing Businesses to Hutchinson which was consummated in January 1996. Income from continuing operations of the Manufacturing Businesses for the period of August 1, 1995 to January 19, 1996, the date of sale, amounted to $315,000 as compared to $1,104,000 for the full year for fiscal 1995. 34 Fiscal Year 1995, as Compared with Fiscal Year 1994 Years Ended July 31, (In Thousands) % of % of 1995 Revenues 1994 Revenues Net Sales $86,173 100% $67,370 100% Costs of Goods Sold $76,145 88.4% $59,138 87.8% Selling, General and Administrative Expenses $ 6,228 7.2% $ 5,696 8.5% Interest Expense, Net $ 1,421 1.6% $ 830 1.2% Income from Continuing Operations Before Taxes $ 1,993 2.3% $ 1,706 2.5% Provision for Income Taxes $ 711 0.8% $ 682 1.0% Income from Discontinued Operations $ 1,104 1.3% $ 1,095 1.6% Net Income $ 2,268 2.6% $ 2,287 3.3% Continuing operations for fiscal 1995 and 1994 consist primarily of the Company's Distribution Group activities comprising Western. The Company reported net sales for fiscal 1995 of $86,173,000 which is an increase of 28% over net sales of $67,370,000 for fiscal 1994. Included in the fiscal 1995 amount are revenues of approximately $15,000,000 related to Western's acquisition of the Sparks, Nevada and Hayward, California stores and the opening of the Santa Rosa, California store. Same store revenues increased 5.6% over the prior year results reflecting a continuation of generally good economic conditions, increased housing starts, as well as revenues realized from the addition of numerous new parts and equipment lines to Western's product offerings. Cost of goods sold as a percentage of sales was 88.4% during fiscal 1995 which is consistent with the prior year results. Management has placed a high priority on improving overall gross margins by increasing higher margin service and parts revenues and by obtaining higher prices for new equipment. Selling, general and administrative expenses were $6,228,000 or 7.2% of sales for fiscal 1995 compared to $5,696,000 or 8.5% of sales for fiscal 1994. The decrease in selling, general and administrative expenses as a percent of sales primarily reflects the spreading of Western's fixed overhead costs over an increased revenue base which was partially offset by $108,000 in certain one-time administrative costs associated with the integration of the Sparks, Nevada and Hayward, California outlets. 35 The $591,000 increase in net interest expense in fiscal 1995, over that incurred in fiscal 1994, is primarily attributable to increased borrowings under Western's floor plan lines of credit with Case and other lenders, rising interest rates in general, and to financing costs relating to Western's initial public offering. The provision for income taxes from continuing operations for fiscal 1995 of $711,000 increased by $29,000 from fiscal 1994 primarily due to increased pre tax income and remained relatively consistent as a percentage of pre tax income. Income from the discontinued operations of the Manufacturing Businesses amounted to $1,104,000 for fiscal 1995 compared to $1,762,000 for fiscal 1994. Additionally, during fiscal 1994 the Company incurred a loss of $365,000, net of tax, on disposition of its Aerodynamic Engineering subsidiary and operating losses for that subsidiary of $302,000 prior to its disposition. LIQUIDITY AND CAPITAL RESOURCES As a result of the Hutchinson Transaction the Company significantly increased its liquidity and capital resources. The Company has used, and intends to use in the future, the proceeds of the Hutchinson Transaction, to acquire and fund the working capital needs of additional businesses. The Company has been granted a $13,000,000 secured demand line of credit from its commercial bank. This line is uncommitted and secured by the Company's portfolio of cash and marketable securities held by the bank. On October 31, 1996 approximately $11,475,000 was outstanding under such line of credit, the principal of which bears interest at the banks 90 day LIBOR rate (currently 5.25%) plus 1%. Western's primary source of internal liquidity has been its profitable operations since its inception in November 1992. As more fully described below, Western's primary sources of external liquidity were contributions to Western by the Company, and equipment inventory floor plan financing arrangements provided to Western by Case Credit Corporation, Seattle-First National Bank ("SeaFirst Bank"), Associates Commercial Corporation ("Associates") and Orix Commercial Credit ("Orix"). In addition, in fiscal 1995, WPE, the immediate parent of Western, completed an initial public offering of 1,495,000 shares of common stock at $6.50 per share, generating net proceeds of $7,801,000. The net proceeds of the offering were utilized to repay amounts due to the Company and to Case, the acquisition and opening of additional outlets, as well as to reduce floor plan debt. Under its inventory floor plan finance arrangements Case provides Western with interest free credit terms on new equipment purchases for four to six months, with the exception of the Model 1818 skid steer loader for which the interest free credit terms are three months and the 36 Model 90B Series special application excavator for which the interest free credit terms are eight months, after which interest commences to accrue monthly at the rate per annum equal to 2% over the prime rate of interest. At September 30, 1996, Western was indebted to Case in the aggregate amount of approximately $36,912,024 under such inventory floor plan finance arrangements. In order to take advantage of a 4% cash discount offered by Case under its new Focus 2000 program, to provide financing beyond the term of applicable Case floor plan financing or as alternatives to Case floor plan financing arrangements for inventory purchased other than from Case, Western has entered into separate secured floor planning lines of credit with SeaFirst, Associates, Orix, and the CIT Group. The Associates line of credit was entered into in August 1993, and allows Western to borrow up to $2,250,000 to finance the purchase of new equipment, to finance up to $2,000,000 of installment sales of equipment to customers approved by Associates (without recourse to Western), and to finance up to $1,000,000 of installments sales of equipment to other customers (with recourse to Western in the event of default). There are no material obligations outstanding under the recourse line of credit. On September 30, 1996, approximately $906,898 was outstanding under these lines, the principal of which bears interest at 2% over the prime rate announced by the U.S. National Bank of Oregon. The SeaFirst line of credit was entered into in June 1994 and provides a $17,500,000 line of credit which can be used to finance new and used equipment or equipment to be held for rental purposes. On September 30, 1996, approximately $15,225,944 was outstanding under such line of credit, the principal of which bears interest at .25% over Seattle-First National Bank's prime rate and is subject to annual review and renewal on June 1, 1997. Western also buys a portion of its equipment from Hamm Compactors ("Hamm") under a floor plan financing agreement with Orix. The Orix floor plan agreement calls for repayment of principal and interest over periods ranging from thirty to forty-eight months, with a balloon payment for the remaining outstanding balance. At September 30, 1996, the aggregate indebtedness owed to Orix was $820,190. The Orix notes bear interest at the highest prevailing prime rates of certain major United States banks, plus 2% per annum. Amounts owing under these floor plan financing agreements are secured by inventory purchases financed by these lenders, as well as all proceeds from their sale or rental, including accounts receivable thereto. On October 19, 1995, Western entered into a purchase and sale agreement with an unrelated party for the Auburn, Washington facility subject to the execution of a lease. Under the terms of this agreement, which closed on December 1, 1995, Western sold the property and is leasing it back from the purchaser. In accordance with Statement of Financial Accounting Standards No. 13 (SFAS 13), the building portion of the lease is being accounted for as a capital lease while the land portion of the lease qualifies for treatment as an operating lease. See Note 6 to the accompanying consolidated financial statements for more information. The proceeds 37 from the Auburn facility sale leaseback transaction were sufficient to retire the related note payable to Case. Effective February 29, 1996, Western acquired substantially all of the operating assets used by Case Corporation ("Case") in connection with its business of servicing and distributing Case construction equipment at a facility located in Sacramento, California (the "Sacramento Operation"). The acquisition was consummated for approximately $630,000 in cash, $1,590,000 in installment notes payable to Case and the assumption of $3,965,000 in inventory floor plan debt with Case and its affiliates. The acquisition is being accounted for as a purchase. The real property and improvements used in connection with the Sacramento Operation, and upon which the Sacramento Operation is located, were sold by Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware limited liability company the owners of which are Messrs. C. Dean McLain, the President and a director of the Company and Western, and Robert M. Rubin, the Chairman and a director of the Company and Western. Simultaneous with its acquisition of the Sacramento Operation real property and improvements, MRR leased such real property and improvements to Western under the terms of a 20 year Commercial Lease Agreement dated as of March 1, 1996. In accordance with SFAS 13, the building portion of the lease is being accounted for as a capital lease while the land portion of the lease qualifies for treatment as an operating lease. See Note 11 to the accompanying consolidated financial statements for more information. On October 10, 1995, using proceeds from its initial public offering, Western retired the $2,175,000 real estate note given to Case for the purchase of the Sparks, Nevada real estate in September 1994. In March 1996 Western consummated an agreement with an institutional lender for a conventional mortgage on the property in the amount of $1,330,000 secured by the Sparks, Nevada real estate. The agreement calls for the principal and interest payments over a seven year term using a fifteen year amortization period. The note cannot be prepaid during the first two years of its term. On June 11, 1996, Western acquired the operating assets of GCS, Inc. ("GCS"), a California-based, closely held distributor of heavy equipment primarily marketed to municipal and state government agencies responsible for street and highway maintenance. Western will operate the GCS business from an existing location in Fullerton, California and from Western's existing facility in Sacramento, California. The Purchase price for the GCS assets was $1,655,000. This transaction is being accounted for as a purchase. In May 1996 approximately 427,000 options granted under the Company's employee stock option plans were exercised and $1,776,000 of net proceeds were received by the Company. The Company has used these funds to reduce its short term bank borrowings. The dilutive effect of the exercise of these options on earnings per share has already been reflected in the weighted average earnings per share stated in this report. 38 Effective May 1, 1996 the Company acquired ConnectSoft, Inc., a business involved with providing computer software products and services. Accordingly, the Company's consolidated operating results for fiscal 1996 include significant software development expenses, including $8,472,000 related to purchased in-process software development. By August 8, 1996 ConnectSoft had three products for e-mail users in production for the retail and OEM marketplace and eXodus had begun marketing its connectivity software protocol known as NTerprise Version 1.1 to businesses using UNIX workstations, X-Terminals and other X-Compatible devices. Fiscal 1997 revenues from the retail products appear to be slower than expected. Sales of NTerprise to businesses typically involve extensive evaluation by customers. The Company is in the process of demonstrating its NTerprise solution to a number of potential end-user and distributors, including Motorola. To date, however, no firm orders have been obtained. However, management believes that firm orders from NTerprise will be received during 1997. For further information concerning the terms of the ConnectSoft acquisition, see "ITEM 1., DESCRIPTION OF BUSINESS". Under the terms of the Company's acquisition of Interglobe, the Interglobe shareholders received the aggregate sum of $400,000 plus an aggregate of 800,000 shares of the Company's Common Stock. Following consummation of the Interglobe acquisition, the Company became obligated to fund Interglobe's operations and working capital needs in the form of intercompany loans and advances based upon annual budgets and forecasts provided to and approved by the Company. For further information concerning the terms of the Interglobe acquisition, see "Item 1., DESCRIPTION OF BUSINESS." During the year ended July 31, 1996, cash and cash equivalents increased by $12,942,000 primarily due to the Hutchinson Transaction. The Company had $1,521,000 cash flow from operations during the period reflecting an increase of $5,023,000 over the prior year. Purchases of fixed assets during the period were related mainly to the opening of new distribution outlets by Western. The Company's cash and cash equivalents of $17,086,000 as of July 31, 1996 and available credit facilities are considered sufficient to support current or higher levels of operations for at least the next twelve months. 39 ITEM 8. FINANCIAL STATEMENTS Page Number Financial Statements: Report of Independent Public Accountants F - 1 Consolidated Balance Sheets as of July 31, 1996 and 1995 F - 2 Consolidated Statements of Operations for the years ended July 31, 1996, 1995 and 1994 F - 4 Consolidated Statements of Stockholders' Equity for the years ended July 31, 1996, 1995 and 1994 F - 5 Consolidated Statements of Cash Flows for the years ended July 31, 1996, 1995 and 1994 F - 6 Notes to Consolidated Financial Statements F - 7 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 40 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Officers, Directors and Key Employees The following table sets forth information with respect to directors, nominees for directors, executive officers and key employees of the Company as of November 8, 1996. 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 56 Chairman of the Board of Directors, President and Chief Executive Officer Lawrence E. Kaplan 53 Director C. Dean McLain 41 Director and Executive Vice President of the Company; President and Chief Executive Officer of Western Artour Baganov 30 President of Interglobe and Director David M. Barnes 53 Vice President of Finance, Chief Financial Officer and Director Howard Katz 54 Executive Vice President and Director ROBERT M. RUBIN. Mr. Rubin has served as the Chairman of the Board of Directors of the Company since May, 1991, and was its Chief Executive Officer from May 1991 to January 1, 1994. Between October, 1990 and January 1, 1994, Mr. Rubin served as the Chairman of the Board and Chief Executive Officer of AUG and its subsidiaries; from January 1, 1994 to January 19, 1996, he served only as Chairman of the Board of AUG and its subsidiaries. From January 19, 1996, Mr. Rubin has served as Chairman of the Board and President and Chief Executive Officer of the Company. Mr. Rubin was the founder, President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May 1986. Mr. Rubin continued as a director of SCI (now known as Olsten Corporation ("Olsten")) until the latter part of 1987. Olsten, a New York Stock Exchange listed company, is engaged in providing home care and institutional staffing services and health care management services. Mr. Rubin is Chairman of the Board, Chief Executive Officer and a 41 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. Mr. Rubin is a former director and Vice Chairman, and currently a minority stockholder, of American Complex Care, Incorporated, a public company formerly engaged in providing on-site health care services, including intra-dermal infusion therapies. In April 1995, American Complex Care, Incorporated's operating subsidiaries made assignments of their assets for the benefit of creditors without resort to bankruptcy proceedings. Mr. Rubin is also Chairman of the Board and a minority stockholder of Universal Self Care, Inc., a public company engaged in the sale of products used by diabetics. Mr. Rubin is also the Chairman of the Board of Western Power & Equipment Corp. ("Western"), a public company engaged in the distribution of construction equipment, principally manufactured by Case Corporation, which is a subsidiary of the Company. The Company owns approximately 56.6% of the outstanding common stock of Western. Mr. Rubin is also a director and a minority stockholder of Response USA, Inc., a public company engaged in the sale and distribution of personal emergency response systems; Diplomat Corporation, a public company engaged in the manufacture and distribution of baby products; Help at Home, Inc., a public company which provides home health care personnel; Arzan International (1991) Ltd.; and Kay Kotts Associates, Inc., a public company engaged in providing tax preparation and assistance services. LAWRENCE E. KAPLAN. Mr. Kaplan has served as a director of the Company since February, 1993. Since January, 1987, Mr. Kaplan has been an officer, director and principal stockholder of Gro-Vest Management Consultants, Inc., an investment banking firm located on Long Island, New York. Mr. Kaplan is also a registered representative, officer, director and principal stockholder of G-V Capital, a brokerage firm. He is also a director of Andover Equities, Inc. and PARK Group, both blank check companies which are looking for merger opportunities. He is also an officer and director of Saratoga Standardbreds Inc., a blank check company which is looking for a merger opportunity. C. DEAN MCLAIN. Mr. McLain has served as an Executive Vice President of the Company since March 1, 1993, as a director of the Company since March 7, 1994 and President of Western since June 1, 1993. From 1989 to 1993, Mr. McLain served as Manager of Privatization of Case Corporation. From 1985 to 1989, Mr. McLain served as General Manager of Lake State Equipment, a distributor of John Deere construction equipment. Mr. McLain holds a B.S. degree in Business and Economics, and a Master's of Business Administration, from West Texas State University. ARTOUR BAGANOV. Mr. Baganov has served as a director of the Company since November 1, 1996. He is a co-founder of interGlobe Networks, Inc. and has served as a director of interGlobe since its inception in December 1994. From March 1996 Mr. Baganov has served as Chairman of the Board, President and Chief Executive Officer of interGlobe. Prior to co-founding interGlobe, Mr. Baganov was a network engineer at the University of Washington, specializing in TCP/IP network topology design and engineering in addition to network management. Mr. Baganov holds a Masters Degree in Engineering from Kalinin 42 Polytechnical Institute, Russia, and a BS in Computer Engineering from the University of Washington. In addition, he has been actively involved in the graduate studies in Computer- Communications Networks area at the University of Washington. Mr. Baganov is also on the Board of Directors of the Greater Seattle Chamber of Commerce. DAVID M. BARNES Mr. Barnes has been Chief Financial Officer of the Company since May 15, 1996, and Vice President Finance and director since November 8, 1996. Mr. Barnes has been a director of Consolidated Stainless, Inc., a manufacturer and distributor of stainless steel products, since June 21, 1994. From April 1990 until July 1990, Mr. Barnes also served as an officer and director of Intelcom Data Systems, Inc., which engages in the design and development of software for the foreign currency exchange and banking industries. From October 1987 until May 1989, Mr. Barnes was Vice President of Finance at U.S. Home Care Corp., a home health care provider. From April 1983 until September 1987, Mr. Barnes was Vice President of Finance and Administration of Lifetime Corporation. From 1975 to 1983, Mr. Barnes was Executive Vice President of Beefsteak Charlies, Inc. Mr. Barnes served as a Director of Universal Self Care, Inc., a distributor and retailer of products and services principally for diabetics, from May 1991 to June 1995 and he is a director, President and a minority stockholder of American Complex Care, Incorporated, a public company formerly engaged in providing on-site health care services, including intradermal infusion therapies. In April 1995, American Complex Care, Incorporated's operating subsidiaries made assignments of their assets for the benefit of creditors without resort to bankruptcy proceedings. HOWARD KATZ. Mr. Katz has been Executive Vice President of the Company since April 15, 1996. From December 1995 through April 15, 1996, Mr. Katz was a consultant for, and from January 1994 through December 1995 he held various executive positions, including Chief Financial Officer from December 1994 through December 1995, with National Fiber Network (a fiber optics telecommunications company). From January 1991 through December 1993, Mr. Katz was the President of Katlaw Construction Corp., a company that provides general contractor services to foreign embassies and foreign missions located in the United States. Prior to joining Katlaw Construction Corp., Mr. Katz was employed as a management consultant by Coopers and Lybrand, LLP and as a divisional controller for several large public companies. 43 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the amount of all compensation paid by the Company for services rendered during each of the three fiscal years of the Company ended July 31, 1996, 1995 and 1994 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.
Long-Term Compensation ==================================================================================================================================== Annual Compensation Awards Payouts ------------------------------------------------------------------------------------------- Other All Other Annual Restricted Compen- Name and Principal Compen- Stock Options/ LTIP sation Position Year Salary Bonus sation Awards SARs(#) Payouts - ------------------------------------------------------------------------------------------------------------------------------------ Robert M. Rubin 1996 $300,000 $50,000 $ 0 $ 0 530,000 $ 0 $ 0 Chairman, President, 1995 $168,750 $50,000 $ 0 $ 0 80,000(4) $ 0 $ 0 Director and acting 1994 $125,000 $69,600 $ 0 $ 0 0 $ 0 $ 0 CFO(1) John Shahid 1996 250,000 90,000 $ 0 $ 0 0 $ 0 $815,833 Former President, 1995 $237,411 $75,000 $ 0 $ 0 215,000(4) $ 0 $ 0 Chief Executive 1994 $190,585 $30,000 $ 0 $ 0 0 $ 0 $ 40,525(2) Officer and Director C. Dean McLain(3) 1996 $250,000 $84,868 $ 0 $ 0 150,000 $ 0 $ 0 Executive Vice 1995 $170,709 $75,000 $ 0 $ 0 195,000(4) $ 0 $ 29,250(5) President and 1994 $141,879 $30,000 $ 0 $ 0 0 $ 0 $ 62,470(5) Director; President of Western ====================================================================================================================================
- ---------------- (1) On June 15, 1995, Western entered into a separate employment agreement with Robert Rubin. Mr. Rubin's 1995 salary includes $18,750 paid through Western (See "Employment, Incentive Compensation and Termination Agreements"). (2) Pursuant to the terms of Mr. Shahid's Employment Agreement dated as of January 1, 1994, Mr. Shahid was permitted to and did purchase from the Company 10,000 shares of the Company's common stock at a price of $.01 per share on August 1, 1994. On August 1, 1994, the closing price for a share of the Company's common stock as reported by NASDAQ was $4-1/16. The value of the 10,000 shares of common stock held by Mr. Shahid as of July 31, 1995 was $48,750. Mr. Shahid resigned as President, CEO and a director of the Company effective January 19, 1996 in connection with the sale of the Company's manufacturing business to subsidiaries of Hutchinson Corporation. (3) Mr. McLain joined the Company in March 1993. Effective as of August 1, 1995, Mr. McLain's employment agreement with the Company was terminated and he entered into an amended employment agreement with Western Power & Equipment Corp. (See "Employment, Incentive Compensation and Termination Agreements"). 44 (4) On May 5, 1995 the Board of Directors canceled the named person's outstanding stock options to acquire an equal number of shares and issued new stock options at the then current market price of $3.125. (5) Pursuant to the terms of Mr. McLain's Employment Agreement, dated February 12, 1993, during the Fiscal Year 1993 Mr. Mclain received $38,095 from the Company as reimbursement for certain expenses that he incurred in connection with his move to Washington State, and the sale of his former residence, in order to permit his assuming his employment duties on behalf of the Company. In addition, under the terms of his Employment Agreement on March 1, 1993, July 31, 1994, and August 1, 1995 Mr. McLain was permitted to and did purchase from the Company 8,000, 6,000, and 6,000 shares of the Company's common stock, respectively, at a price of $.01 per share. On March 1, 1993, August 1, 1994, and on August 1, 1995, the closing prices for a share of the Company's common stock as reported by NASDAQ was $5-3/4, $4-1/16 and $4 7/8, respectively. The value of the 20,000 shares of common stock held by Mr. McLain as of July 31, 1995 was $97,500. 45 Stock Option Plans Option Grants in Fiscal Year 1996 The following table identifies individual grants of stock options made during the last completed fiscal year to the executive officers named in the Summary Compensation Table:
Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ---------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) % of Total Options Exercise Options Granted to of Base Granted Employees in Price Expiration Name (#) Fiscal Year ($/Sh) Date 5% ($) 10%($) ---- ----- ----------- -------- ------ ------ ------ Robert Rubin 450,000 40.9% $3.78125 4/25/01 $1,786,640 $1,871,719 John Shahid -0- -0- N/A N/A N/A N/A C. Dean McLain 150,000 13.6% $3.78125 4/25/01 $ 595,547 $ 623,906
46 The following table provides information concerning the exercise of stock options during the last completed fiscal year by each executive officer named in the Summary Compensation Table, and the fiscal year-end value of unexercised options held by each such person.
Aggregated Options Exercised In Last fiscal Year and Fiscal Year-End Option Values - ------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) Number of Unexercised Value of Unexercised In- Value Options at Fiscal Year- the-Money Options at Shares Acquired on Realized End Fiscal Year-End Name Exercise (#) ($) (#) ($) ---- ------------ ----- ---- --- Exercisable/ Exercisable/ Unexercisable Unexercisable Robert Rubin -0- -0- 80,000 (exercisable) $240,000 (exercisable) 450,000 (exercisable) $646,875 (exercisable) John Shahid 226,546 $696,900 -0- -0- C. Dean McLain -0- -0- 195,000 (exercisable) $566,719 (exercisable) 150,000 (exercisable) $337,500 (exercisable) 12,750 (exercisable) $ 14,742 (exercisable)
47 Employment, Incentive Compensation and Termination Agreements In November 1994, Robert M. Rubin entered into a three-year employment and bonus compensation agreement with the Company, retroactive to August 1, 1994. Under the terms of that agreement, Mr. Rubin serves as Chairman of the Board of the Company and its subsidiaries through and including July 31, 1997. Mr. Rubin receives an annual base salary of $150,000 per annum. Such base salary shall be increased by $10,000 for the fiscal year ending July 31, 1996 and by $15,000 for the fiscal year ending July 31, 1997. In addition, Mr. Rubin was entitled to a guaranteed bonus of $50,000 plus an additional annual incentive bonus payment equal to (i) $5,000 for each $.01 increase in net earnings per share above $.55 per share for the fiscal year ending July 31, 1995, (ii) $5,000 for each $.01 increase in net earnings per share above $.60 per share for the fiscal year ending July 31, 1996 and (iii) $5,000 for each $.01 increase in net earnings per share above $.65 per share for the fiscal year ending July 31, 1997. Upon completion of Western's initial public offering, Mr. Rubin's employment agreement with the Company was amended to (i) eliminate his guaranteed annual bonus, and (ii) limit his annual incentive bonus to $50,000 per annum for each of fiscal years ended July 31, 1996 and 1997, and made it payable only in the event that the consolidated net income of the Company, excluding the net income of Western, shall exceed $1,500,000 in each of such fiscal years. Following the amendment of his employment agreement with the Company, Western entered into a separate employment agreement with Mr. Rubin, effective June 14, 1995 and expiring July 31, 1998. Pursuant to such agreement, Mr. Rubin serves as Chairman of the Board of Western and shall receive an annual base salary of $150,000, payable at the rate of $12,500 per month from the effective date of such agreement. In addition to his base annual salary, Mr. Rubin shall be entitled to receive an annual bonus equal to $50,000 per annum, payable only in the event that the "consolidated pre-tax income" of Western (as defined) shall be in excess of $3,000,000 for the fiscal year ending July 31, 1996, $3,500,000 for the fiscal year ending July 31, 1997, and $4,000,000 for the fiscal year ending July 31, 1998, respectively. Under the terms of his employment agreement with Western, Mr. Rubin is only obligated to devote a portion of his business and professional time to Western (estimated at approximately 20%). The term "consolidated pre-tax income" is defined as consolidated net income of the Company and any subsidiaries of Western subsequently created or acquired, before income taxes and gains or losses from disposition or purchases of assets or other extraordinary items. The Company has entered into an amended and restated employment agreement with Mr. Rubin, dated as of June 3, 1996, to extend the term of Mr. Rubin's employment through July 31, 2001 (the "Restated Agreement"). The Restated Agreement provides for a base salary payable to Mr. Rubin of $175,000 for the fiscal year ending July 31, 1997, $200,000 for the fiscal year ending July 31, 1998, $225,000 for the fiscal year ending July 31, 1999, and a base salary for the fiscal years ending July 31, 2000 and July 31, 2001 as determined by the Compensation Committee of the Company's Board of Directors and ratified by a majority of the entire Board of Directors of the Company (other than the employee). The base salary in each 48 of the fiscal years ending July 31, 2000 and 2001 will not be less than the annual base salary in effect in the immediately preceding fiscal year, plus an amount equal to the increase in the annual cost of living as published by the Bureau of Labor Statistics of the United States Department of Labor for wage earners in the New York metropolitan area measured over the course of the immediately preceding fiscal year. The Restated Agreement also provides for incentive bonuses to be paid to Mr. Rubin of (i) $75,000 on November 1, 1997, if the net income of the Company, including all of its consolidated subsidiaries other than Western Power & Equipment Corp., as determined by the Company's independent auditors using generally accepted accounting principles, consistently applied (the "Corporations' Net Income"), is greater than or equal to $2,000,000 for the fiscal year ended July 31, 1997; (ii) $100,000 on November 1, 1998 if the Corporations' Net Income is greater than or equal to $2,500,000 for the fiscal year ended July 31, 1998; and (iii) $125,000 on November 1, 1999 if the Corporations' Net Income is greater than or equal to $3,000,000 for the fiscal year ended July 31, 1999. Incentive compensation for each of the fiscal years ending July 31, 2000 and July 31, 2001 shall be as determined by the Compensation Committee of the Company's Board of Directors and ratified by a majority of the entire Board of Directors of the Company (other than the employee). John Shahid served as President and Chief Executive Officer of the Company, AUG California, Inc. and each of its American United Products, Inc. and American United Seal, Inc. operating subsidiaries, pursuant to the terms of an Employment Agreement, dated as of January 1, 1994, which was to terminate on December 31, 1998. Under that Employment Agreement, Mr. Shahid received a base salary starting at $190,000 per year, which was to escalate to as high as $265,000 per year during the last year of such agreement. His Employment Agreement provided for payment of bonuses and for such other fringe benefits as are paid to other executive officers of the Company. Such fringe benefits took the form of medical coverage, excess life insurance benefits and an automobile allowance. Mr. Shahid's Employment Agreement also provided for (i) bonus payments based on the Company achieving prescribed levels of pre-tax profits (commencing at a maximum of $30,000 bonus for the fiscal year 1994 and rising to a maximum of $110,000 bonus for fiscal year 1998); (ii) the granting of options to acquire 12,500 shares of Company's Common Stock at fair market value on the date of grant under the Company's 1991 Stock Option Plan, with respect to each fiscal year of the Employment Agreement in which the maximum Bonus is paid, and (iii) the sale to Mr. Shahid of shares of Company Common Stock (ranging in amounts from 10,000 shares to 15,000 shares) at $.01 per share, with respect to each year in which the Company achieved prescribed levels of pre-tax profits. On January 19, 1996, as a result of the Hutchinson Transaction, Mr. Shahid and the Company entered into a Termination Agreement whereby Mr. Shahid resigned as an officer and director of the Company and each of its subsidiaries in consideration for the payment of an aggregate of $815,833, representing salary payments under his Employment Agreement though December 31, 1998, as well as a bonus payment for fiscal year 1996 in the amount of $90,000. The Termination Agreement also provides that the Company shall retain Mr. Shahid as a consultant for a period of three years, commencing April 1, 1996, for which consulting services he will be paid an aggregate of $200,000 in equal quarterly installments. 49 Prior to the Western 1995 initial public offering, C. Dean McLain served as President and Chief Executive Office of Western and Executive Vice President of the Company pursuant to the terms of an employment agreement with the Company effective March 1, 1993, which was to terminate on July 31, 1998. Pursuant to his employment agreement, in fiscal year 1995 Mr. McLain received a base salary of $148,837 and the maximum $75,000 bonus provided for in such fiscal year. Such agreement entitled Mr. McLain to scheduled increases in his base salary up to $172,300 per year during the fiscal year ending July 31, 1998. The terms of such employment agreement also provided for the issuance to Mr. McLain of an aggregate of 20,000 shares of the Company's Common Stock at $.01 per share. In addition, Mr. McLain received options to acquire an aggregate of 45,000 shares of the Company's Common Stock at fair market value ($4.75 per share) on the date of grant under the Company's 1991 Stock Option Plan, and additional options under the Company's 1991 Stock Option Plan to purchase 150,000 shares of Company Common Stock at fair market value ($5.50 per share) on the date of grant. These options have since been repriced to $3.125 per share. Effective as of August 1, 1995, Mr. McLain's employment agreement with the Company was terminated and he entered into an amended employment agreement with Western, expiring July 31, 2005. Pursuant to such agreement, Mr. McLain serves as President and Chief Executive Officer of Western and will receive an annual base salary, payable monthly, of $250,000 through the end of fiscal 1996, $265,000 per annum in fiscal 1997, $280,000 per annum in fiscal 1998, $290,000 per annum in fiscal 1999, and $300,000 per annum in fiscal 2000. For each of the fiscal years ending 2001, 2002, 2003, 2004 and 2005, inclusive, Mr. McLain's base salary shall be determined by the Compensation Committee of Western and ratified by the full Board of Directors of Western. In each of the five fiscal years from 2001 through 2005, such base salary shall not be less than the annual base salary in effect in the immediately preceding fiscal year plus a cost of living adjustment. In addition, Mr. McLain will be entitled to receive bonus payments in each of the five fiscal years ending 1996 through 2000, inclusive, equal to 5% of such fiscal year consolidated pre-tax income of Western in excess of $1,750,000 in each such fiscal year (the "Incentive Bonus"); provided, that the maximum amount of the Incentive Bonus payable by Western to Mr. McLain shall not exceed $150,000 in any such fiscal year, without regard to the amount by which the Company's consolidated pre-tax income shall exceed $1,750,000 in each of such fiscal years. For each of the fiscal years ending 2001 through 2005, Mr. McLain's incentive bonus shall be determined by the Compensation Committee of Western's Board of Directors and ratified by Western's full Board of Directors. The maximum annual incentive bonus which Mr. McLain shall be entitled to receive under his Employment Agreement shall not be less than $150,000. As used in Mr. McLain's Employment Agreement, the term "consolidated pre-tax income" is defined as consolidated net income of Western and any subsidiaries of Western subsequently created or acquired, before the Incentive Bonus, income taxes and gains or losses from disposition or purchases of assets or other extraordinary items. Under the terms of his amended employment agreement, the 150,000 stock options, exercisable at $6.50 per share, awarded to Mr. McLain under Western's 1995 Stock Option Plan in March 1995, were canceled and on August 1, 1995 Mr. McLain was granted options to 50 purchase 300,000 shares of Western common stock at $6.00 per share, the closing sale price of the Company's common stock on August 1, 1995. As the number of shares underlying Western's 1995 Stock Option Plan was at that time insufficient for the full granting of such options, the options to purchase 300,000 shares were granted on August 19, 1995 subject to stockholder approval of the amendment of the 1995 Stock Option Plan (the "Plan"), which was approved by the stockholders of Western on December 6, 1995. Such amendment to the Plan added 550,000 shares of Common Stock to be available for option grants under the Plan. The granting of all stock to Mr. McLain pursuant to his amended employment agreement was ratified at Western's 1995 Annual Meeting. The Western options granted to Mr. McLain were repriced to $4.50 per share in December 1995. In the event that Western does not meet the accumulated consolidated pre-tax income levels described above, Mr. McLain shall still be entitled to options to purchase the 125,000 Western shares should the accumulated consolidated pre-tax income of Western for the five fiscal years ending 1996 through 2000 equal or exceed $16,000,000. In the event such additional incentive stock options become available to him, Mr. McLain may exercise such options beginning August 1, 1996 and ending July 31, 2005 at $4.50 per share. Mr. McLain's employment agreement also provides for fringe benefits as are customary for senior executive officers in the industry in which the Company operates, including medical coverage, excess life insurance benefits and use of an automobile supplied by the Company. The Company hired Howard Katz as Executive Vice President effective April 15, 1996. Mr. Katz currently receives a base salary of $130,000 per annum, payable monthly, until July 31, 1997, at which point the Company's Board of Directors will review Mr. Katz's compensation arrangements. Mr. Katz does not have an employment agreement with the Company. The Company hired David M. Barnes as its Chief Financial Officer effective May 15, 1996. Mr. Barnes receives a base salary of $125,000 per annum, payable bi-monthly. Mr. Barnes does not have an employment agreement with the Company. The Company entered into an employment agreement with Robert Marcus ("Marcus"), dated as of May 15, 1996, pursuant to which Marcus was hired for the period expiring July 31, 1999 to be the President and Chief Executive Officer of ConnectSoft. See "Recent Developments." As compensation for his services, Marcus will receive a base salary of $125,000 per annum, and normal fringe benefits available to other employees. The Company also entered into a stock option agreement with Marcus pursuant to which he was granted a five-year option to acquire up to 100,000 shares of Company Common Stock at an exercise price of $5.25 per share, the fair market value of a share of Common Stock on the date of option grant. Under the terms of the Marcus option, the option vests 25% in July 1996, and 25% in each successive July through July 1999. In connection with the Interglobe Merger, the Company and Interglobe entered into an employment agreement with Artour Baganov, a director of the Company and President of 51 Interglobe, expiring July 31, 2000. Under the terms of such agreement, Mr. Baganov receives an annual base salary of $150,000, annual cost of living increases (not to exceed 5% in any one year) and an annual bonus equal to 4.5% of the amount of any, by which the Pre-Tax Income (as defined) of Interglobe exceeds $250,000, $1,000,000, $2,000,000 and $4,500,000 in each of fiscal years ending 1997 through 2000, respectively. In addition, the 698,182 Company stock options issued to Mr. Baganov become exercisable at [$5.50] per share immediately upon the occurrence of certain events, and otherwise on a cumulative basis at the rate of 25% in each of fiscal year 1997 through 2000, provided that Interglobe meets or exceeds the Pre-Tax Income thresholds described above. By agreement dated August 10, 1995, the Company agreed to pay severance to certain specified employees, including John Palumbo (its former Chief Financial Officer), in the event that such persons' employment by the successor to the Company's manufacturing business was terminated prior to the first anniversary of the closing date of the sale of the manufacturing business. Such severance payment shall be equal to any terminated employee's salary, at the level last paid by the Company for the 12 months succeeding the closing date, minus any severance received from the successor company. Mr. Palumbo has informed the Company that his employment by such successor, Hutchinson, was terminated effective March 15, 1996, and that his severance compensation from Hutchinson would terminate on April 19, 1996. As a result, Mr. Palumbo is entitled to receive approximately $66,000 in severance compensation, plus the availability of certain benefits from the Company, through January 19, 1997 under the Company's severance program. To date, Mr. Palumbo is the only person taking advantage of the Company's severance program. In December 1995, the Company amended each of its then outstanding employee stock option plans in anticipation of the consummation of the Hutchinson transaction. Under the old terms of the plans, all options granted to employees would have terminated within ninety days of such employees' termination of employment with the Company or any of its subsidiaries. As a majority of the Company's employees, other than those of Western, were to be terminated upon the consummation of the Hutchinson transaction, the Company felt that it was in its best interests to amend the Plans in order to extend the expiration dates of these options and to allow for such options to immediately vest in full upon the consummation of the Hutchinson transaction. All of the options granted under the Plans became exercisable until January 19, 1998. At such time, the options held by individuals no longer employed by the Company or its subsidiaries shall immediately terminate. Options which continue to be held by Company employees shall revert back to their old vesting terms and original expiration dates. One effect of these amendments is to change the federal income tax treatment of incentive options held by non-employees of the Company. Upon exercise, these options shall be treated as non-qualified stock options for federal income tax purposes. As a result of such option exercise period extension, the Company incurred additional compensation expense for the fiscal year ended July 31, 1995 in the amount of $332,293. Such amount is equal to the product of the number of options whose exercise periods were extended and the aggregate difference between the exercise price of each extended option and the market price for a share of Company Common Stock on 52 January 19, 1996 (the closing date of the Hutchinson Transaction, the day that the option extension became effective). Compensation Committee Interlocks and Insider Participation During the fiscal year ended July 31, 1996, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") did not meet. During this time the Company's Board of Directors decided all compensation matters relating to the Company's executive officers. Mr. Rubin's annual compensation identified in the Summary Compensation Table was provided for under his employment agreements entered into in July 1991 and August 1994, and his amended and restated employment agreement dated as of June 3, 1996, which were approved by the Company's Board of Directors. In June 1995, following completion of Western's initial public offering, Mr. Rubin's 1994 employment agreement with the Company was amended to (i) eliminate his guaranteed annual bonus, and (ii) limit his annual incentive bonus to $50,000 per annum for each of fiscal years ended July 31, 1996 and 1997, and payable only in the event that the consolidated net income of the Company, excluding the net income of Western, shall exceed $1,500,000 in each of such fiscal years. For information concerning Mr. Rubin's June 1996 amended and restated employment agreement, see "Employment, Incentive Compensation and Termination Agreements", above. Mr. Rubin also entered into a separate employment agreement with Western. Mr. Shahid's annual compensation was provided for under his employment contracts which were entered into in January, 1991 and as of January 1, 1994, and which were approved by votes of the Company's Board of Directors. See, "Employment, Incentive Compensation and Termination Agreements," above. Mr. McLain's annual compensation was provided for under his employment agreement dated February 12, 1993, which was approved by vote of the Company's Board of Directors. Effective as of August 1, 1995, Mr. McLain's employment agreement with the Company was terminated and he entered into an amended employment agreement with Western. See "Employment, Incentive Compensation and Termination Agreements", above. During the last fiscal year, other than Messrs. Rubin, Shahid and McLain, who were then officers of the Company and members of the Board of Directors, no officers or employees of the Company or any subsidiary participated in the Board's compensation decisions. Of the Compensation Committee members, only Mr. Rubin was at any time an officer or employee of the Company or any of its subsidiaries. While Mr. Rubin serves on the Compensation Committees of the Boards of Directors of other publicly held corporations, no executive officers or directors of such companies serve on the Company's Compensation Committee. The Company's Audit, Compensation and Stock Option Committees are comprised of Messrs. Rubin and Kaplan. No director of the Company receives any directors fees for attendance at Board meetings, although they do receive reimbursement for actual expenses of such attendance. 53 In October 1991, Mr. Rubin agreed to waive rights inherent in his ownership of the Company's Series A Preferred Stock to designate a majority of the members of the Company's Board of Directors and to use his best efforts to cause the Company to amend its Certificate of Incorporation so as to eliminate all rights of Mr. Rubin or any other holder of the Series A Preferred Stock to designate a majority of the members of the Board of Directors. In partial consideration for his agreement to waive and modify such rights and privileges, the Company issued to Mr. Rubin for $200,000 ($2.63 per share) an aggregate of 76,000 additional shares of Company Common Stock. Mr. Rubin paid for such shares by delivering to the Company his full recourse 10% promissory note, which note is secured by collateral other than the shares acquired (certain marketable securities in corporations other than the Company) which has a fair market value in excess of $200,000. This note was payable over five years, commencing March 31, 1992, together with accrued interest, in twenty equal quarterly principal installments of $10,000 each. In March 1993, the Company agreed to amend Mr. Rubin's note to be payable in a single payment 36 months from the date of issuance at 8% interest per annum. In connection with such amendment, Mr. Rubin agreed to apply no less than 50% of any bonus received by him against the outstanding principal of the installment note. On November 7, 1996, the Board of Directors of the Company agreed to extend the maturity date of such note to March 31, 1999. On January 26, 1994, the Company entered into a month-to-month public relations consulting agreement with Gro-Vest Management Consultants, Inc. ("Gro-Vest Consultants"), a company one of whose principal stockholders, directors and officers is Lawrence Kaplan. Commencing on March 1, 1994, the Company became obligated to pay $3,000 per month to Gro-Vest Consultants for its services under such agreement, subject to termination of the agreement on 30 days' notice provided by either party thereto. An aggregate of $43,000 was paid to Gro-Vest Consultants in the 1996 fiscal year. At the closing of the Hutchinson Transaction, the Company, Robert Rubin and Hutchinson (as guarantor) entered into a five-year Non-Competition Agreement in favor of Hutchinson and its affiliates, pursuant to which Mr. Rubin and the Company agreed not to compete with the businesses acquired in the Hutchinson transaction. Under the terms of the Non-Competition Agreement, Mr. Rubin will receive payments aggregating $200,000 over a seven year period. In addition, at the Closing Hutchinson engaged Mr. Rubin as a consultant to provide advisory services relating to the acquired manufacturing business over a seven year period, for which services Mr. Rubin will receive payments aggregating $1,000,000. On February 9, 1996, the Company loaned an aggregate of $450,000 to Diplomat Corporation ("Diplomat") in connection with Diplomat's acquisition of BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a director. Before the BioBottoms transaction, Mr. Rubin held approximately 22% of Diplomat's outstanding capital stock. Such loan (i) bears interest at the prime rate of CoreStates Bank, N.A. plus 2% and is payable monthly, (ii) is subordinated to a $2,000,0000 revolving credit loan agreement between Diplomat and Congress Financial Corporation, (iii) is payable in full on or before May 4, 1996 and (iv) is secured by a second priority lien in all of the assets of Diplomat and its wholly-owned 54 subsidiary, BioBottoms, Inc. The loan was repaid in full in May 1996. In addition to repayment of principal and its receipt of accrued interest, the Company received a facilities fee of $50,000. Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between the Company and ERD Waste Corp.("ERD"), the Company agreed to provide certain financial accommodations to ERD by making available a $4.4 million standby letter of credit expiring May 31, 1997 issued by Citibank, N.A. in favor of Chemical Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the principal lender to ERD and its subsidiaries, and upon issuance of the Letter of Credit Chemical Bank made available $4.4 million of additional funding to ERD under ERD's existing lending facility. The funding was used to refinance certain outstanding indebtedness of Environmental Services of America, Inc. ("ENSA"), a wholly-owned subsidiary of ERD. Robert M. Rubin, the Chairman and Chief Executive Officer and a principal stockholder of the Company is also the Chairman, Chief Executive Officer, a director and a principal stockholder of ERD, owning approximately 25.1% of the outstanding ERD Common Stock. In consideration for making the Letter of Credit available, in addition to repayment by ERD of all amounts drawn under the Letter of Credit and the grant of a security interest in certain machinery and equipment of ENSA to secure such repayment, ERD agreed (i) to pay to the Company all of the Company's fees, costs and expenses payable to Citibank and others in connection with making the Letter of Credit available, as well as the amount of all interest paid by the Company on drawings under the Letter of Credit prior to their repayment by ERD and (ii) to issue to the Company an aggregate of 25,000 shares of ERD common stock for each consecutive period of 90 days or any portion thereof, commencing August 1, 1996 that the Letter of Credit remains outstanding. ERD Common Stock trades on the NASDAQ National Market and, at the time of closing of the transaction with ERD, its the closing price of ERD Common Stock, as traded on Nasdaq was $9.25 per share. In August 1996, a subsidiary of ERD which operates a waste facility in Nassau County, New York was cited by the New York State Department of Environmental Conservation ("DEC") for violating certain DEC regulations. Such waste facility currently accounts for approximately 13% of ERD's consolidated revenues. As a result of the uncertainties surrounding ERD's waste facility operations, the per share price of ERD Common Stock closed at $2.875 per share on November 8, 1996. Although the Company has been advised by ERD that it and the DEC have reached agreement in principle to settle on acceptable terms such violations and pending charges alleged against ERD and one of the employees of the ERD subsidiary, to date, no such settlement has been finalized. If an acceptable settlement is not reached, the business of ERD could be materially and adversely affected. On November 8, 1996, the Company and ERD amended and restated their agreements to provide that if and to the extent that the Letter of Credit provided by the Company is called for payment, ERD will issue to the Company its convertible note bearing interest at 12% per annum, payable monthly, and payable as to principal on the earliest to occur of: (i) May 30, 1999, (ii) ERD's receipt of the initial proceeds from any public or private placement of debt or equity securities 55 of ERD, or (iii) completion of any bank refinancing by ERD, to the extent of all proceeds available after payment of other secured indebtedness. In addition, the ERD notes, if issued, will be convertible, at any time at the option of the Company, into ERD Common Stock at a conversion price equal to $4.40 per share, or a maximum of 1,000,000 ERD shares if the entire $4.4 million note is issued and converted into ERD Common Stock. In addition to the collateral provided under the May 30, 1996 agreement, ERD also provided the Company with a junior mortgage on the waste facility owned by ERD's subsidiary, subordinated to existing indebtedness encumbering such facility. Under the terms of an indemnity agreement, dated May 30, 1996, Robert M. Rubin agreed to indemnify the Company for all losses, if any, incurred by the Company as a result of issuance of the Letter of Credit for the benefit of ERD. In consideration of his negotiating the modification of the ERD agreement, on November 8, 1996, the Company's Board of Directors (Mr. Rubin abstaining) agreed to amend the indemnity agreement with Mr. Rubin to limit his contingent liability thereunder to the extent of 23% (Mr. Rubin's approximate percentage beneficial ownership in the outstanding Company Common Stock as of May 30, 1996) of all losses that the Company may incur in connection with its having provided the Letter of Credit financial accommodation on behalf of ERD. Mr. Rubin's reimbursement obligations are also subject to pro rata reduction to the extent of any repayments made directly by ERD or from proceeds received by AUGI from the sale of ERD capital stock described above. As of October 31, 1996, the directors and executive officers listed below hold outstanding non-qualified options to acquire shares of Company Common Stock granted under the Company's 1996 Stock Option Plan, adopted on April 25, 1996 and amended as of July 30, 1996, as follows: options were granted on April 25, 1996 to Robert M. Rubin (450,000 options), C. Dean McLain (150,000 options) and Howard Katz (150,000 options) at an exercise price of $3.78125 per share; options were granted on May 15, 1996 to David M. Barnes (100,000 options) at an exercise price of $5.25 per share; and options were granted to Robert M. Rubin (30,000 options), Howard Katz (100,000 options) and David M. Barnes (50,000 options) at an exercise price of $5.125 on October 4, 1996. The exercise prices of all such options equals the average of the closing bid and asked prices for a share of Company Common Stock as reported on The Nasdaq National Market on the date of option grant. On July 30, 1996, the Board of Directors of the Company amended the terms of the 1996 Stock Option Plan to make all options granted under the 1996 Stock Option Plan exercisable without shareholder approval. On the date the 1996 Stock Option Plan was amended, the market price of the Company's Common Stock was $6.0125 per share, as a result of which the Company incurred a compensation charge equal to $1,670,667, representing the aggregate value of such unexercised in-the-money options issued under such option plan (including unexercisable options) to the named persons. All options granted to each of Messrs. Rubin and McLain in April 1996, and 100,000 options granted to Mr. Katz at $5.125 per share in October 1996, are immediately exercisable. The options granted to Mr. Barnes in May 1996 and the remaining 150,000 options granted to 56 Mr. Katz vest immediately as to 33-1/3% and as to 33-1/3% at the end of each of various fiscal periods ending 1997 and 1998, subject to their continued employment with the Company. The options to acquire 30,000 shares granted to Mr. Rubin and 50,000 shares granted to Mr. Barnes in October 1996 vest 50% on the first anniversary of the option grant and 50% on the second anniversary of the option grant. In June 1996, the Company agreed to loan to Mr. Rubin up to $1,200,000, at an interest rate equal to one percent above the fluctuating Prime Rate offered by Citibank, N.A. All borrowings under the loan are repayable on a demand basis, when and if requested by the Company, but in no event later than January 31, 1998. Mr. Rubin's indebtedness will be secured by his pledge of 150,000 shares of Company Common Stock and his collateral assignment of all payments to him under the terms of his seven-year Consulting Agreement and Non-Competition Agreement with Hutchinson, which currently aggregate $1,200,000. Board Compensation Committee Report on Executive Compensation The Board of Directors of the Company has decided that the best way to attract and retain highly capable employees on a basis that will encourage them to perform at increasing levels of effectiveness and to use their best efforts to promote the growth and profitability of the Company and its subsidiaries, is to enter into employment agreements with its senior executive officers. During the fiscal year ended July 31, 1995, Messrs. Rubin, Shahid and McLain were all under contract with the Company. This had enabled the Board to concentrate on the negotiation of particular employment contracts rather than on the formulation of more general compensation policies for all management and other personnel. Upon the effective date of the initial public offering of Western, Mr. McLain's Employment Agreement was terminated. Mr. Shahid's Employment Agreement was terminated upon consummation of the Hutchinson Transaction. See, "Employment, Incentive Compensation and Termination Agreements" above. The Company believes that its compensation levels as to all of its employees were comparable to industry standards. As of January 19, 1996, Mr. Rubin was the Company's only senior executive officer of the Company employed under a contract approved by the full Board of Directors. See "Employment, Incentive Compensation and Termination Agreements," above. In setting levels of compensation under such employment contracts and in approving management's compensation of all other Company employees, the Board of Directors evaluates the Company's overall profitability, the contribution of particular individuals to Company performance and industry compensation standards. A significant percentage of the compensation paid to each of Messrs. Shahid, McLain and Rubin in the past under their respective employment agreements and payable to Mr. Baganov under his agreement was and is tied to the Company's achievement of prescribed levels of pre-tax income of the Company as a whole or of the subsidiary for which such executive is responsible. See, "Employment, Incentive Compensation and Termination Agreements," above. The members of the Company's Board of Directors are Messrs. Robert M. Rubin, C. Dean McLain, Lawrence E. Kaplan, Howard Katz, Artour Baganov and David M. Barnes. 57 ROBERT M. RUBIN LAWRENCE E. KAPLAN C. DEAN MCLAIN HOWARD KATZ ARTOUR BAGANOV DAVID M. BARNES Compliance with Section 16(a) of the Exchange Act. To the knowledge of the Company, no officers, directors, beneficial owners of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any other person subject to Section 16 of the Exchange Act with respect to the Company, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year, which ended July 31, 1996, other than Howard Katz who failed timely to file a Form 3 and Form 4 for activities occurring in the month of April 1996. 58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of October 31, 1996 with respect to the beneficial ownership of the Common Stock of the Company by each beneficial owner of more than 5% of the total number of outstanding shares of the Common Stock of the Company, each director and nominee for director and all executive officers and directors of the Company as a group. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares.
Robert M. Rubin Director, President, Chief 1,775,798(1)(2) 20.3% 6060 King's Gate Circle Executive Officer Del Ray Beach, FL 33484 Lawrence E. Kaplan Director 14,283 --* 330 Vanderbilt Motor Pkwy Hauppauge, NY 11788 C. Dean McLain Director, Executive Vice- 269,750(2)(3) 3.2% 4601 N.E. 77th Avenue President and President of Suite 200 Western Power Vancouver, WA 98662 Artour Baganov Director and President 1520 Fourth Avenue, of InterGlobe 698,182(4) 8.5% Suite 200 Seattle, Washington 98101 Associated Capital L.P.(5) 570,000 6.9% 477 Madison Avenue 14th Floor New York, NY 10022 David M. Barnes Vice President of Finance 33,333(6) --* 11130 NE 33rd Place and Director Bellevue, WA 98004 Howard Katz Executive Vice President 150,000(6) 1.8% 300 East 56th Street and Director New York, NY 10022 All directors and executive officers as a group (6 persons) 2,941,346(1)(2)(3)(4)(6) 31.7%
59 - ---------- * Less than one percent (1%) (1) Includes non-qualified options to purchase 80,000 shares granted to Mr. Rubin at an exercise price of $3.125 per share under the Company's 1991 Stock Option Plan which are fully exercisable. (2) Includes non-qualified options granted under the 1996 Stock Option Plan (options to acquire 450,000 shares to Mr. Rubin; options to acquire 150,000 shares to Mr. McLain). Such options were granted on April 25, 1996 at an exercise price of $3.78125 per share, the fair market value of the Common Stock on the date of option grant. The 1996 Stock Option Plan was amended in July 1996 to make options granted under the plan exercisable without stockholder approval. Messrs. Rubin and McLain's continuing employment by the Company is governed by the terms of their employment agreements. Does not include 30,000 options granted to Mr. Rubin on October 4, 1996 under the 1996 Stock Option Plan, which options are not yet exercisable. (3) Includes (i) options to purchase 95,000 shares of the Company's Common Stock at $3.125 per share granted under the Company's 1991 Stock Option Plan, (ii) options to purchase 12,750 shares of the Company's Common Stock at $4.875 per share under the 1991 Stock Option Plan, and (iii) options to purchase 150,000 shares of the Company's Common Stock at $3.78125 per share granted under the 1996 Stock Option Plan. (4) Does not include Interglobe Options to purchase a maximum of 698,182 shares of Company Common Stock at $5.50 per share which are exercisable only under certain conditions specified in connection with the Interglobe merger. (5) The General partner of Associated Capital, L.P., a Delaware limited partnership ("Associated"), is A Cap, Inc., a New York corporation ("A Cap"). Under Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended, A Cap may be deemed to be a direct beneficial owner of the shares of Company Common Stock owned by Associated by virtue of its interest in, and control over, Associated. Jay H. Zises, as President of A Cap, has the sole power to vote and to direct the voting of, and to dispose and to direct the disposition of, the shares of the Company's Common Stock deemed to be beneficially owned by A Cap. Under Rule 13d-3, Mr. Zises may be deemed to be an indirect beneficial owner of the Company Common Stock owned by Associated. (6) Includes options to purchase 100,000 shares granted to Mr. Katz at an exercise price of $5.125 per share and options to purchase 50,000 shares granted to Mr. Katz at an exercise price of $3.78125 under the 1996 Plan which are immediately exercisable. Does not include options granted under the 1996 Stock Option Plan to Messrs. Barnes (66,667 shares at an exercise price of $3.78125 per share and 50,000 at an exercise price of $5.125 per share) and Katz (100,000 shares) at exercise price of $3.78125, respectively, 60 which are not yet exercisable. The options issuable to each of Messrs. Barnes and Katz which are not yet exercisable are only exercisable under certain conditions related to their continued employment with the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Item 11, Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Employment, Incentive and Termination Agreement", and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations," above. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of July 31, 1995 and 1994..................................... F-3 Consolidated Statements of Operations for the years ended July 31, 1995, 1994, and 1993.............. F-4 Consolidated Statements of Stockholders' Equity for the years ended July 31, 1995, 1994 and 1993.................................................. F-5 Consolidated Statements of Cash Flows for the years ended July 31, 1995, 1994 and 1993............... F-7 Notes to Consolidated Financial Statements.................. F-9 2. Schedule II -- Valuation and Qualifying Accounts ............... S-1 (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on July 24, 1996, with respect to the acquisition of ConnectSoft. (c) Exhibits. Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation of Registrant. (8) 61 3.2 By-laws of Registrant. (9) 4.1 Specimen Certificate of Common Stock. (10) 4.2 1991 Employee Stock Option Plan. (8) 4.3 1996 Stock Option Plan, as amended 10.1 Agreement of Purchase and Sale, dated December 4, 1992, by and between Case and Western Power (Schedules omitted) (1) 10.2 Employment Agreement, by and between Western Power and C. Dean McLain. (14) 10.3 Financing Agreement with Associates Commercial Corporation and Western Power. (3) 10.4 Asset Purchase Agreement, dated as of September 22, 1994, by and between Case and Western Power (schedules omitted). (4) 10.5 Management Agreement between Western Power and American United Global, Inc. (6) 10.6 Revised Financing Agreement with Seattle-First National Bank and Western Power. (14) 10.7 Auburn Facility Real Estate Purchase and Sale Agreement, dated October 19, 1995, by and between Western Power and Ford Kiene. (14) 10.8 Western Power Lease Agreement--Sacramento, California. (7) 10.9 Sacramento Acquisition Agreement with Western Power a. Asset Purchase Agreement (7) b. Used Equipment Note (7) c. Parts Note (7) d. Accounts Receivable Note (7) e. Goodwill Note (7) f. Real Estate Note from MRR to Case (7) g. Deed to Secure Debt of MRR to Case (7) h. Security Agreement (7) i. C. Dean McLain's Personal Guaranty (7) 10.10 GCS Acquisition Agreement with Western Power (14) 62 Exhibit Number Description ------ ----------- 10.11 Amended and Restated Employment Agreement with Robert M. Rubin (11) 10.12 Asset Purchase Agreement, dated as of November 22, 1995, by and among Hutchinson Corporation, American United Global, Inc. ("AUGI"), AUG California, Inc. ("AUG-Ca"), American United Products, Inc. ("AUP"), and American United Seal, Inc. ("AUS") (Schedules and Exhibits omitted). (12) 10.13 Non-Competition Agreement, dated January 19, 1996, among Hutchinson Seal Corporation, AUGI, AUG-Ca, AUP and AUS. (12) 10.14 Non-Competition Agreement, dated January 19, 1996, between Hutchinson Seal Corporation and Robert M. Rubin. (12) 10.15 Agreement of Hutchinson Corporation to guaranty payments under Non- Competition and Consulting Agreements. (12) 10.16 Consulting Agreement, dated January 19, 1996, between Hutchinson Seal Corporation and Robert M. Rubin (12) 10.17 $2,625,000 Purchase Note from N O-Ring Corporation to AUGI. (12) 10.18 $1,050,000 Purchase Note from Stillman Seal Corporation to AUGI. (12) 10.19 Guaranty of Hutchinson Corporation of the Purchase Notes, aggregating $3,675,000 of N O-Ring Corporation and Stillman Seal Corporation. (12) 10.20 January 19, 1996, amendment to certain provisions of Asset Purchase Agreement. (12) 10.21 Agreement and Plan of Merger, dated June 28, 1996, by and among AUGI, ConnectSoft, Inc., and certain shareholders of ConnectSoft, Inc. (without exhibits) (13) 10.22 Agreement and Plan of Merger, dated August 22, 1996, by and among AUGI, Interglobe Networks, Inc. and certain shareholders of Interglobe Networks, Inc. (without exhibits) 63 Exhibit Number Description ------ ----------- 10.23 Asset Purchase Agreement, dated October 17, 1996 by and among AUGI, Seattle Online, Inc. and certain shareholders of Seattle Online, Inc., including amendments (without exhibits). 21. Subsidiaries of the Company. 23. Consent of Price Waterhouse LLP. 27. Financial Data Schedule. - ---------- (1) Filed as an Exhibit to the Current Report on Form 8-K of American United Global, Inc. ("AUGI"), as filed on December 19, 1992 and incorporated herein by reference thereto. (2) Filed as an Exhibit to the AUGI Annual Report on Form 10-K, as filed on October 29, 1993 and incorporated herein by reference thereto. (3) Filed as an Exhibit to Amendment No.1 to AUGI's Registration Statement on Form S-1, filed on February 1, 1994 and incorporated herein by reference thereto. (Registration No. 33-72556) (4) Filed as an Exhibit to the Current Report on Form 8-K of AUGI, as filed on September 23, 1994 and incorporated herein by reference thereto. (5) Filed as an Exhibit to Amendment No. 1 to the Western Power & Equipment Corp. ("Western Power") Registration Statement on Form S-1, filed on May 16, 1995 and incorporated herein by reference thereto. (Registration No. 33-89762). (6) Filed as an Exhibit to the Western Power Registration Statement on Form S-1, filed on February 24, 1995 (Registration No. 33-89762). (7) Filed as an Exhibit to the Current Report on Form 8-K of Western Power as filed on March 6, 1996 and incorporated herein by reference thereto. (8) Included with the filing of AUGI's Registration Statement on Form S-1 on October 18, 1991, as amended by Amendment No. 1, dated December 18, 1991, Amendment No. 2, dated January 9, 1990, Amendment No. 3, dated January 24, 1992 and Amendment No. 4, dated January 28, 1992. (9) Filed as an Exhibit to the definitive Proxy Materials of Atrom Corp., a New York corporation, as filed on December 10, 1991. (10) Filed as on Exhibit to AUGI's Registration Statement on Form S-18 (Registration No. 330330 81-NY)_ and incorporated herein by reference thereto. 64 (11) Filed as on Exhibit to AUGI's Preliminary Proxy Materials filed 1996 Annual Meeting on June 27, 1996. (12) Filed as on Exhibit to AUGI's Current Report on Form 8-K, dated February 2, 1996. (13) Filed as an Exhibit to AUGI's Current Report on Form 8-K, dated July 24, 1996. (14) Filed as an Exhibit to Western Power Report on Form 10-K for fiscal year ended July 31, 1996. 65 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES REPORT AND CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1996 F-1 REPORT OF INDEPENDENT ACCOUNTANTS November 8, 1996 To the Board of Directors and Shareholders of American United Global, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of American United Global, Inc. and its subsidiaries at July 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes during the year ended July 31, 1994. PRICE WATERHOUSE LLP Portland, Oregon November 8, 1996 F-2 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JULY 31, 1996 1995 ------------- ------------- ASSETS Current assets: Cash $ 17,086,000 $ 4,144,000 Investment in marketable debt securities 6,268,000 - Trade accounts receivable, less allowance for doubtful accounts of $652,000 and $370,000, respectively 6,628,000 6,008,000 Other receivables - 1,102,000 Note receivable from shareholder 838,000 - Inventories (Note 4) 65,697,000 46,413,000 Prepaid expenses 476,000 22,000 Deferred tax asset (Note 8) 1,528,000 - ------------- ------------- Total current assets 98,521,000 57,689,000 Property and equipment, net (Note 5) 8,878,000 7,062,000 Note receivable (Note 10) 3,198,000 - Intangibles and other assets, net of accumulated amortization of $1,272,000 and $823,000, respectively 4,579,000 2,526,000 Net assets held for sale (Note 10) - 9,552,000 ------------- ------------- $ 115,176,000 $ 76,829,000 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under floor financing lines (Note 7) $ 54,364,000 $ 37,072,000 Short-term borrowings (Note 7) 4,660,000 6,023,000 Current portion of capital lease obligations (Note 11) 1,119,000 51,000 Accounts payable 4,252,000 2,171,000 Accrued liabilities 5,387,000 1,454,000 Income taxes payable (Note 8) 5,104,000 896,000 ------------- ------------- Total current liabilities 74,886,000 47,667,000 Long-term borrowings (Note 7) 2,968,000 - Capital lease obligations, net of current portion (Note 11) 2,083,000 47,000 Other non-current liabilities - 305,000 Purchased business obligations (Notes 3 and 6) 4,564,000 - Minority interest (Note 9) 9,459,000 8,556,000 ------------- ------------- Total liabilities 93,960,000 56,575,000 ------------- ------------- Commitments and contingencies (Note 11) Shareholders' equity (Notes 9 and 12): Preferred stock, 12.5% cumulative, $1.00 per share liquidation value, $.01 par value; 1,200,000 shares authorized; none issued and outstanding - - Series B convertible preferred stock, convertible to common, $3.50 per share liquidation value, $.01 par value; 1,500,000 shares authorized; none issued and outstanding - - Common stock, $.01 par value; 20,000,000 shares authorized; 6,266,382 and 5,654,479 shares issued and outstanding, respectively 63,000 57,000 Additional contribution capital 20,654,000 15,889,000 Note receivable from shareholder - (184,000) Deferred compensation (293,000) - Retained earnings 792,000 4,492,000 ------------- ------------- Total shareholders' equity 21,216,000 20,254,000 ------------- ------------- $ 115,176,000 $ 76,829,000 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of this statement. F-3 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1996 1995 1994 -------------- ------------- ------------- Net sales $ 106,831,000 $ 86,173,000 $ 67,370,000 Cost of goods sold 94,095,000 76,145,000 59,138,000 -------------- ------------- ------------- Gross profit 12,736,000 10,028,000 8,232,000 Selling, general and administrative expenses 9,168,000 6,228,000 5,696,000 Stock option compensation 1,671,000 - - Restructuring charge 571,000 - - Research and development expenses (Note 3) 9,764,000 - - -------------- ------------- ------------- Operating (loss) income (8,438,000) 3,800,000 2,536,000 Interest expense, net 1,394,000 1,421,000 830,000 Loss on Western Power & Equipment initial public offering (Note 9) - 386,000 - -------------- ------------- ------------- (Loss) income from continuing operations before income taxes and minority interest (9,832,000) 1,993,000 1,706,000 Provision for income taxes (Note 8) 741,000 711,000 682,000 Minority interest in earnings of consolidated subsidiaries 902,000 118,000 - -------------- ------------- ------------- (Loss) income from continuing operations (11,475,000) 1,164,000 1,024,000 -------------- ------------- ------------- Discontinued operations, net of taxes (Note 10): Income from operations, net of tax 315,000 1,104,000 1,460,000 Gain (loss) on disposal (net of tax of $5,042,000 and $244,000 in 1996 and 1994) 7,460,000 - (365,000) -------------- ------------- ------------- 7,775,000 1,104,000 1,095,000 -------------- ------------- ------------- Extraordinary item - Gain on early debt extinguishment, less applicable income taxes - - 30,000 -------------- ------------- ------------- Cumulative effect of a change in accounting principle (Note 8) - - 138,000 -------------- ------------- ------------- Net (loss) income (3,700,000) 2,268,000 2,287,000 Dividends on preferred stock - - (86,000) -------------- ------------- ------------- Net (loss) income available for common shareholders $ (3,700,000) $ 2,268,000 $ 2,201,000 -------------- ------------- ------------- -------------- ------------- ------------- (Loss) earnings per common and common equivalent share: (Loss) income from continuing operations $ (1.98) $ 0.20 $ 0.18 Discontinued operations 1.34 0.20 0.21 Extraordinary item - - 0.01 Cumulative effect of change in accounting principle - - 0.03 -------------- ------------- ------------- Net (loss) income per share $ (0.64) $ 0.40 $ 0.43 -------------- ------------- ------------- -------------- ------------- ------------- Weighted average number of shares 5,810,526 5,729,852 5,170,175 -------------- ------------- ------------- -------------- ------------- -------------
The accompanying notes are an integral part of this statement. F-4 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK --------------------- ------------------------- NUMBER OF NUMBER OF SHARES AMOUNT SHARES AMOUNT --------- ---------- ---------- ---------- Balance at July 31, 1993 1,200,000 $ 12,000 4,817,000 $ 48,000 Net income Dividends paid on preferred stock Public offering, net of $968,000 in expenses 920,000 9,000 Shares repurchased (100,000) (1,000) Conversion of preferred stock to subordinated note payable (1,200,000) (12,000) Exercise options 2,000 --------- ---------- ---------- ---------- Balance at July 31, 1994 - - 5,639,000 56,000 Net income Issuance of common shares as compensation 16,000 1,000 Net collection on note receivable from shareholder --------- ---------- ---------- ---------- Balance at July 31, 1995 - - 5,655,000 57,000 Net loss Issuance of common shares as compensation 12,000 Stock issued under stock option plans and warrants 600,000 6,000 Tax benefit related to stock option plans and warrants Stock option compensation Net collection on note receivable from shareholder --------- ---------- ---------- ---------- Balance at July 31, 1996 - $ - 6,267,000 $ 63,000 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ADDITIONAL TOTAL CONTRIBUTION RETAINED SHAREHOLDERS' CAPITAL OTHER EARNINGS EQUITY -------------- ------------- ---------- -------------- Balance at July 31, 1993 $ 13,650,000 $ (200,000) $ 23,000 $ 13,533,000 Net income 2,287,000 2,287,000 Dividends paid on preferred stock (86,000) (86,000) Public offering, net of $968,000 in expenses 3,855,000 3,864,000 Shares repurchased (462,000) (463,000) Conversion of preferred stock to subordinated note payable (1,188,000) (1,200,000) Exercise options 3,000 3,000 -------------- ------------- ---------- -------------- F-5 Balance at July 31, 1994 15,858,000 (200,000) 2,224,000 17,938,000 Net income 2,268,000 2,268,000 Issuance of common shares as compensation 31,000 32,000 Net collection on note receivable from shareholder 16,000 16,000 -------------- ------------- ---------- -------------- Balance at July 31, 1995 15,889,000 (184,000) 4,492,000 20,254,000 Net loss (3,700,000) (3,700,000) Issuance of common shares as compensation 15,000 15,000 Stock issued under stock option plans and warrants 1,770,000 1,776,000 Tax benefit related to stock option plans and warrants 510,000 510,000 Stock option compensation 2,470,000 (293,000) 2,177,000 Net collection on note receivable from shareholder 184,000 184,000 -------------- ------------- ---------- -------------- Balance at July 31, 1996 $ 20,654,000 $ (293,000) $ 792,000 $ 21,216,000 -------------- ------------- ---------- -------------- -------------- ------------- ---------- --------------
The accompanying notes are an integral part of this statement. F-6 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1996 1995 1994 --------- --------- ---------- Cash flows from operating activities: Net (loss) income $ 3,700,000 $ 2,268,000 $2,287,000 Adjustments to reconcile net (loss) income to net cash used by operating activities: Cumulative effect of change in accounting principle - - (138,000) Shares issued in lieu of compensation - 32,000 - Depreciation and amortization 1,194,000 1,068,000 633,000 (Gain) Loss on disposal of business (7,460,000) - 365,000 Loss on Western Power & Equipment initial public offering - 386,000 - Loss on sale of fixed assets 4,000 35,000 Deferred tax provision (781,000) (267,000) (200,000) Gain on debt extinguishment - (30,000) Income applicable to minority interest 902,000 118,000 - Purchased research and development 8,472,000 - - Stock option compensation 1,671,000 - - Imputed interest 161,000 - - Write-off capitalized software costs 262,000 - - Change in assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable (267,000) (2,420,000) (94,000) Inventories (12,830,000) (5,181,000) (5,736,000) Prepaid expenses, other receivables and other assets 544,000 (1,196,000) 116,000 Other assets (149,000) - - Inventory floor financing 12,411,000 - - Accounts payable (665,000) 261,000 749,000 Accrued liabilities 2,566,000 273,000 251,000 Income taxes payable (314,000) 324,000 (348,000) Other non-current liabilities - 223,000 135,000 Discontinued operations - 605,000 (1,253,000) Other (496,000) - - --------- --------- ---------- Net cash provided by (used in) operating activities 1,521,000 (3,502,000) (3,228,000) --------- --------- ---------- Cash flows from investing activities: Proceeds from sale of fixed assets 2,075,000 6,000 26,000 Proceeds from sale of business, net 19,099,000 - 500,000 Purchase of property and equipment (695,000) (332,000) (309,000) Purchase of debt securities (6,268,000) - - Purchase of distribution outlets (2,325,000) - - Acquisition of businesses, net of cash acquired (105,000) (557,000) - ---------- --------- ---------- Net cash provided by (used in) investing activities 11,781,000 (883,000) 217,000 ---------- --------- ---------- Cash flows from financing activities: Net borrowings (payments) under revolving credit agreements (3,424,000) 4,187,000 1,467,000 Net borrowings (payments) under term loans 1,268,000 (1,623,000) (314,000) Principal payments under capitalized lease obligations (394,000) (52,000) (20,000) Proceeds from Company public offerings - 7,801,000 3,401,000 Net (payments) borrowings under notes payable to shareholders - (2,575,000) (800,000) Dividends paid on preferred stock - - (86,000) Decrease in receivable from underwriter 1,102,000 - - Exercise of stock options 1,776,000 - 3,000 Collections (increase) of notes receivable from shareholder, net (688,000) 16,000 - --------- --------- ---------- Net cash provided by financing activities (360,000) 7,754,000 3,651,000 --------- --------- ---------- Net increase in cash 12,942,000 3,369,000 640,000 Cash at beginning of year 4,144,000 775,000 135,000 --------- --------- ----------
F-7 Cash at end of year $ 17,086,000 $4,144,000 $ 775,000
The accompanying notes are an integral part of this statement. F-8 1. DESCRIPTION OF BUSINESS American United Global, Inc. (the "Company") has been engaged in two distinct businesses consisting of a distribution operation and a manufacturing operation. Through its Western Power & Equipment Corp. ("Western") subsidiary, the Company operates as a retail distributor for the sale, servicing, and leasing of light to medium-sized construction equipment and parts (the "Distribution Service Group"). Substantially all of this equipment is manufactured by Case Corporation ("Case"). The Company's manufacturing business consisted of two units, National O-Ring, which manufactured and distributed a full range of standard-size, low-cost, synthetic rubber o-ring sealing devices for use in automotive and industrial applications, and Stillman Seal, which specialized in the design, manufacture and distribution of rubber-to-metal bonded sealing devices and molded rubber shapes for use in commercial aerospace, defense and communications industry applications (collectively the "Manufacturing Group"). The Manufacturing Group was sold pursuant to the terms of an Asset Purchase Agreement dated as of November 22, 1995. The effect of the sale on the results of operations of the Company has been included in discontinued operations in the accompanying consolidated statements of operations for the year ended July 31, 1996 as more fully described in Note 10. In accordance with the rules and regulations of the Securities and Exchange Commission, previously reported financial statements of the Company have been restated to present National O-Ring/Stillman Seal as a discontinued operation. The net assets of National O-Ring/Stillman Seal are presented as assets held for sale in the restated balance sheet for fiscal 1995. The Manufacturing Group also included Aerodynamic Engineering, Inc. which performed precision machining of close tolerance parts primarily for use in the commercial aerospace and defense industries until its disposal in fiscal 1994. This subsidiary was sold in April 1994 as further discussed in Note 10. As discussed in Note 3, the Company acquired ConnectSoft, Inc. ("ConnectSoft"), effective May 1, 1996. ConnectSoft provides communications software applications and services for persons seeking access to and utilization of resources and information available on the Internet. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Minority interest represents the minority shareholders' proportionate share of the equity of Western which was 43% at July 31, 1996. There is also a 25% minority interest held in eXodus Technologies, Inc. ("eXodus"), a former division of Connectsoft, but no minority interest is presented due to accumulated losses. CASH EQUIVALENTS For financial reporting purposes, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-9 INVENTORY VALUATION Inventories are stated at the lower of cost or market. Cost is determined based upon the first-in, first-out method for parts inventory and specific identification for construction equipment. INVESTMENT SECURITIES Investments in marketable debt securities represent primarily treasury notes which are carried at amortized cost as these investments have been classified as held-to-maturity securities. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold until maturity. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 30 years. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are expensed as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts; any gain or loss thereon is included in the results of operations. INTANGIBLE ASSETS Intangible assets acquired in business acquisitions such as name recognition, existing technology, geographical location and presence and noncompete agreements represent value to the Company. Intangibles are amortized using the straight-line method over the assets' estimated useful lives ranging from 5 to 40 years. Such lives are based on the factors influencing the acquisition decision and on industry practice. The carrying value of intangible assets is assessed for any permanent impairment by evaluating the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of the expected future net cash flows is less than book value. Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. SFAS No. 121 is required to be implemented by the Company for the fiscal year beginning August 1, 1996 and is not expected to have a significant impact on the Company's financial statements. INCOME TAXES Effective August 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferral method to an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities. The cumulative effect of the adoption in fiscal 1994 was an increase in net income of $138,000, resulting primarily from the recognition of certain net operating F-10 loss carryforwards. REVENUE RECOGNITION Revenue on equipment and parts sales is recognized upon shipment of products and passage of title. Equipment rental and service revenue is generally recognized at the time such services are provided. Software related contract service revenue is recognized on either the percentage-of-completion contract accounting method or on a completed contract basis, depending on the structure of the contract. Revenue from sales of software products to end-users and distributors is recognized upon product shipment, net of an allowance for returns. SOFTWARE DEVELOPMENT COSTS The Company acquired certain software development costs in connection with the acquisition of ConnectSoft as more fully described in Note 3. 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 the software and hardware technology. After consideration of the above factors, the Company amortizes capitalized software costs at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Capitalized software development costs are included in intangible and other assets in the accompanying consolidated balance sheet. RESEARCH AND DEVELOPMENT Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. ADVERTISING EXPENSE The Company expenses all advertising costs as incurred. Total advertising expense for the years ended July 31, 1996, 1995 and 1994 was $263,000, $274,000 and $134,000, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities as presented in the consolidated financial statements approximates fair value based on the short-term nature of these instruments. The recorded amount of long-term debt approximates fair value as the actual interest rates approximate current competitive rates. The fair value of investment securities held is approximately $179,000 less than the carrying value at July 31, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the fiscal periods presented. Actual results could F-11 differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENT In October 1995, the Financial Accounting Standards Board issued FAS 123, "Accounting for Stock-Based Compensation", which establishes financial accounting and reporting standards for stock-based employee compensation plans and for the issuance of equity instruments to acquire goods and services from non-employees. The Company has not determined its method of adoption for fiscal 1997. EARNINGS PER SHARE Net income (loss) per share is computed by dividing the net income available for common shareholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period using the treasury stock method. The Company's preferred stock that has been granted in connection with the ConnectSoft acquisition (see Note 3) has not been included in the loss per share calculation for the year ended July 31, 1996, as their effect is antidilutive. The additional shares to be potentially issued to the ConnectSoft shareholders upon occurrence of certain events (see Note 3) have not been included in the determination of loss per share for the year ended July 31, 1996. Fully diluted earnings (loss) per share is not presented as it is considered to be the same as primary earnings per share. 3. ACQUISITIONS Effective November 1, 1992, the Company's newly formed Western subsidiary completed the acquisition from Case of certain assets used in connection with seven separate Case retail construction equipment distributorships located in the states of Washington and Oregon (the "Western Acquisition"). The purchase included approximately $33,000,000 of various assets, including inventories of new and used Case construction equipment and spare parts, as well as the land and building at one of the locations. The purchase price paid was approximately $1,937,000 in cash and approximately $31,000,000 was financed, primarily through inventory floor planning dealer finance agreements with Case and its affiliates. In addition, the Company incurred approximately $2,000,000 in other related acquisition costs in connection with the transaction. The obligations of Western to Case and its affiliates under the various purchase notes and related financing and security agreements with Case and its affiliates are guaranteed by the Company. Effective September 10, 1994, Western acquired the assets and operations of two additional factory-owned stores of Case in the states of California and Nevada. The purchase price paid was approximately $557,000 in cash, $4,153,000 in installment notes payable to Case and the assumption of $5,019,000 in inventory floor planning dealer finance agreements with Case and its affiliates. The acquisitions were accounted for as purchases, and the net assets and the results of operations of the businesses acquired are included in the consolidated accounts from their respective acquisition dates. F-12 The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the two additional stores had been acquired as of August 1, 1993. Pro forma results for the year ended July 31, 1995 are not presented as the results are not materially different than actual results. YEAR ENDED JULY 31, 1994 -------------- Net sales $ 81,833,000 Net income 2,053,000 Earnings per share 0.40 Effective February 29, 1996, Western acquired the assets and operations of two additional factory-owned stores of Case in the state of California. The acquisition was consummated for approximately $630,000 in cash, $1,590,000 in installment notes payable to Case and the assumption of $3,965,000 in inventory floor plan debt with Case and its affiliates. The results of operations of these two stores have been included in the consolidated results of operations from the effective date of the acquisition. The acquisition was accounted for as a purchase and resulted in the recording of approximately $150,000 in goodwill which is included in intangible and other long-term assets in the accompanying consolidated financial statements and is being amortized on a straight-line basis over 20 years. On May 1, 1996, the Company acquired control of ConnectSoft, Inc. Pursuant to the terms of the merger agreement, the ConnectSoft shareholders received, on a pro rata basis, approximately 972,000 unregistered shares of the Company's Series B convertible preferred stock. This preferred stock does not pay dividends, is not subject to redemption, has a liquidation preference of $3.50 per share over the Company's common stock and shares voting rights with the Company's common stock with restrictions on the shareholders' ability to vote the shares until December 31, 1999. Each share of Series B preferred stock is convertible into shares of the Company's common stock at the shareholders' option on a one-for-one basis. However, the conversion ratio may be increased to one-for-two or one-for-three if certain criteria are met by ConnectSoft. In the event that the "Combined Pre-Tax Income", as defined in the merger documents of any of the "Subject Entities", as defined as in the merger document, in any one of the three fiscal years ending July 31, 1997, 1998 or 1999 equals or exceeds $3,000,000, each share of preferred stock may be converted into two shares of the Company's common stock. If the "Combined Pre-Tax Income" equals or exceeds $5,000,000, each share of preferred stock may be converted into three shares of the Company's common stock. Additionally, the conversion ratio of the preferred stock shall be adjusted, such that each share of preferred stock is convertible into three shares of the Company's common stock, notwithstanding the levels of "Combined Pre-Tax Income" achieved, if on or before December 31, 1999 (1) the Company sells the assets or securities of any of the "Subject Entities" for consideration aggregating $5,000,000 or more, (2) the Company consummates an initial public offering of any of the "Subject Entities" resulting in gross proceeds in excess of $10,000,000 or in a market valuation of 100% of the issuer's common stock equaling or exceeding $50,000,000, or (3) a transaction occurs with any third party with the result that no shares of the Company's common stock will be publicly traded on a national securities exchange. F-13 The acquisition of ConnectSoft was not closed until August 8, 1996. However, utilizing the purchase method of accounting, the operating results from ConnectSoft have been included in the consolidated operating results commencing May 1, 1996 because the Company assumed operational and financial control effective May 1, 1996. The purchase price plus direct costs of acquisition have been initially allocated to the assets acquired and the liabilities assumed based on management's estimates and a valuation of the Company's preferred stock issued and the assets and liabilities obtained. Adjustments to the initial purchase price allocation will occur, if necessary, during fiscal 1997. Issuance of the Company's preferred stock to the ConnectSoft shareholders had not occurred as of July 31, 1996 and, accordingly, these shares are not reflected as outstanding as of July 31, 1996. For purposes of computing earnings per share, these preferred shares have not been included as their effect is antidilutive. The fair value of the preferred stock is reflected as purchased business obligations in the accompanying consolidated balance sheet. A summary of assets acquired, liabilities assumed and purchase price paid is as follows: Value of preferred stock $ 3,989,000 Costs of acquisition 430,000 Liabilities assumed 8,690,000 -------------- Cost of assets acquired $ 13,109,000 -------------- -------------- This convertible preferred stock has been valued at fair market value at May 1, 1996. The valuation technique utilized has considered that the conversion ratio increases based on the earnings of the "Subject Entities". Accordingly, the acquisition price based on this value has been determined at acquisition, and, therefore, this preferred stock is not viewed as contingent securities. The purchase price has been allocated to the assets acquired, including certain intangible assets such as purchased computer software, covenant not to compete, name recognition and research and development in process. The cost initially allocated to each of ConnectSoft's assets and liabilities at the date of the acquisition, as determined in accordance with the purchase method of accounting, is presented in the table below: Accounts receivable $ 130,000 Prepaid and other current assets 301,000 Intangible assets: Goodwill/trademark 900,000 Software technology - complete 700,000 Software technology - in progress (charged to research and development expense) 8,472,000 Non-compete agreement 500,000 Property and equipment 2,015,000 Other long-term assets 91,000 Accounts payable and accrued liabilities (3,769,000) Debt and capital lease obligations (4,921,000) ------------ Net assets acquired $ 4,419,000 ------------ ------------ F-14 In connection with the purchase of ConnectSoft, the Company entered into an agreement with a creditor of ConnectSoft whereby the Company purchased from the creditor a note payable due from ConnectSoft for cash and a $1,500,000 promissory note payable due on April 30, 1999. This creditor was also a shareholder of ConnectSoft and, accordingly, received the Company's preferred stock as consideration for its shares of ConnectSoft. As part of this agreement, the former creditor granted to the Company an irrevocable right and option to purchase all or any portion of the Company's securities owned by the creditor during the period December 31, 1996 to December 31, 1999. These shares will be purchased at the highest closing price 30 days prior to date of exercise. If the Company exercises its option, the creditor shall receive at a minimum $4,000,000 from the Company irrespective of whether or not the purchase price payable for these shares based on the exercise price shall equal $4,000,000. If the net proceeds are greater than $4,000,000, the first $1,000,000 greater than $4,000,000 shall be applied to reduce the then outstanding principal amount of the note payable to the creditor, and to the extent such note payable shall have then been fully paid, any remaining amounts shall be allocated 50% to the Company and 50% to the creditor. The following unaudited pro forma summary combines the consolidated results of operations as if ConnectSoft and the factory owned stores of Case had been acquired as of the beginning of the periods presented, including the impact of certain adjustments. YEAR ENDED JULY 31, 1996 1995 ------------- -------------- Net sales $ 122,096,000 $ 110,231,000 Net loss $ (8,340,000) $ (10,724,000) Loss per share $ (1.44) $ (1.87) The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. In addition, effective June 11, 1996, Western acquired the assets and operations of GCS, Inc. ("GCS"), a California-based closely held distributor of heavy equipment primarily marketed to municipal and state government agencies responsible for highway maintenance. The acquisition was consummated for approximately $1,655,000 in cash. The acquisition was accounted for as a purchase and resulted in goodwill of approximately $400,000 which is included in intangible and other long-term assets in the accompanying consolidated financial statements and is being amortized on the straight-line basis over 20 years. Pro forma financial information relating to this acquisition has not been provided because its effect is immaterial. The results of operations of the GCS stores have been included in the consolidated results of operations of the Company from the effective date of the acquisition. F-15 4. INVENTORIES Inventories consist of the following: JULY 31, 1996 1995 --------------- --------------- Parts $ 6,320,000 $ 5,290,000 Equipment new and used 59,377,000 41,123,000 --------------- --------------- $ 65,697,000 $ 46,413,000 --------------- --------------- --------------- --------------- At July 31, 1996 and 1995, approximately $12,079,000 and $4,756,000, respectively, of equipment was being held for rent and, in accordance with standard industry practice, is included in new and used equipment inventory. Such equipment is generally being depreciated at an amount equal to 80% of the rental payments received. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following: JULY 31, 1996 1995 ------------ ---------- Machinery and equipment $ 2,092,000 $1,574,000 Furniture and office equipment 1,925,000 1,892,000 Computer system 2,328,000 - Land 840,000 1,903,000 Building 3,042,000 2,347,000 Construction in progress 892,000 596,000 ------------ ---------- 11,119,000 8,312,000 Less: Accumulated depreciation and amortization (2,241,000) (1,250,000) ------------ ---------- $ 8,878,000 $7,062,000 ------------ ---------- ------------ ---------- 6. LICENSE AGREEMENT Effective May 4, 1996, the Company entered into a software licensing agreement for technology to be utilized in a software product being developed by the Company. The term of this license agreement is for three years commencing June 1, 1996. In consideration for the license granted, the Company will make a $450,000 nonrefundable advance minimum royalty payment to the licensor. Royalties due under this agreement are 15% of the sales price to third parties subject to a minimum payment due on each sale. Additionally, the Company has agreed to sell 100,000 unregistered shares of its common stock for $1,000 to the licensor which were issued subsequent to July 31, 1996. Other provisions of the agreement grant the licensor the right to designate one member of the board of directors of one of F-16 the Company's subsidiaries and certain rights to receive options to purchase shares of the subsidiary's common stock in the event that the subsidiary completes an initial public offering. The value assigned to the shares to be issued was $250,000. The full cost of the license was expensed as research and development during fiscal 1996. 7. BORROWINGS Borrowings consist of the following: JULY 31, 1996 1995 ------------- ------------ Borrowings under floor financing lines $ 54,364,000 $37,072,000 Line of credit with bank 2,927,000 - Term and mortgage notes payable 3,201,000 6,023,000 Note payable to creditor (Note 3) 1,500,000 - -------------- ----------- Total borrowings 61,992,000 43,095,000 Less current portions: Borrowings under floor financing lines 54,364,000 37,072,000 Other third-party borrowings 4,660,000 6,023,000 -------------- ----------- $ 2,968,000 $ - -------------- ----------- -------------- ----------- Scheduled principal payments of all borrowings are as follows: 1997 $ 59,024,000 1998 204,000 1999 1,658,000 2000 63,000 2001 68,000 Thereafter $ 975,000 -------------- $ 61,992,000 -------------- -------------- FLOOR FINANCING LINES Western has an inventory floor financing line with Case Credit Corporation, the financing operation of Case Corporation, to purchase new equipment and attachments. The Case credit floor plan line provides for a four-month to eight-month interest free term followed by a term during which interest is charged at prime plus 2% (10.25% at July 31, 1996). Principal payments are generally due at the earlier of sale of the equipment or twelve to forty-eight months from the invoice date. At July 31, 1996 there was approximately $38,501,000 outstanding under floor financing arrangements. F-17 Western also has a credit facility with Seafirst Bank to provide up to $17,500,000 for the purchase of new and used equipment held for sale as well as equipment held for rental. The credit line calls for monthly interest payments at prime plus .25% (8.5% at July 31, 1996). Principal payments are generally due in periodic installments over terms ranging from twelve months to twenty-four months from the borrowing date. At July 31, 1996, approximately $14,352,000 was outstanding under this facility. In addition to the Case and Seafirst Bank credit lines, Western has entered into floor plan financing arrangements with other equipment manufacturers and commercial credit companies. These credit facilities provide for interest free terms ranging up to six months and require monthly principal and interest payments over terms ranging up to forty-eight months. The interest rate paid on these credit facilities are prime plus 2%. The total amount outstanding under these other financing arrangements was $1,511,000 at July 31, 1996. OTHER BORROWINGS Western entered into various term notes with Case for the purchase of used equipment, parts, shop tools, furniture and fixtures and accounts receivable. The terms of these notes provide for interest charges at various rates up to prime plus 2% and are collateralized by the related equipment, parts and fixed assets. As of July 31, 1996, approximately $963,000 was outstanding under these notes. On October 10, 1995, using proceeds from its initial public offering, Western retired the $2,175,000 real estate note given to Case for the purchase of the Sparks, Nevada real estate in September 1994. In March 1996, Western consummated an agreement with an institutional lender for a conventional mortgage on the property in the amount of $1,330,000, secured by the Sparks, Nevada real estate. The agreement calls for principal and interest payments over a seven year term using a fifteen year amortization period. The note cannot be prepaid during the first two years of its term. In connection with the acquisition of the original seven stores, Western entered into a purchase agreement for the Auburn, Washington facility subject to the completion by Case of certain environmental remediation. In December 1995, after completion of the remediation, Western entered into a sale-leaseback transaction with an unrelated party regarding the Auburn facility which resulted in no gain or loss to Western. Using the proceeds of the sale-leaseback, Western repaid a $2,075,000 collateralized mortgage with Case. The term of the lease is 20 years at an initial annual rate of $204,000. In addition to base rent, Western is responsible for the payment of all related taxes and other assessments, utilities, insurance and repairs with respect to the leased real property during the term of the lease. In accordance with SFAS 13, the building portion of the lease is being accounted for as a capital lease (see Note 11) while the land portion of the lease qualifies for treatment as an operating lease. During fiscal 1996, the Company obtained a $10,000,000 secured demand line of credit from a commercial bank. This line is secured by the Company's portfolio of cash and marketable securities held by the bank. On July 31, 1996 approximately $2,927,000 was outstanding under this line of credit, the principal of which bears interest at the bank's base rate plus 1% or 90 day LIBOR plus 1%. F-18 The applicable rate is elected upon issuance of each advance on the line of credit. Effective October 1996, the secured demand line of credit was increased to $13,000,000 of which $4,400,000 may be in the form of letters of credit. During May 1993, ConnectSoft entered into a financing arrangement whereby it requested advances from a financing company and pledged receipts on accounts receivable to repay these advances. The interest rate charged to ConnectSoft amounts to 48% per year. The advances made under this arrangement are collateralized by the accounts receivable and other assets of ConnectSoft. At July 31, 1996, ConnectSoft had a total liability under this arrangement of $585,000 and was in default with respect to one of its covenants. As a result, the total amount due is classified as a short-term liability. 8. INCOME TAXES Effective August 1, 1993, the Company adopted SFAS No. 109, Accounting for Income Taxes. The cumulative effect of adoption was an increase in net income of $138,000, or $.03 per share. The provision (benefit) for income taxes from continuing operations before extraordinary items comprises the following: YEAR ENDED JULY 31, 1996 1995 1994 ------------ ------------ ------------- Current: Federal $ 1,280,000 $ 918,000 $ 672,000 State 242,000 60,000 210,000 ------------ ------------ ------------ 1,522,000 978,000 882,000 ------------ ------------ ------------ Deferred: Federal (779,000) (252,000) (153,000) State (2,000) (15,000) (47,000) ------------ ------------ ------------ (781,000) (267,000) (200,000) ------------ ------------ ------------ $ 741,000 $ 711,000 $ 682,000 ------------ ------------ ------------ ------------ ------------ ------------ The principal reasons for the variation from the customary relationship between income taxes at the statutory federal rate and that shown in the consolidated statement of income are as follows: YEAR ENDED JULY 31, 1996 1995 1994 ------- ------- -------- Statutory federal income tax rate $ (3,343,000) $ 677,000 $ 580,000 State income taxes, net of federal income tax benefit 82,000 74,000 68,000 Purchased research and development 3,627,000 Valuation allowance 271,000 Other 104,000 (40,000) 34,000 ------------ ------------ ---------- $ 741,000 $ 711,000 $ 682,000 ------------ ------------ ---------- ------------ ------------ ---------- F-19 Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows: JULY 31, 1996 1995 ------------ ----------- Depreciation and amortization $ (587,000) $ (488,000) Deferred income (117,000) - ------------ ----------- Gross deferred tax liabilities (704,000) (488,000) ------------ ----------- Inventory reserve 258,000 193,000 Bad debt reserve 222,000 159,000 Accrued vacation and bonuses 127,000 92,000 State taxes 124,000 53,000 Loss carryforwards 88,000 - Loss on Western initial public offering 131,000 154,000 Stock options 1,127,000 - Operating lease 194,000 - Intangible assets 150,000 - Other 186,000 27,000 ------------ ----------- Gross deferred tax assets 2,607,000 678,000 Valuation allowance (375,000) - ------------ ----------- Net deferred tax assets 2,232,000 678,000 ------------ ----------- $ 1,528,000 $ 190,000 ------------ ----------- ------------ ----------- At July 31, 1996, the Company had federal income tax loss carryforwards of $260,000 which will begin to expire in 2010. Utilization of such net operating losses will be subject to annual limitations due to the Company's acquisition of ConnectSoft in May 1996. 9. SHAREHOLDERS' EQUITY On February 25, 1994, the Company completed a public offering of 920,000 units at $5.25 per unit, each unit consisting of one share of common stock, $.01 par value, and one redeemable common stock purchase warrant. Each warrant entitled the holder to purchase one share of common stock until February 16, 1996, at an exercise price of $7.50. During fiscal 1996, the exercise period for these warrants was extended to February 16, 1997. The warrants are subject to redemption by the Company at a redemption price of $.10 per warrant. Simultaneous with the offering, the Company purchased an aggregate of 100,000 shares of its issued and outstanding common stock from certain shareholders of the Company for $4.625 per share. The net proceeds of the offering after the purchase of the selling shareholders' shares were approximately $3,401,000. In addition, during fiscal 1994, all outstanding shares of the Company's preferred stock, along with an existing $1,375,000 note payable, were exchanged for a new subordinated note payable to a related party totaling F-20 $525,000 that were incurred in connection with the Western Acquisition and used the balance of the proceeds to pay down the Company's revolving credit facility with Congress Financial Corporation. During fiscal 1995, Western completed an initial public offering of 1,495,000 shares of common stock at $6.50 per share. The net proceeds of the offering were approximately $7,801,000 including $1,102,000 from the exercise of an over allotment option which was received subsequent to July 31, 1995. Prior to the offering, Western issued promissory notes totaling $250,000 (the "Bridge Loans"), and 38,462 shares of its common stock to certain investors. The shares were valued at the estimated offering price and recorded as deferred debt issuance costs. Such costs were written off in June 1995 when the Bridge Loans were retired using proceeds from the offering. The net proceeds per share from Western's offering and the Bridge Loans were lower than the Company's per share basis in Western at the time of the offering. Accordingly, the Company recognized a $386,000 pretax loss in connection with the transaction during the year ended July 31, 1995. Western has been authorized to issue 10,000,000 shares of "blank check" preferred stock, with respect to which all the conditions and privileges thereof can be determined solely by action of Western's Board of Directors without further action of its shareholders. As of July 31, 1996 none were issued and outstanding. 10. DISCONTINUED OPERATIONS Pursuant to the terms of an Asset Purchase Agreement, dated as of November 22, 1995, on January 19, 1996 all of the assets of the National O-Ring and Stillman Seal businesses (the "Manufacturing Business") were sold to, and substantially all of the liabilities associated with operation of the Manufacturing Business were assumed by, subsidiaries of Hutchinson Corporation (the "Hutchinson Transaction"). The Purchase Price for the Manufacturing Business was $24,500,000, $20,825,000 of which was paid in cash and the aggregate $3,675,000 balance was paid by delivery of two 24-month non-interest bearing promissory notes (the "Notes" ) issued by Hutchinson. The Notes, which have been discounted for financial statement presentation by $638,000, are non-interest bearing and guaranteed by Total America, Inc., the parent corporation of Hutchinson, whose securities are listed on the New York Stock Exchange. The discounted note balance aggregates $3,198,000 at July 31, 1996. At the closing of the Hutchinson Transaction, the Company, Hutchinson (as guarantor) and Robert Rubin, who is the chairman and a director of the Company, entered into a five-year Non-Competition Agreement in favor of Hutchinson and its affiliates, pursuant to which Mr. Rubin and the Company agreed not to compete with the business acquired in the Hutchinson Transaction. Under the terms of the Non-Competition Agreement, Mr. Rubin will receive payments aggregating $200,000 over a seven-year period. In addition, Hutchinson engaged Mr. Rubin as a consultant to provide advisory services F-21 relating to the acquired Manufacturing Business over a seven-year period, for which services Mr. Rubin will receive payments aggregating $1,000,000. On January 19, 1996, as a result of the Hutchinson Transaction, Mr. John Shahid, the former president, chief executive officer and director of the Company and the Company entered into a Termination Agreement whereby Mr. Shahid resigned as an officer and director of the Company and each of its subsidiaries in consideration for the payment of an aggregate of $816,000, representing salary payments under his Employment Agreement through December 31, 1998, as well as a bonus payment for fiscal year 1996 in the amount of $90,000. The Termination Agreement also provides that the Company shall retain Mr. Shahid as a consultant for a period of two years, commencing April 1, 1996, for which consulting services he will be paid quarterly an aggregate of $200,000. Benefits under the termination agreement as well as the two-year consulting agreement were fully expensed during fiscal 1996. Additionally, the Company recognized $506,000 in compensation expense resulting from amendments made to its employee stock option plans (see Note 12). These charges, along with other costs of the Hutchinson Transaction were included in determining the gain on the sale of the Manufacturing Business. Details of this transaction are as follows: Sale price $ 23,862,000 Basis of net assets sold (9,634,000) Expenses of sale (1,726,000) ------------ Gain on sale before income taxes 12,502,000 ------------ Income tax provision (5,042,000) ------------ Gain on sale of wholly-owned subsidiaries $ 7,460,000 ------------ ------------ Although the results of National O-Ring and Stillman Seal subsidiaries have previously been reported in the consolidated financial statements, these subsidiaries were operated as a separate line of business whose products, activities and class of customers differed from other operations of the Company. Based upon this determination, the disposal of these two subsidiaries has been accounted for as discontinued operations and accordingly, their operating results are segregated in the accompanying statement of operations. F-22 Results of National O-Ring and Stillman Seal for each of the three prior fiscal years through the date of disposition are as follows: 5-1/2 MONTHS ENDED JANUARY 19, YEAR ENDED JULY 31, 1996 1995 1994 ------------- ------------- ----------- Net sales $ 16,928,000 $ 37,441,000 $34,820,000 Costs and expenses 16,410,000 35,511,00 32,147,000 ------------- ------------- ----------- Income before taxes 518,000 1,930,000 2,673,000 Provision for income taxes 203,000 826,000 911,000 ------------- ------------- ----------- Net income 315,000 $ 1,104,000 $ 1,762,000 ------------- ------------- ----------- ------------- ------------- ----------- On April 29, 1994, the Company sold its Aerodynamic Engineering, Inc. ("AEI") subsidiary to Mayer Eisel, Inc., a company owned and operated by the former owners of Aerodynamics, Inc. The Company had originally purchased AEI from Aerodynamics, Inc. In consideration for the sale of AEI, the Company received $500,000 in cash, a four-year $500,000 promissory note from Mayer Eisel, Inc. (prepaid at a discount in October 1995), equipment valued at $100,000 and the cancellation of the remaining outstanding balance of notes totaling $875,000. The Company also assumed indebtedness of Aerodynamic, Inc. due to Congress Financial Corporation in the amount of $958,000 and entered into a five-year noncompete agreement with Mayer Eisel, Inc. Although the results of AEI have previously been reported as part of the Manufacturing Group, the subsidiary was operated as a separate line of business whose products, activities and class of customers differed from the other Manufacturing Group operations. Based upon this determination, the disposal of AEI has been accounted for as a discontinued operation and, accordingly, its operating results are segregated in the accompanying consolidated statement of operations for the year ended July 31, 1994. Results of AEI's operations through its date of disposal are as follows: YEAR ENDED JULY 31, 1994 ---------------- Net sales $ 1,648,000 Costs and expenses 2,151,000 ---------------- (Loss) before income taxes (503,000) Income tax benefit 201,000 ---------------- Net (loss) $ (302,000) ---------------- ---------------- F-23 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company and Western lease certain facilities and certain computer equipment and software under noncancelable lease agreements. The building portion of two of the Western's facility leases qualify under SFAS 13 as "capital leases" (i.e., an acquisition of an asset and incurrence of a liability). The remaining facility lease agreements have terms ranging from one to five years. Certain of the facility lease agreements provide for options to renew and generally require the Company and Western to pay property taxes, insurance, and maintenance and repair costs. Total rent expense under all operating leases aggregated $1,100,000, $733,000 and $435,000 for the fiscal years 1996, 1995 and 1994, respectively. The computer equipment lease expires February 1997 and meets certain specific criteria to be accounted for as a capital lease. In connection with the acquisition of ConnectSoft, the Company acquired certain capital lease obligations. These lease obligations were valued at the acquisition date at fair market value which was based on a refinancing agreement for these leases that the Company is currently negotiating. The terms of the refinancing have not been finalized and, accordingly, the specific payment terms have not been determined, however the anticipated terms of the new leases are for a thirty-six month period. As the terms of these leases have not been finalized, the payments associated with these leases are not disclosed over the next five years on an annual basis. Assets recorded under capital leases are as follows: JULY 31, 1996 1995 1994 ----------- ---------- --------- Capitalized asset value $ 3,668,000 $ 170,000 $ 170,000 Less accumulated amortization (287,000) (54,000) (20,000) ----------- ---------- --------- $ 3,381,000 $ 116,000 $ 150,000 ----------- ---------- --------- ----------- ---------- --------- F-24 Future minimum lease payments under all noncancelable leases as of July 31, 1996, are as follows: YEAR ENDING CAPITAL OPERATING JULY 31, LEASES LEASES ----------- ----------- ----------- 1997 $ 26,000 $1,493,000 1998 (23,000) 1,324,000 1999 (26,000) 1,087,000 2000 (30,000) 896,000 2001 (8,000) 444,000 Thereafter 1,765,000 2,793,000 ----------- ----------- Total annual lease payments 1,704,000 $8,037,000 Refinanced leases 1,500,000 ---------- Less amount representing interest 2,000 ---------- ---------- Present value of minimum lease payments 3,202,000 Less: Current portion 1,119,000 ---------- Long-term portion $2,083,000 ---------- LEGAL PROCEEDINGS The Company is involved in certain legal proceedings that have arisen in the normal course of business. Based on the advice of legal counsel, management does not anticipate that these matters will have a material effect on the Company's consolidated financial condition or results of operations. 12. STOCK OPTION PLANS EMPLOYEE STOCK BONUS PLAN (THE "TRANSFER PLAN") In March 1991, the Company granted incentive options under the Transfer Plan to purchase an aggregate of 38,496 shares of common stock at purchase prices of $1.63 and $6.50. During fiscal 1994 and 1996, 1,780 and 23,558 options, respectively, were exercised under the Transfer Plan. No options were exercised during fiscal 1995. There are currently outstanding options to purchase 770 shares of common stock under the Transfer Plan, all of which are exercisable at $1.63. THE 1991 EMPLOYEE INCENTIVE STOCK OPTION PLAN (THE "1991 STOCK OPTION PLAN") Key employees of the Company can receive incentive options to purchase an aggregate of 750,000 shares of common stock at initial exercise prices equal to 100% of the market price per share of the Company's common stock on the date of grant. The 1991 Stock Option Plan was approved by the Board of Directors and shareholders in June 1991 and became effective from May 21, 1991. F-25 Set out below is a summary of the activity of the 1991 Stock Option Plan: YEAR ENDED JULY 31, 1996 1995 1994 -------- -------- ------- Beginning balance 623,450 623,450 461,050 Granted - 170,000 Exercised 427,450 - - Expired or canceled - - 7,600 -------- -------- ------- Ending balance 196,000 623,450 623,450 -------- -------- ------- -------- -------- ------- STOCK OPTION BONUS PLAN (THE "STOCK BONUS PLAN") The Stock Bonus Plan was established in October 1991, and granted certain key employees non-qualified options to acquire 171,000 shares of stock, which options were only exercisable in the event that the Company realized certain targeted annual earnings in fiscal years 1992-1994. The Company did not meet its annual earnings target in 1992; however, it met its annual earnings targets in 1993 and 1994 and 114,000 options were granted at exercise prices equal to the market price at the date of grant. During 1996, 99,625 options were exercised under the Stock Bonus Plan. At July 31, 1996, 14,375 options were exercisable and outstanding under this plan. AMENDMENTS TO THE PLANS On May 5, 1995, the Company's Board of Directors approved the re-pricing of options outstanding under all three plans. With the exception of the $1.63 options under the Transfer Plan, all outstanding options were repriced to $3.125, which was the closing market price on May 5, 1995. In connection with the Hutchinson Transaction described in Note 10, the Company amended the Transfer Plan, 1991 Stock Option Plan and the Stock Bonus Plan by accelerating the vesting period and extending the exercise term for all options under these plans. The amendment was subject to the consummation of the Hutchinson Transaction and affected 761,008 options outstanding on the closing date. The difference between the fair market price on the date of closing and the respective exercise prices applied to the options totaled $506,000 which was included as an expense in determining the gain on Hutchinson Transaction. 1996 EMPLOYEE STOCK OPTION PLAN (THE "1996 PLAN") In April 1996, the Company's Board of Directors authorized and approved the creation of the 1996 Plan for which two million shares of the Company's common stock has been reserved. Concurrent with the 1996 Plan's adoption, options to acquire 800,000 shares at an exercise price of $3.76 per share were granted to the Company's principle shareholder and management. In May, options to acquire an additional 250,000 shares at an exercise price of $5.25 were granted to two other employees. All exercise prices represented the fair market value of the Company's common stock on the date of grant. Of these options granted 100,000 options granted at $5.25 have been canceled. F-26 The 1996 Plan as originally adopted required shareholder approval which had not been obtained by the end of the fiscal year. On July 30, 1996, the Board amended the 1996 Plan so that shareholder approval was not required. The difference between the fair market value on the date of the amendment and the respective exercise prices applied to the options was recognized as compensation expense based on the options' vesting schedule. This resulted in a fiscal 1996 expense of approximately $1,671,000 and $293,000 of deferred compensation to be recognized over the next two fiscal years. OTHER OPTIONS AND WARRANTS GRANTED Prior to fiscal 1996, the Company granted warrants and options to certain consultants of the Company in consideration for services rendered to the Company. Of these warrants and options, 522,500 were outstanding at July 31, 1996 with exercise prices ranging from $3.13-$7.00. During fiscal 1996, 100,000 options with an exercise price of $5.25 were granted to the president of one of the Company's subsidiaries. Of these options, all were unexercised and 25,000 were vested at July 31, 1996. WESTERN STOCK OPTION PLAN In March 1995, the Company, as the sole shareholder of Western, approved Western's 1995 Stock Option Plan, as previously adopted by the Board of Directors (the "Plan"), under which key employees, officers, directors and consultants of Western can receive incentive stock options and non-qualified stock options to purchase up to an aggregate of 300,000 shares of common stock. In December 1995, the shareholders amended the 1995 stock option plan to increase the number of shares underlying the plan from 300,000 to 850,000 shares. The Plan provides that the exercise price of incentive stock options be at least equal to 100 percent of the fair market value of the common stock on the date of grant. With respect to non-qualified stock options, the Plan requires that the exercise price be at least 85 percent of fair value on the date such option is granted. Upon approval of the Plan, Western's Board of Directors awarded non-qualified stock options for an aggregate of 200,000 shares, all of which provide for an exercise price of $6.50 per share. On December 28, 1995, the exercise price of the options previously granted was lowered to $4.50 per share, the market price as of that date. All outstanding options are exercisable commencing August 1, 1996 and expire on July 31, 2005. Subsequent to July 31, 1996, Western's Board of Directors approved the grant of an additional 347,000 options to employees, directors and consultants of Western at an exercise price of $4.375 per share, the market price as of the date of grant. These options vest ratably over a two-year period commencing August 1, 1996. EXODUS STOCK OPTION COMMITMENT In connection with the Company's acquisition of ConnectSoft, employees of eXodus are entitled to receive stock options, under terms similar to the Company's 1996 Plan, of not less than 15% of the outstanding shares of eXodus immediately prior to an initial public offering of eXodus. 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company paid interest of $1,998,000, $1,091,000 and $795,000 during the fiscal years 1996, F-27 1995, and 1994, respectively. The Company paid $2,084,000, $1,575,000 and $1,268,000 in income taxes during fiscal 1996, 1995 and 1994, respectively. In September 1994, Western acquired the assets and operations of two stores in California and Nevada for approximately $557,000 in cash (including $108,000 of indirect expenses), $4,153,000 in installment notes payable and the assumption of $5,019,000 in inventory floor plan debt. In February 1996, Western acquired the assets and operations of two stores in California for approximately $630,000 in cash, $1,590,000 in installment notes payable and the assumption of $3,965,000 in inventory floor plan debt. In addition, a capital lease obligation of $740,000 was incurred related to the lease of the Sacramento facility. Effective June 11, 1996, Western acquired the assets and operations of GCS, Inc, for approximately $1,655,000 in cash. In May 1996, the Company acquired ConnectSoft by issuing shares of its Series B Preferred Stock valued at $3,989,000 and incurred $430,000 in acquisition costs. A capital lease obligation of $926,000 was incurred in fiscal 1996 when the Company consummated a sale-leaseback transaction. A note receivable of $3,037,000 arose due to the sale of the Manufacturing Group in fiscal 1996. As discussed in Note 10, the Company sold AEI to Mayer Eisel, Inc. In partial consideration of the sale, the Company received a four-year $500,000 promissory note, which was prepaid at a discount in October 1995 equipment valued at $100,000 and the cancellation of the remaining outstanding balance of the convertible notes totaling $875,000. The remaining consideration was received in cash. As discussed in Note 9, concurrent with the Company's public offering in February 1994, all outstanding Preferred Stock, along with an existing $1,375,000 note payable was exchanged for a new subordinated note totaling $2,575,000. 14. RELATED PARTIES The real property and improvements used in connection with the Sacramento Operations of Western, and upon which the Sacramento Operation is located, were sold by Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware limited liability company the owners of which are Messrs. C. Dean McLain, the president of Western and a director of Western, and Robert M. Rubin, the chairman, chief executive officer, a director and principal shareholder of the Company. Simultaneous with its acquisition of the Sacramento Operation real property and improvements, MRR leased such real property and improvements to Western under the terms of a 20 year commercial lease agreement dated March 1, 1996 with Western paying an initial annual rate of $168,000. Under the lease, such annual rate increases to $192,000 after five years and is subject to fair market adjustments at the end of ten years. In addition to base rent, the Company is responsible for the payment of all related taxes and other assessments, utilities, insurance and repairs (both structural and regular maintenance) with respect to the leased real property during the term of the lease. In accordance with SFAS 13, the building portion of the lease is being accounted for as a capital lease (see Note 11) while the land portion of the lease qualifies for treatment as an operating lease. F-28 On February 9, 1996, the Company loaned an aggregate of $450,000 to Diplomat Corporation ("Diplomat") in connection with Diplomat's acquisition of BioBottoms, Inc. Diplomat is a public company of which Robert Rubin serves as a director. Before the BioBottoms, Inc. transaction, Mr. Rubin held approximately 22% of Diplomat's outstanding capital stock. The loan to Diplomat earned interest at the prime rate plus 2% and was repaid in May 1996. In connection with the above transaction, Mr. Rubin personally made a secured loan to Diplomat in the aggregate principal amount of $2,353,100 which matures in February 1999, and committed to make available a stand-by loan of up to $300,000 aggregate principal. In consideration for making his loan to Diplomat and committing to make this stand-by commitment, Mr. Rubin received shares of Diplomat convertible preferred stock. Pursuant to an Agreement, dated May 30, 1996 (the "ERD Agreement") between the Company and ERD Waste Corp. ("ERD"), the Company agreed to provide certain financial accommodations to ERD by making available a $4.4 million standby letter of credit expiring May 31, 1997 issued by Citibank, N.A. in favor of Chemical Bank (the "Letter of Credit") on behalf of ERD. Chemical Bank is the principal lender to ERD and its subsidiaries, and upon issuance of the Letter of Credit Chemical Bank made available $4.4 million of additional funding to ERD under ERD's existing lending facility. The funding was used to refinance certain outstanding indebtedness of Environmental Services of America, Inc. ("ENSA"), a wholly-owned subsidiary of ERD. Robert M. Rubin is the chairman, chief executive officer, a director and principal shareholder of ERD. Under the terms of a separate Indemnity Agreement, Mr. Rubin has agreed to a limited indemnification to the Company for certain losses or liabilities that it may incur in connection with its having provided the Letter of Credit financial accommodation on behalf of ERD. In consideration for making the Letter of Credit available, in addition to repayment by ERD of all amounts drawn under the Letter of Credit by the delivery of notes convertible into ERD unregistered common stock in the aggregate principal amount of all drawings under the Letter of Credit, ERD granted the Company a security interest in certain machinery and equipment of ENSA to secure such repayment, and agreed to pay to the Company all of the Company's fees, costs and expenses payable to Citibank, N.A. and others in connection with making the Letter of Credit available. No provision for loss on this guarantee has been recorded at July 31, 1996 as management believes that the Company's exposure to loss on this guarantee is minimal. There can be no assurance, however, that the Company will not be required to make payments on behalf of ERD in accordance with the terms of this guarantee. Loss, if any, will be recorded when determinable. On June 28, 1996 the Company entered into a credit agreement with Mr. Rubin pursuant to which Mr. Rubin delivered a demand promissory note for up to $1,200,000. The note is payable on demand no later than July 31, 1997. At July 31, 1996, $838,000 was outstanding on the promissory note. 15. OPERATING BUSINESS GROUPS As described in Note 1, the Company historically has been engaged in two distinct businesses consisting of the Manufacturing Group and the Distribution Service Group. During fiscal 1996, as more fully described in Note 3, through the acquisition of ConnectSoft the Company added a Technology Group to its businesses. Total revenue by segment represents sales to unaffiliated F-29 customers. Inter-segment sales are not material. Operating profit (loss) represents total revenue less operating expenses. In computing operating profit (loss) none of the following items has been added or deducted: general corporate expenses, interest expense, income taxes or extraordinary gains. Identifiable assets are those assets used in the operations of each industry segment. Corporate assets primarily consist of cash, investments and certain prepaid expenses. As discussed in Note 10, the Manufacturing Business was sold during fiscal 1996. All operating results of the Manufacturing Business have been included in the gain on discontinued operations. The Company has no foreign assets and export sales amount to less than 1% of the Company's total sales. No material amounts of the Company's sales are dependent upon a single customer; however, substantially all the Distribution Service Group's revenues resulted from sales, leasing and servicing of equipment and parts manufactured by Case. Summarized financial information by business group for fiscal 1996, 1995 and 1994 is as follows:
DISTRIBUTION TECHNOLOGY SERVICE GROUP GROUP CORPORATE TOTAL ---------- ------------- ---------- ------------ 1996: Revenue $ 276,000 $ 106,555,000 $ - $106,831,000 Operating (loss) profit (10,527,000) 5,201,000 (3,112,000) (8,438,000) Identifiable assets 4,170,000 85,290,000 25,716,000 115,176,000 Depreciation and amortization 374,000 820,000 - 1,194,000 Capital expenditures - 695,000 - 695,000 DISTRIBUTION SERVICE GROUP CORPORATE TOTAL -------------- ---------- ------------ 1995: Revenue $ 86,173,000 $ - $86,173,000 Operating profit (loss) 3,983,000 (183,000) 3,800,000 Identifiable assets 66,852,000 425,000 67,277,000 Depreciation and amortization 1,068,000 - 1,068,000 Capital expenditures 332,000 - 332,000 1994: Revenue 67,370,000 - 67,370,000 Operating profit (loss) 2,880,000 (344,000) 2,536,000 Identifiable assets 45,000,000 1,311,000 46,311,000 Depreciation and amortization 633,000 - 633,000 Capital expenditures 309,000 - 309,000
F-30 16. EMPLOYEE SAVINGS PLAN The Company has a voluntary savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby eligible participants may contribute a percentage of compensation subject to certain limitations. The Company has the option to make discretionary qualified contributions to the plan, however, no Company contributions were made for fiscal 1996, 1995 or 1994. 17. SUBSEQUENT EVENTS Effective September 20, 1996, the Company acquired all of the outstanding capital stock of Interglobe Networks, Inc. ("Interglobe"), a private company providing engineering, design and consulting services for users and providers of telecommunications facilities on the Internet and other media. The shareholders of Interglobe exchanged their shares for $400,000 and 800,000 unregistered shares of the Company's common stock. Additionally, options were granted to certain employees to purchase up to an additional 800,000 shares of the Company's common stock upon the achievement of certain anticipated profits. The acquisition will be accounted for by the purchase method. Accordingly, the results of operations of Interglobe will be included with the results of operations of the Company for periods subsequent to the date of acquisition. Interglobe had revenue of $937,000 (unaudited) and net income of $269,000 (unaudited) for the year ended July 31, 1996. The unaudited pro forma combined results of operations of the Company and Interglobe for the year ended July 31, 1996 are as follows: Revenue $ 107,768,000 Net loss $ (3,431,000) Loss per share $ (0.59) In November 1996, the Company completed the acquisition of the assets of Seattle On-Line, a company engaged in the production of regional websites that showcase metropolitan areas and sale of advertising on these websites. The purchase price of Seattle On-Line consisted of $300,000 cash and up to 25,000 unregistered shares of the Company's common stock. Additionally, the Company issued warrants to purchase 333,333 shares of the Company's common stock at specified prices for a period of three years commencing with the effective date of the acquisition. The warrants carry certain provisions that affect the warrants' exercise price based on future profitability of Seattle On-Line. Pro-forma financial information has not been provided relating to this acquisition because the effect is immaterial. In October 1996, the Company entered into letters of intent with the stockholders of Broadcast Tower Sites, Inc. and its affiliates (the "BTS Companies"), pursuant to which it is contemplated that the Company will acquire, through a merger transaction (the "BTS Merger") the BTS Companies. The BTS Companies are engaged in providing site acquisition, zoning, architectural and engineering services as well as consulting services, to the wireless telecommunications industry. At the closing of the BTS Merger, it is contemplated that the name of the BTS Companies will be changed. Such new name has not yet been determined. Pursuant to the terms of the proposed BTS Merger, the BTS shareholders will receive an aggregate of 507,246 shares of Company Common Stock, certain of which carry registration provisions, $780,000 in cash and three year Company notes aggregating $600,000, bearing interest at the Citibank NA prime rate and payable in installments of $100,000, $200,000 and $300,000 on each of the three anniversary dates of the closing of the BTS Merger. The closing of the BTS Merger is scheduled for December 1996. In a related transaction, the Company also agreed to acquire 100% of the capital stock of Arcadia Consulting, Inc. ("Arcadia"), a company recently formed for the purpose of providing consulting services to clients in the wireless telecommunications industry. The Company has agreed to pay a purchase price of $220,000 in cash, plus a combination of shares of Company Common Stock and AUGI notes due March 15, 1998 valued (based on the estimated market price of AUGI Common Stock as traded on Nasdaq on the date of closing of such acquisition) at between approximately $1.3 million and $1.6 million. The closing of the Arcadia acquisition is conditioned upon the Company's acquisition of the BTS Companies, and is scheduled to occur in or about January 1997. Following the Arcadia acquisition, Arcadia will be merged with and into the BTS Companies. Upon closing of the BTS Merger, the former stockholders of the BTS Companies and Arcadia will receive three-year employment agreements with the BTS Companies and the Company pursuant to which they will receive, in addition to their base salaries and annual bonuses based upon performance of the BTS Companies, options exercisable over a five year period entitling the holders to purchase an additional aggregate 300,000 shares of Company Common Stock (the "BTS Options"). The BTS Options shall vest and be exercisable (i) 100,000 options on November 30, 1997 in the event that the BTS Companies achieve at least $1,800,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1997, (ii) 100,000 options on November 30, 1998 in the event that the BTS Companies achieve at least $2,200,000 of Pre-Tax Income (as defined) in the 12 months ending November 30, 1998, and (iii) 100,000 options on November 30, 1999 in the event that the BTS Companies achieve at least $3,000,000 of Pre-Tax Income in the 12 months ending November 30, 1999. Alternatively, all 300,000 BTS Options shall vest if, during the period commencing upon closing the Merger and terminating on November 30, 1999, the accumulated Pre-Tax Income of the BTS Companies has equalled or exceeded $6,500,000. In the event that a change in control of the Company occurs, or the Company effects a sale of all or substantially all of the assets of the BTS Companies, prior to November 30, 1999, all of the BTS Options shall immediately vest upon such occurrence. In addition, the BTS Merger agreement provides that if the Company effects a public offering of the BTS Companies or a sale of the BTS Companies prior to November 30, 2000, the former BTS Companies and Arcadia stockholders may elect (but shall not be required) to exchange all Company securities received by them in the BTS Merger (the "Exchange Option") for an aggregate of 16.67% of the common stock of the BTS Companies then owned by the Company prior to such transaction. Upon completion of the Arcadia acquisition, Solon L. Kandel, the President and sole stockholder of Arcadia, will be employed by the BTS Companies as its President and Chief Executive Officer, under a three year employment agreement containing terms which are substantially identical to those provided to each of the former stockholders of the BTS Companies, including 100,000 Options and an Exchange Option entitling Mr. Kandel to 8.33% of the common stock of the BTS Companies. In addition, Mr. Kandel will be nominated to serve as a member of the Board of Directors of the Company. F-31 AMERICAN UNITED GLOBAL, INC. AND SUBSIDIARIES SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED JULY 31, 1996 (000'S) - -------------------------------------------------------------------------- BALANCE AT CHARGED AT CHARGED TO BALANCE BEGINNING OF COSTS AND OTHER AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ------------ ------------ --------- --------- ----------- ---------- Accounts receivable reserve: 1996 $ 370 $ 353 $ - $ (204) $ 519 1995 233 215 - (78) 370 1994 74 165 - (6) 233 Inventory reserve: 1996 449 470 - (5) 914 1995 439 50 - (40) 449 1994 500 - - (61) 439 S-1 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November __, 1996 AMERICAN UNITED GLOBAL, INC. By: ------------------------- Robert M. Rubin, Chairman In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated Signatures Title Date ---------- ----- ---- Chairman of the Board, November __, 1996 - ----------------------- Chief Executive Officer Robert M. Rubin and Director Executive Vice President November __, 1996 - --------------------- and Director C. Dean McLain Director November __, 1996 - ---------------------- Lawrence E. Kaplan Vice President-Finance November __, 1996 - ----------------------- and Chief Financial David M. Barnes and Chief Accounting Officer President of Interglobe November __, 1996 - ---------------------- Networks, Inc. and Director Artour Baganov Executive Vice President November __, 1996 - ------------------- and Director Howard Katz SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 12, 1996 AMERICAN UNITED GLOBAL, INC. By: /S/ Robert M. Rubin ------------------------- Robert M. Rubin, Chairman In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated Signatures Title Date ---------- ----- ---- /S/ Robert M. Rubin Chairman of the Board, November 12, 1996 - ----------------------- Chief Executive Officer Robert M. Rubin and Director /S/ C. Dean McLain Executive Vice President November 12, 1996 - --------------------- and Director C. Dean McLain /S/ Lawrence E. Kaplan Director November 12, 1996 - ---------------------- Lawrence E. Kaplan /S/ David M. Barnes Vice President-Finance November 12, 1996 - ----------------------- and Chief Financial David M. Barnes and Chief Accounting Officer /S/ Artour Baganov President of Interglobe November 12, 1996 - ---------------------- Networks, Inc. and Director Artour Baganov /S/ Howard Katz Executive Vice President November 12, 1996 - ------------------- and Director Howard Katz EX-4.3 2 EXHIBIT 4.3 1996 STOCK OPTION PLAN, AS AMENDED Exhibit 4.3 AMERICAN UNITED GLOBAL, INC. 1996 EMPLOYEE STOCK OPTION PLAN 1. PURPOSES The purposes of the American United Global, Inc. 1996 Employee Stock Option Plan (the "Plan") are to aid American United Global, Inc. and its "subsidiaries" or "parents" (as defined under the federal securities laws) (together the "Company") in attracting and retaining highly capable employees and to enable selected key employees and consultants or other representatives of the Company to acquire or increase ownership interest in the Company on a basis that will encourage them to perform at increasing levels of effectiveness and use their best efforts to promote the growth and profitability of the Company. Consistent with these objectives, this Plan authorizes the granting to selected key employees and consultants of options to acquire shares of the Company's voting Common Stock, par value $.01 per share (the "Common Stock"), pursuant to the terms and conditions hereinafter set forth. Options granted hereunder may be (i) "Incentive Options" (which term, as used herein, shall mean options that are intended to be "incentive stock options" within the meaning of Code Section 422), or (ii) "Nonqualified Options" (which term, as used herein, shall mean options that are not intended to be Incentive Options). 2. EFFECTIVE DATE Following approval by the holders of a majority of the outstanding shares of common stock, this Plan shall become effective on April 25, 1996 (the "Effective Date"). 3. ADMINISTRATION (a) This Plan shall be administered by a committee (the "Committee") consisting of not less than two members of the Board of Directors of the Company (the "Board of Directors"), who are selected by the Board of Directors. If, at any time, there are less than two members of the Committee, the Board of Directors shall appoint one or more other members of the Board of Directors to serve on the Committee. All Committee members shall serve, and may be removed, at the pleasure of the Board of Directors. (b) A majority of the members of the Committee (but not less than two) shall constitute a quorum, and any action taken by a majority of such members present at any meeting at which a quorum is present, or acts approved in writing by all such members, shall be the acts of the Committee. (c) Subject to the other provisions of this Plan, the Committee shall have full authority to decide the date or dates on which options (the "Options") to acquire shares of Common Stock will be granted under this Plan (the "Date of Grant"), to determine whether the Options to be granted shall be Incentive Options or Nonqualified Options, or a combination of both, to select the persons to whom the Options will be granted and to determine the number of shares of Common Stock to be covered by each Option, the price at which such shares may be purchased upon the exercise of such option (the "Option Exercise Price"), and other terms and conditions of the Options. In making those determinations, the Committee shall solicit the recommendations of the President and Chairman of the Board of the Company and may take into account the proposed optionee's 2 present and potential contributions to the Company's business and any other factors which the Committee may deem relevant. Subject to the other provisions of this Plan, the Committee shall also have full authority to interpret this Plan and any stock option agreements evidencing Options granted hereunder, to issue rules for administering this Plan, to change, alter, amend or rescind such rules, and to make all other determinations necessary or appropriate for the administration of this Plan. All determinations, interpretations and constructions made by the Committee pursuant to this Section 3 shall be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action, determination or omission taken or made in good faith with respect to this Plan or any Option granted hereunder. 4. ELIGIBILITY Subject to the provisions of Section 7 below, key employees of the Company (including officers and directors who are employees) and consultants and other representatives of the Company shall be eligible to receive Options under this Plan. 5. OPTION SHARES (a) The shares subject to Options granted under this Plan shall be shares of Common Stock and, except as otherwise required or permitted by Subsection 5(b) below, the aggregate number of shares with respect to which Options may be granted shall not exceed 1,250,000 shares. If an Option expires, terminates or is otherwise surrendered, in whole or in part, the shares allocable to the unexercised portion of such Option shall again become available for grants of Options hereunder. As determined from time to time by the Board of Directors, the shares available under this Plan for grants of Options may consist 3 either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock which have been reacquired by the Company or a subsidiary following original issuance. (b) The aggregate number of shares of Common Stock as to which Options may be granted hereunder, as provided in Subsection 5(a) above, the number of shares covered by each outstanding Option and the Option Exercise Price shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or other subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. (c) The aggregate fair market value, determined on the Date of Grant (as such term is defined in Section 6(a) below), of the shares of stock with respect to which Incentive Options are exercisable for the first time by an Optionee (as such term as defined in Section 6 below) during any calendar year (under all incentive stock option plans of the Company and its subsidiaries) may not exceed $100,000. 6. TERMS AND CONDITIONS OF OPTIONS The Committee may, in its discretion, grant to a key employee only Incentive Options, only Nonqualified Options, or a combination of both, and each Option granted shall be clearly identified as to its status. Recipients other than employees of the Company can only receive Nonqualified Options. Each Option granted pursuant to this Plan shall be evidenced by a stock option agreement between the Company and the recipient to whom the option is granted (the "Optionee") in such form or forms as the Committee, from time 4 to time, shall prescribe, which agreements need not be identical to each other but shall comply with and be subject to the following terms and conditions: (a) Option Exercise Price. The Option Exercise Price at which each share of Common Stock may be purchased pursuant to an Option shall be determined by the Committee, except that (i) the Option Exercise Price at which each share of Common Stock may be purchased pursuant to an Incentive Option shall be not less than 100% of the fair market value for each such share on the Date of Grant of such Incentive Option and (ii) the Option Exercise Price at which each share of Common Stock may be purchased pursuant to a Non-Qualified Option shall not be less than 85% of the fair market value for each share on the Date of Grant of such Nonqualified Option. Anything contained in this Section 6(a) to the contrary notwithstanding, in the event that the number of shares of Common Stock subject to any Option is adjusted pursuant to Section 5(b) above, a corresponding adjustment shall be made in the Option Exercise Price per share. (b) Duration of Options. The duration of each Option granted hereunder shall be determined by the Committee, except that each Nonqualified Option granted hereunder shall expire and all rights to purchase shares of Common Stock pursuant thereto shall cease one day before the tenth anniversary of the Date of Grant of such Option and each Incentive Option granted hereunder shall expire and all rights to purchase shares of Common Stock pursuant thereto shall cease one day before the tenth anniversary of the Date of Grant of such Option (in each case, the "Expiration Date"). (c) Vesting of Options. The vesting of each Option granted hereunder shall be determined by the Committee. Only such vested portions of Options may be 5 exercised. Anything contained in this Section 6(c) to the contrary notwithstanding, an Optionee shall become fully (100%) vested in each of his or her Options upon his or her termination of employment with the Company or any of its subsidiaries for reasons of death, disability or retirement. The Committee shall, in its sole discretion, determine whether or not disability or retirement has occurred. (d) Merger, Consolidation, etc. In the event the Company shall, pursuant to action by its Board of Directors, at any time propose to merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to, another corporation and provision is not made pursuant to the terms of such transaction for (i) the assumption by the surviving, resulting or acquiring corporation of outstanding Options, (ii) the substitution therefor of new options granting reasonably similar rights and privileges, or (iii) the payment of cash or other consideration in respect thereof, the Committee shall cause written notice of the proposed transaction to be given to each Optionee not less than 30 days prior to the announced anticipated effective date of the proposed transaction, and the Committee shall specify in such notice a date, which date shall be not less than 10 days prior to the announced anticipated effective date of the proposed transaction (the "Vesting Date"), upon which Vesting Date each Optionee's Options shall become fully (100%) vested. Each Optionee shall have the right to exercise his or her Options to purchase any or all shares then subject to such Options during the period commencing on the Vesting Date and ending at 5:00 p.m. on the day which is two (2) days prior to the announced anticipated effective date of the proposed transaction. If the transaction is consummated, each Option, to the extent not previously exercised prior to the effective date of the transaction, shall terminate 6 on such effective date. If the transaction is abandoned or otherwise not consummated, then to the extent that any Option not exercised prior to such abandonment shall have vested solely by operation of this Section 6(d), such vesting shall be annulled and be of no further force or effect and the vesting period set forth in Section 6(c) above shall be reinstituted as of the date of such abandonment. (e) Exercise of Options. A person entitled to exercise an Option, or any portion thereof, may exercise it (or such vested portion thereof) in whole at any time, or in part from time to time, by delivering to the Company at its principal office, directed to the attention of its Chairman, President or such other duly elected officer as shall be designated in writing by the Committee to the Optionee, written notice specifying the number of shares of Common Stock with respect to which the Option is being exercised, together with payment in full of the Option Exercise Price for such shares. Such payment shall be made in cash or by certified check or bank draft to the order of the Company; provided, however, that the Committee may, in its sole discretion, authorize such payment, in whole or in part, in any other form, including payment by personal check or by the exchange of shares of Common Stock of the Company previously acquired by the person entitled to exercise the Option and having a fair market value on the date of exercise equal to the price for which the shares of Common Stock may be purchased pursuant to the Option. (f) Nontransferability. Options shall not be transferable other than by will or the laws of descent and distribution and no Option may be exercised by anyone other than the Optionee; that if the Optionee dies or becomes incapacitated, the Option may be exercised by his or her estate, legal representative or beneficiary, as the case may be, subject 7 to all other terms and conditions contained in this Plan. (g) Termination of Employment. The following rules shall apply in the event that an Optionee is an employee of the Company as regards such Optionee's termination of employment with the Company: (i) In the event of an Optionee's termination of employment with the Company either (1) by the Company for Cause (as defined in any relevant employment agreement to which Optionee is a party) or for fraud, dishonesty, habitual drunkenness or drug use, or willful disregard of assigned duties by such Optionee in the absence of such an agreement, or (2) by the Optionee voluntarily otherwise than at the end of an employment term under a relevant employment agreement to which Optionee is a party and without the written consent of the Company, then the Option shall immediately terminate. (ii) In the event of the Optionee's termination of employment with the Company for reason of retirement or under circumstances other than those specified in subsection (g)(i) immediately above, and for reasons other than death or disability, the Option shall terminate three months after the date of such termination of employment or on the Expiration Date, whichever shall first occur; provided, however, that if the Optionee dies within such 3-month period, the time period set forth in subsection (g) (iii) immediately below shall apply. (iii) In the event of the death or disability, of the Optionee while the Optionee is employed by the Company, the Option shall terminate on the first anniversary of the Optionee's date of termination of employment, or on the 8 Expiration Date, whichever shall first occur. (iv) Anything contained in this Section 6 to the contrary notwithstanding, the Option may only be exercised following the Optionee's termination of employment with the Company for reasons other than death, disability or retirement if, and to the extent that, the Option was exercisable immediately prior to such termination of employment. (v) The Optionee's transfer of employment between American United Global, Inc. and its "subsidiaries" and "parents" (as defined under the federal securities laws) shall not constitute a termination of employment and the Committee shall determine in each case whether an authorized leave of absence for military service or otherwise shall constitute a termination of employment. (vi) Termination of the Optionee's employment shall not affect the vesting schedule of the Optionee's Option. (h) No Rights as Stockholder or to Continued Employment. No Optionee shall have any rights as a stockholder of the Company with respect to any shares covered by an Option prior to the date of issuance to such Optionee of the certificate or certificates for such shares, and neither this Plan nor any Option granted hereunder shall confer upon an Optionee any right to continuance of employment by the Company or interferes in any way with the right of the Company to terminate the employment of such Optionee. (i) Each stock option agreement shall specify whether the Options granted thereunder are Incentive Options, Nonqualified Options, or a combination of both. 9 7. TEN PERCENT STOCKHOLDERS The Committee shall not grant an Incentive Option to an individual who owns, at the time such Incentive Option is granted (directly or by attribution pursuant to Section 425(d) of the Code), shares of capital stock of the Company possessing more than 10% of the voting power of all classes of capital stock of the Company unless, at the time such Incentive Option is granted, the price at which each share of Common Stock may be purchased pursuant to the Incentive Option is at least 110% of the fair market value of each such share on the Date of Grant and such Incentive Option, by its terms, is not exercisable after the expiration of five years from the Date of Grant. 8. ISSUANCE OF SHARES; RESTRICTIONS (a) Subject to the conditions and restrictions provided in this Section 8, the Company shall, within 20 business days after an Option has been duly exercised in whole or in part, deliver to the person who exercised the Option one or more certificates, registered in the name of such person, for the number of shares of Common Stock with respect to which the Option has been exercised. The Company may legend any stock certificate issued hereunder to reflect any restrictions provided for in this Section 8. (b) Unless the shares subject to Options granted under the Plan have been registered under the Securities Act of 1933, as amended (the "Act") (and, in the case of any Optionee who may be deemed an "affiliate" of the Company as such term is defined in Rule 405 under the Act, such shares have been registered under the Act for resale by the Optionee), or the Company has determined that an exemption from registration under the Act is available, the Company 10 may require prior to and as a condition of the issuance of any shares of Common Stock, that the person exercising an Option hereunder (i) sign such agreements with respect thereto as the Company may require in any Option Agreement by and between the Company and the Optionee, and (ii) furnish the Company with a written representation in a form prescribed by the Committee to the effect that such person is acquiring such shares solely with a view to investment for his or her own account and not with a view to the resale or distribution of all or any part thereof, and that such person will not dispose of any of such shares otherwise than in accordance with the provisions of Rule 144 under the Act unless and until either the distribution of such shares is registered under the Act or the Company is satisfied that an exemption from such registration is available. (c) Anything contained herein to the contrary notwithstanding, the Company shall not be obliged to sell or issue any shares of Common Stock pursuant to the exercise of an Option granted hereunder unless and until the Company is satisfied that such sale or issuance complies with all applicable provisions of the Act and all other laws or regulations by which the Company is bound or to which the Company or such shares are subject. 9. SUBSTITUTE OPTIONS Anything contained herein to the contrary notwithstanding, Options may, at the discretion of the Board of Directors, be granted under this Plan in substitution for options to purchase shares of capital stock of another corporation which is merged into, consolidated with, or all or a substantial portion of the property or stock of which is acquired by, the Company or a subsidiary. The terms, provisions and benefits to Optionees 11 of such substitute options shall in all respects be as similar as reasonably practicable to the terms, provisions and benefits to Optionees of the Options of the other corporation on the date of substitution, except that such substitute Options shall provide for the purchase of shares of Common Stock of the Company instead of shares of such other corporation. 10. TERM OF THE PLAN Unless the plan has been sooner terminated pursuant to Section 11 below, this Plan shall terminate on, and no Options shall be granted after, the tenth anniversary of the Effective Date. The provisions of this Plan, however, shall continue thereafter to govern all Options theretofore granted, until the exercise, expiration or cancellation of such Options. 11. AMENDMENT AND TERMINATION OF PLAN The Board of Directors at any time may terminate this Plan or amend it from time to time in such respects as it deems desirable; provided, however, that, without the further approval of the stockholders of the Company, no amendment shall (i) increase the maximum aggregate number of shares of Common Stock with respect to which Options may be granted under this Plan, (ii) change the eligibility provisions of Section 4 hereof, or (iv) create a "modification" of any Incentive Stock Options previously granted or otherwise modify the Plan with respect to the granting of Incentive Stock Options, as those terms are defined under the Code; and provided, further, that, subject to the provisions of Section 6 hereof, no termination of or amendment hereto shall adversely affect the rights of an Optionee or other person holding an option theretofore granted hereunder without the consent of such Optionee or other person, as the case may be. 12 FIRST AMENDMENT TO AMERICAN UNITED GLOBAL, INC. 1996 EMPLOYEE STOCK OPTION PLAN The AMERICAN UNITED GLOBAL, INC. 1996 EMPLOYEE STOCK OPTION PLAN (the "Plan"), pursuant to authority granted by the Board of Directors of American United Global, Inc. (the "Company") and the 1996 Plan Committee of the Company's Board of Directors, does hereby amend Section 2 of the Plan to the effect that stockholder approval of the Plan shall not be necessary for the Plan to be effective, by deleting the existing Section 2 of the Plan in its entirety and substituting therefor the following language: "2. EFFECTIVE DATE This Plan shall become effective on April 25, 1996 (the "Effective Date")." IN WITNESS WHEREOF, the Plan is hereby amended as aforesaid as of the date hereinafter set forth. DATE: as of July 30, 1996 AMERICAN UNITED GLOBAL, INC. By: /s/ Robert M. Rubin __________________________ Robert M. Rubin, President EX-10.22 3 EXHIBIT 10.22 AGREE & PLAN OF MERGER - 08/22/96 Exhibit 10.22 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (this "Agreement"), entered into this 22nd day of August 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; I-GLOBE ACQUISITION CORP., a Washington corporation ("Mergerco"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; INTERGLOBE NETWORKS, INC., a Washington corporation (the "Company"), having its principal offices at 1520 4th Avenue, Suite 200, Seattle, Washington 98101; and ARTOUR BAGANOV ("Baganov"), BRIAN BURSCH ("Bursch"), and ALI MARASHI ("Marashi"). Baganov, Bursch, and Marashi are each hereinafter individually referred to as a "Principal Stockholder" and are collectively hereinafter referred to as the "Principal Stockholders". W I T N E S S E T H: WHEREAS, Baganov, Bursch, and Marashi are the record and beneficial owners of one hundred percent (100%) of the issued and outstanding shares of the common stock of the Company, on a fully-diluted basis, after giving effect to: (a) the exercise of all outstanding options and warrants to purchase common stock of the Company, (b) the conversion into common stock of all convertible notes, convertible debentures, shares of convertible preferred stock of all series, or other securities convertible into shares of common stock of the Company, and (c) the exercise of all other rights and privileges to receive or acquire shares of Common Stock of the Company; and (d) there being no other capital stock of the Company issued or outstanding other than the common stock of the Company; and (e) there being no options, warrants, subscription rights, rights of first refusal, convertible securities, or other rights to purchase or receive shares of any of the securities referred to in (a), (b), (c), or (d) preceding (collectively, the "Fully Diluted Equity"); and WHEREAS, Mergerco is a wholly-owned direct subsidiary of AUGI, having been formed for the purpose of merging with and into the Company, and thereby enabling AUGI to acquire all of the shares of capital stock of the Company as shall represent the Fully Diluted Equity of the Company as at the effective date of the Merger (hereinafter, referred to as the "Stock") pursuant to the Merger hereinafter provided for; and WHEREAS, the Principal Stockholders, the Board of Directors of the Company, the Board of Directors of Mergerco, AUGI, as the sole stockholder of Mergerco, and the Board of Directors of AUGI, have all authorized and approved the Merger and the consummation of the other transactions contemplated by this Agreement, all on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein set forth, the parties hereby covenant and agree as follows: 1. THE MERGER. 1.1 The Merger. At the time of the Closing on the Closing Date (as such terms are hereinafter defined) and in accordance with the provisions of this Agreement and the applicable provisions of the Washington Business Corporation Act ("Washington Law"), Mergerco shall be merged with and into the Company (the "Merger") in accordance with the terms and conditions of this Agreement and a certificate of merger in substantially the form of Exhibit "A" annexed hereto (the "Certificate of Merger"), with the Company as the surviving corporation of such Merger (the Company being hereinafter sometimes referred to as the "Surviving Corporation"). Thereupon, the separate existence of Mergerco shall cease, and the Company, as the Surviving Corporation, shall continue its corporate existence under Washington Law under its current name, Interglobe Networks, Inc. 1.2 Effectiveness of the Merger. As soon as practicable upon or after the satisfaction or waiver of the conditions precedent set forth in Sections 7, 8 and 9 below, Mergerco and the Company will execute the Certificate of Merger (subject to such revisions as to form (but not substance) as may be required by the relevant provisions of Washington Law), and shall file or cause to be filed such Certificate of Merger with the Secretary of State of Washington; and the Merger shall become effective as of the date of the filing of such Certificate of Merger, which shall occur on the "Closing Date" (as hereinafter defined), and the Closing shall be deemed to occur as of such Closing Date in accordance with Section 10 hereof. 1.3 Effect of the Merger. Upon the effectiveness of the Merger: (a) the Surviving Corporation shall own and possess all assets and property of every kind and description, and every interest therein, wherever located, and all rights, privileges, immunities, powers, franchises and authority of a public as well as of a private nature, of each of Mergerco and the Company (the "Constituent Corporations"), and all obligations owed to, belonging to or due to each of the Constituent Corporations, all of which shall be vested in the Surviving Corporation pursuant to Washington Law without further act or deed, and (b) the Surviving Corporation shall be liable for all claims, liabilities and obligations of the Constituent Corporations, all of which shall become and remain the obligations of the Surviving Corporation pursuant to Washington Law without further act or deed. 1.4 Surviving Corporation. Upon the effectiveness of the Merger, the Certificate of Incorporation, By-Laws, directors and officers of the Surviving Corporation shall be identical to those of Mergerco as in effect immediately prior to the effectiveness of the Merger. 1.5 Status and Conversion of Securities. At the Closing Date and upon the effectiveness of the Merger: (a) Treasury Stock. Each share of capital stock of the Company held by the Company as treasury stock immediately prior to the effectiveness of the Merger shall 2 be canceled and extinguished, and no payment or issuance of any consideration shall be payable or shall be made in respect thereof; (b) Mergerco Stock. Each share of capital stock of Mergerco outstanding immediately prior to the effectiveness of the Merger shall be converted into and shall become one (1) share of common stock of the Surviving Corporation; and (c) Options and Warrants. As of the date of this Agreement there are, and at the Closing Date there shall be, no options, warrants, rights, or other agreements to acquire any securities of the Company, or any securities directly or indirectly convertible into or exchangeable for or exercisable to acquire the same, and no agreements to issue or acquire or dispose of any of the foregoing. (d) Treatment of Fully Diluted Equity. Each share of the Stock of the Company outstanding immediately prior to the effectiveness of the Merger, representing: (i) the Fully Diluted Equity of the Company; and (ii) all other securities of the Company exercisable, convertible or exchangeable for shares of Fully Diluted Equity, shall be canceled and extinguished and converted into the right to receive a proportionate amount of the Merger Consideration payable pursuant to Section 2 below. Such Merger Consideration shall be paid and delivered to the holders of the outstanding Stock upon: (A) surrender to the Surviving Corporation of the certificates representing such shares of outstanding Stock (all of which shall be delivered free and clear of any and all pledges, Liens (as such term is hereinafter defined), claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever, except any restrictions which may be created by operation of state or federal securities laws) at the time and place of the Closing as provided in Section 10 below; and (B) delivery to the Surviving Corporation and AUGI by the subject holder of Stock of an appropriate letter confirming (x) such holder's ownership of such holder's Stock free and clear as aforesaid (which representation and warranty shall survive the Closing), (y) such information regarding such holder and such holder's background and financial status as may reasonably be requested by AUGI, and (z) such holder's investment intent with respect to the AUGI Securities being received by such holder pursuant to Section 2 below. 1.6 Books and Records. On the Closing Date, the Company shall deliver to AUGI all of the stock books, records and minute books of the Company, all financial and accounting books and records of the Company and, except as may otherwise be agreed by the 3 parties to this Agreement at the Closing, all referral, client, customer and sales records of the Company. 1.7 Tax Free Reorganization. The parties to this Agreement intend for the transactions whereby the Company, upon consummation of the Merger, will become a wholly-owned subsidiary of AUGI and the owners of the Company's securities immediately prior to the consummation of the Merger shall receive the Merger Consideration upon consummation of the Merger, shall be treated as a tax free reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended. 2. MERGER CONSIDERATION. 2.1 Merger Consideration. On consummation of the Merger, the record owners of all outstanding Fully Diluted Equity of the Company shall receive their allocable percentages, as specified in Section 3 of this Agreement, of an aggregate of (a) Eight Hundred Thousand (800,000) shares of common stock, $0.01 par value per share, of AUGI (the "AUGI Common Stock"); and (b) Four Hundred Thousand ($400,000) Dollars, payable by wire transfer of immediately available funds to bank accounts designated by the Principal Stockholders. 3. ALLOCATION OF MERGER CONSIDERATION. 3.1 On consummation of the Merger, the Merger Consideration shall be deliver ed to the owners of the Outstanding Fully Diluted Equity of the Company as follows: Artour Baganov - 698,182 shares of AUGI Stock Brian Bursch - 32,000 shares of AUGI Stock Ali Marashi - 69,818 shares of AUGI Stock The cash portion of the merger consideration shall be allocated among the Principal Stockholders in accordance with their respective ratios by which the above shares of AUGI Common Stock bear to 800,000 shares of AUGI Common Stock. 4. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS. The Principal Stockholders, jointly and severally, hereby represent and warrant to Mergerco and AUGI as follows, it being understood and agreed that neither AUGI nor Mergerco is or will be required to undertake any independent investigation to determine the truth, accuracy and completeness of the representations and warranties made by the Principal Stockholders in this Agreement and that no due diligence investigation undertaken by AUGI or Mergerco shall in any way be deemed to ascribe any knowledge to AUGI or Mergerco different from, or in addition to, the following representations and warranties made to AUGI and Mergerco, or to reduce, effect, or eliminate their complete reliance upon such representations 4 and warranties, and it being further understood and agreed that the survival of each such representation and warranty shall be as set forth in Section 12.2(d) of this Agreement: 4.1 Ownership of the Stock. (a) The number of shares of outstanding Stock, the record owners thereof, and the record addresses and social security number or tax identification number of each of the Principal Stockholders, are as set forth on Schedule 4.1 annexed hereto. Each Principal Stockholder is the legal and beneficial owner of such Principal Stockholder's shares of the Stock enumerated next to such Principal Stockholder's name on Schedule 4.1 hereto, free and clear of all pledges, Liens, claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever, except any restrictions which may be created by operation of state or federal securities laws (which restrictions are set forth on such Schedule. For purposes of this Agreement, a "Lien" shall mean any mortgage, deed of trust, trust, pledge, vendors' or other lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature of any of the foregoing, any claim, security interest, assignment, or encumbrance of any kind, any negative lien and the filing of or agreement to give any financing statement or similar notice of security interest. (b) Schedule 4.1 accurately sets forth the number of shares of Stock owned of record and beneficially by each Principal Stockholders, and all of the Stock has been duly authorized and validly issued, and is fully paid and non-assessable. 4.2 Valid and Binding Agreement. (a) The execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions contemplated hereby by the Company have been duly and validly authorized by the Board of Directors of the Company and the Principal Stockholders, and the Company has the full corporate right, power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. This Agreement constitutes the legal, valid and binding obligation of the Company and of the Principal Stockholders, enforceable against the Company and the Principal Stockholders in accordance with its terms. (b) Each Principal Stockholder has full legal right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and, when executed and delivered by such Principal Stockholder, the Registration Rights Agreement, the Non-Competition and Non-Disclosure Agreement and the Employment Agreement of such Principal Stockholder (as such terms are hereinafter defined), constitutes and will constitute the legal, valid and binding obligations of such Principal Stockholder, enforceable against such Principal Stockholder in accordance with their respective terms. 5 4.3 Organization, Good Standing and Qualification. (a) The Company: (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington; (ii) has all necessary corporate power and authority to carry on its business and to own, lease and operate its properties; and (iii) is not required, by the nature of its properties or business, to be qualified to do business as a foreign corporation in any other foreign jurisdiction in which the failure to be so qualified would have a material adverse effect on the Company, its properties or assets, its business, or its condition (financial or otherwise). (b) The Company has no subsidiary corporations. (c) True and complete copies of the Articles of Incorporation and By-Laws of the Company (including all amendments thereto), and a correct and complete list of the officers and directors of the Company, are annexed hereto as Schedule 4.3. 4.4 Capital Structure; Stock Ownership. (a) The authorized and outstanding shares of capital stock of the Company, and the record owners of such shares of capital stock, and all outstanding options, warrants and other securities convertible, exchangeable or exercisable for shares of common stock of the Company, if any, are as set forth on Schedule 4.4 annexed hereto. Other than as set forth on Schedule 4.4, no other shares of capital stock of the Company are issued or outstanding. (b) Except as set forth in Schedule 4.4 annexed hereto (all of which agreements and commitments will be terminated and canceled as of the Closing Date, without any payment by the Company), if there are any at the date hereof, there are no outstanding subscriptions, options, rights, warrants, convertible securities or other agreements or calls, demands or commitments: (i) obligating the Company to issue, transfer or purchase any shares of its capital stock, or (ii) obligating the Principal Stockholders or any other stockholder of the Company to transfer any shares of the Stock owned by such stockholder. Other than in respect of the stock purchase rights described in Schedule 4.4 (all of which shall be terminated and canceled as of the Closing Date, without any payment by the Company), if there are any at the date hereof, no shares of capital stock of the Company are reserved for issuance pursuant to stock options, warrants, agreements or other rights to purchase capital stock. 4.5 Investments. The Company does not own, directly or indirectly, any stock or other equity securities of any corporation or entity, or have any direct or indirect equity or ownership interest in any person, firm, partnership, corporation, venture or business other than the business conducted by the Company. 6 4.6 Financial Information. (a) Annexed hereto as Schedule 4.6(a) are the audited financial statements of the Company as at December 31, 1995 and for the fiscal period from December 9, 1994 (date of inception) through December 31, 1995, including balance sheets, statements of operations, statements of stockholders' equity, and statements of cash flow, as reported on by Richard A. Eisner & Company (the "Audited Financial Statements"). Schedule 4.6(a) also includes the unaudited financial statements of the Company as at June 30, 1996 and for the six months then ended, including balance sheets and statements of operations for the fiscal periods then ended (the "Unaudited Financial Statements"). Such Audited Financial Statements and Unaudited Financial Statements are herein collectively referred to as the "Financial Statements". (b) The Financial Statements: (i) are true, complete and correct in all respects and present fairly the financial position of the Company as of the dates thereof and for the periods reflected therein, all in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis; (ii) make full and adequate provision, in accordance with generally accepted accounting principles, for the various assets and liabilities of the Company on a basis and the results of its operations and transactions in its accounts, as of the dates and for the periods referred to therein; (iii) reflect only assets and liabilities and results of operations and transactions of the Company, and do not include or reflect any assets, liabilities or transactions of any corporation or entity except the Company; and (iv) were prepared from, and are consistent with, the books and records of the Company, which accurately and consistently reflect all transactions to which the Company was and is a party; provided, that the Unaudited Financial Statements omit footnote disclosures required under GAAP and are subject to fiscal year end audit adjustments which would not, individually or in the aggregate, be material. (c) Except as expressly set forth in the Financial Statements and/or in the Schedules to this Agreement, or arising in the normal course of the Company's business since December 31, 1995 (the "Last Fiscal Year End"), there are as at the date hereof, no liabilities or obligations (including, without limitation, any tax liabilities or accruals) of the Company, whether absolute, accrued, contingent or otherwise and whether due or to become due, that are, singly or in the aggregate, material. (d) Schedule 4.6(d) annexed hereto contains: (i) an aging schedule of accounts receivable and accounts payable of the Company as at June 30, 1996 (the "Stub Period Date"), (ii) a list of the outstanding principal balance of and approximate accrued interest on all indebtedness (other than accounts payable), loans and/or notes payable of the Company as of the Stub Period Date; (iii) a list of any leasehold or other contractual obligations of the Company to any of the Principal Stockholders, any other stockholder of the Company (if any), and/or any of their respective Affiliates on the date hereof; (iv) a list of all obligations of the Company guaranteed by any of the Principal Stockholders, any other stockholder of the Company (if any), and/or any of their respective Affiliates on the date hereof, and the terms of such guarantees; (v) a list reflecting the nature and amount of all obligations owed to the Company on the date 7 hereof by any of the Principal Stockholders, any other stockholder of the Company (if any), and/or any of their respective Affiliates; and (vi) a list reflecting the nature and amount of all obligations owed by the Company on the date hereof to any of the Principal Stockholders, any other stockholder of the Company (if any), and/or any of their respective Affiliates. Wherever used in this Agreement, the term "Affiliate" means, with respect to any person or entity, any other person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the first person or entity. 4.7 No Material Changes. Except as and to the extent described in Schedule 4.7 annexed hereto (which Schedule may make reference to any other Schedule hereto or to any other document(s) referred to in this Agreement which has heretofore been delivered to Mergerco), since the Last Fiscal Year End, the business of the Company has continued to be operated only in the ordinary course, and there has not been: (a) Any material adverse change in the condition (financial or otherwise), operations, business, properties, or prospects of the Company from that shown in the most recent Audited Financial Statements, or any material transaction or commitment effected or entered into outside of the normal course of the Company's business; (b) Any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting the business, operations, assets, properties, condition (financial or otherwise), or prospects of the Company; (c) Any declaration, setting aside or payment of any dividend or other distribution with respect to the Stock, any other payment of any kind by the Company to any of its stockholders or any of their respective Affiliates outside of the ordinary course of business, any forgiveness of any debt or obligation owed to the Company by any of its stockholders or any of their respective Affiliates, or any direct or indirect redemption, purchase or other acquisition by the Company of any capital stock of the Company; or (d) Any other event or condition arising from or out of or in connection with the operation of the Company which has materially and adversely affected, or may reasonably be expected to materially and adversely affect, the Company, its assets or properties, its business, condition (financial or otherwise), or prospects. 4.8 Tax Returns and Tax Audits. (a) Except as and to the extent disclosed in Schedule 4.8 annexed hereto: (i) on the date hereof, all foreign, federal, state, and local tax returns and tax reports required to be filed by the Company on or before the date of this Agreement have been timely filed with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed, except for such prior failures to file in timely fashion as have been subsequently followed by complete and proper filing and payment of all amounts due in respect thereof, including interest and penalties, if any; (ii) all foreign, federal, state, and local 8 income, franchise, sales, use, property, excise, and other taxes (including interest and penalties and including estimated tax installments where required to be filed and paid) due from or with respect to the Company as of the date hereof have been fully paid, and appropriate accruals shall have been made on the Company's books for taxes not yet due and payable; (iii) as of the date hereof, all taxes and other assessments and levies which the Company is required by law to withhold or to collect on or before the date hereof have been duly withheld and collected, and have been paid over to the proper governmental authorities to the extent due and payable on or before the date hereof; (iv) there are no outstanding or pending claims, deficiencies or assessments for taxes, interest or penalties with respect to any taxable period of the Company, except claims for taxes not yet due and payable; and (v) no tax Liens have been filed on the Company's assets. At and after the date hereof, the Company will have no liability for any foreign, federal, state, or local income tax with respect to any taxable period ending on or before the date hereof, except as and to the extent disclosed in Schedule 4.8, if any. (b) There are no audits pending or, to the knowledge of the Company and each Principal Stockholder, threatened, with respect to any foreign, federal, state, or local tax returns of the Company, and no waivers of statutes of limitations have been given or requested with respect to any tax years or tax filings of the Company. No presently pending assessments of tax deficiencies have been made against the Company or with respect to its income, receipts or net worth, and no extensions of time are in effect for the assessment of deficiencies against the Company. The Company has not received notice of any claim by any authority in a jurisdiction in which the Company does business and does not file tax returns that the Company or its income, receipts or net worth may be subject to tax in that jurisdiction. The Company is not a party to any tax-sharing or allocation agreement, nor does the Company owe any amount under any tax-sharing or allocation agreement. The Company has no liability for unpaid taxes because it once was a member of an "affiliated group" within the meaning of Section 1502 of the Code. 4.9 Personal Property; Liens. The Company has and owns good and marketable title to all of its personal property, free and clear of all Liens whatsoever, except for: (a) Liens securing the Company's indebtedness for money borrowed, if any, as reflected in the Financial Statements, pursuant to the security agreements listed in Schedule 4.9 annexed hereto; (b) Liens securing the deferred purchase price of machinery, equipment, vehicles and/or other fixed assets, if any, as reflected in the Financial Statements or as incurred after the date thereof in the ordinary course of business of the Company, pursuant to security agreements listed in Schedule 4.9; and (c) materialmen's, workmen's and other similar statutory liens arising in the ordinary course of business, none of which are material singly or in the aggregate, each of the Liens described in (a), (b), and (c) of this sentence being hereinafter referred to as "Permitted Liens". The aggregate book value of all items of machinery, equipment, vehicles, and other fixed assets owned or leased by the Company does not exceed $100,000, and all of such fixed assets are in good operating condition and repair (reasonable wear and tear excepted) and are adequate for their use in the Company's business as presently conducted. 9 4.10 Real Property. (a) The Company neither owns nor has any interest of any kind (whether ownership, lease or otherwise) in any real property except to the extent of the Company's leasehold interests under the leases for its business premises, true and complete copies of which leases (including all amendments thereto) are annexed hereto as Schedule 4.10 (the "Leases"). (b) The Company and the landlords thereunder are presently in compliance in all material respects with all of their respective obligations under the Leases, and the premises leased thereunder are in good condition (reasonable wear and tear excepted) and are adequate for the operation of the Company's current and presently contemplated business. (c) The Company is in actual possession of the properties demised under the Leases and has good and marketable title to the leasehold estates conveyed under the Leases, free and clear of any Lien or any sublease or right of occupancy, except as set forth on Schedule 4.10 hereto, if at all. (d) The Company has the right of ingress and egress through a public road or street, to and from the properties demised under the Leases. (e) The properties demised under the Leases and the improvements thereon constitute all of the real property and leases currently used exclusively or materially for the business of the Company and are adequate and sufficient for the current and currently anticipated operations of the Company and its business. (f) There is no pending proceeding for the taking or condemnation of all or any portion of the properties demised under the Leases or pending taking or condemnation proceeding which would result in a termination of any Lease of real property and, to the knowledge of the Company and the Principal Shareholders, none of the same is threatened. (g) There are no material items of maintenance that have been materially deferred with respect to any of the improvements on the real property demised under the Leases. (h) The Company has received no uncured notice from applicable governmental authorities of any outstanding violations of any building or zoning laws, codes or regulations, or governmental or judicial orders issued pursuant thereto, with respect to the real property and the improvements thereon demised under the Leases, and there are no such violations. 4.11 Accounts Receivable. All accounts receivable shown on the balance sheet as of the Stub Period Date included in the Financial Statements (the "Balance Sheet"), and all accounts receivable thereafter created or acquired by the Company prior to the Closing Date, (a) have arisen or will arise in the ordinary course of the Company's business, (b) are and will 10 be subject to no counterclaims, set-offs, allowances or discounts of any kind, except to the extent of the allowance for doubtful accounts as of the Stub Period Date reflected in the Balance Sheet, and (c) have been, are and will be bona fide receivables due to the Company, valid and collectible in the ordinary course of business within three (3) months after the Closing Date (subject to the aforesaid allowance for doubtful accounts), without necessity of instituting any legal proceedings for collection. 4.12 Inventories. All supplies and other inventories shown on the Balance Sheet, and all inventories thereafter acquired by the Company prior to the Closing Date, have been and will be valued at the lower of cost or market, and consisted and will consist of items which are of a quality and quantity which are useable in the ordinary course of the Company's business for customary commercial purposes, and are substantially at the Company's normal working levels of the same in the current conduct of its business in the ordinary course. 4.13 Insurance Policies. Schedule 4.13 annexed hereto contains a true and correct schedule of all insurance coverages held by the Company concerning its business and properties (including but not limited to professional liability insurance). All such policies are in full force and effect and the Company is not in default thereunder. Such policies provide adequate insurance coverage for the Company, its properties and its business and are sufficient for compliance with all requirements of law. 4.14 Permits and Licenses; Consents. The Company possesses and is in material compliance with every license, permit, franchise, clearance, waiver, certificate, registration, order, authorization, consent, approval, administrative finding or directive of, or release by (each of the foregoing, a "Permit") any Governmental Authority (as such term is hereinafter defined) having jurisdiction over the Company, or its business, properties, or assets, necessary in order to operate its business in the manner presently conducted and currently planned to be conducted except for any such Permits the failure to hold does not and is not reasonably expected to have a material adverse effect on the Company, its business, properties, or assets; all of the Company's Permits are valid, current and in full force and effect; and none of such Permits will be voided, revoked or terminated, or are voidable, revocable or terminable, upon and by reason of the Merger and the change of ownership of the Company pursuant to this Agreement. Schedule 4.14 hereto lists all of the Permits of or in respect of any Governmental Authority or any other Person (as such term is hereinafter defined) which are required for the execution or delivery by the Company and the Principal Stockholders of this Agreement and the consummation of the transactions contemplated hereby. For purposes of this Agreement, the term "Governmental Authority shall mean any nation or government, foreign or domestic, and any territory, possession, protectorate, province, state, county, parish, regional authority, metropolitan authority, city, town, village, other locality, or other political subdivision or agency, regulatory body, or other authority, commission, tribunal, representative or official thereof, and any Person (as such term is hereinafter defined) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. For purposes of this Agreement, the term "Person" shall mean any natural person, corporation, partnership, joint venture, trust or unincorporated organization, joint stock company or other similar 11 organization, Governmental Authority or any other legal entity, whether acting in an individual, fiduciary or other capacity. 4.15 Contracts and Commitments. (a) Schedule 4.15 annexed hereto lists all material contracts, leases, commitments, technology agreements, software development agreements, software licenses, indentures and other agreements to which the Company is a party (collectively, "Material Contracts") including, without limitation, the following: (i) any contract for the purchase of equipment, supplies, other materials, or other inventory items other than purchase orders for supplies entered into in the ordinary course of business; (ii) any contract related to the purchase or lease of any capital asset involving aggregate payments of more than $5,000 per annum; (iii) all technology agreements, software development agreements and software licenses involving the Company or any Affiliate, regardless of the duration thereof or the amount of payments called for or required thereunder; (iv) any guarantee, make-whole agreement, or similar agreement or undertaking to support, directly or indirectly, the financial or other condition of any other person or entity; (v) each contract for or relating to the employment of any officer, employee, technician, agent, consultant, or advisor to or for the Company that is not cancelable by the Company without penalty, premium or liability (for severance or otherwise) on less than thirty (30) days' prior written notice; (vi) license, royalty, franchise, distributorship, dealer, manufacturer's representative, agency and advertising agreements; (vii) any contract with any collective bargaining unit; (viii) any mortgage of real property; (ix) any factoring agreement with respect to the accounts receivable of the Company; (x) any pledge or other security agreement by the Company other than guaranties entered into in the ordinary course of business which are not material to the Company, (xi) any joint venture agreement or similar arrangement; (xii) any non-competition agreement or similar arrangement; and (xiii) any contract, lease, commitment, indenture, or other agreement to which the Company is a party that may not be terminated without penalty, premium or liability by the Company on not more than thirty (30) days' prior written notice. (b) Except as set forth in Schedule 4.15: (i) all Material Contracts are in full force and effect; (ii) the Company and, to the best knowledge of the Company and each of the Principal Stockholders, the other parties thereto, each are in compliance with all of their respective obligations under the Material Contracts in all material respects, and are not in breach or default thereunder, nor has there occurred any condition or event which, after notice or lapse of time or both, would constitute a default thereunder; and (iii) none of the Material Contracts will be voided, revoked or terminated, or voidable, revocable or terminable, in whole or in part, upon and by reason of the Merger and the change of ownership of the Company pursuant to this Agreement. (c) No purchase commitment by the Company is in excess of the normal, ordinary and usual requirements of the business of the Company. 12 (d) There is no outstanding power of attorney granted by the Company to any person, firm or corporation for any purpose whatsoever. 4.16 Customers and Suppliers. Neither any of the Principal Stockholders nor the Company is aware of any existing, announced or anticipated changes in the policies of, or the relationships with, or the business of, any material clients, customers, or suppliers of the Company which will materially adversely affect the Company or its condition, financial or otherwise, business, or prospects. 4.17 Labor, Benefit and Employment Agreements. (a) Except as set forth in Schedule 4.17 annexed hereto, the Company is not a party to any agreement with respect to the employment or compensation of any non-hourly and/or non-union employee(s). The Company is not now, and never has been, a party to or subject to any collective bargaining agreement or other labor agreement. Schedule 4.17 sets forth the amount of all compensation or remuneration (including any discretionary bonuses) paid by the Company during the 1995 calendar year or to be paid by the Company during the 1996 calendar year to employees or consultants who presently receive aggregate compensation or remuneration at an annual rate in excess of $25,000. (b) No union is now certified or, to the best of the knowledge of the Company and each of the Principal Stockholders, claims to be certified as a collective bargaining agent to represent any employees of the Company, and there are no labor disputes existing or, to the best of the knowledge of the Company and each of the Principal Stockholders, threatened, involving strikes, slowdowns, work stoppages, job actions or lockouts of any employees of the Company. (c) There are no unfair labor practice charges or petitions for election pending or being litigated before the National Labor Relations Board or any other federal or state labor commission relating to any employees of the Company. The Company has not received any written notice of any actual or alleged violation of any law, regulation, order or contract term affecting the collective bargaining rights of employees, equal opportunity in employment, or employee health, safety, welfare, or wages and hours. (d) The Company has not, at any time, been and is not now required to make contributions to, be a party to or covered by (or had any of its employees covered by), and has not withdrawn from (partially or otherwise), and has not had and does not have any obligations to or in respect of any "multiemployer plan" (as defined in Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")). (e) Except as disclosed in Schedule 4.17, the Company does not maintain, or have any liabilities or obligations of any kind with respect to, any bonus, commission, deferred compensation, excess benefits, pension, thrift, savings, employee ownership, salary continuation, severance, profit sharing, retirement, supplemental retirement, 13 or other such benefit plan, and does not have any potential or contingent liability in respect of any actions or transactions relating to any such plan other than to make contributions thereto if, as, and when due in respect of periods subsequent to the date hereof. Without limitation of the foregoing, (i) the Company has made all required contributions to or in respect of any and all such benefit plans, (ii) no "accumulated funding deficiency" (as defined in Section 412 of the Internal Revenue Code of 1986, as amended (the "Code")) has been incurred in respect of any of such benefit plans, and the present value of all vested accrued benefits thereunder does not, on the date hereof, exceed the assets of any such plan allocable to the vested accrued benefits thereunder, (iii) there has been no "prohibited transaction" (as defined in Section 4975 of the Code) with respect to any such plan, and no transaction which could give rise to any tax or penalty under Section 4975 of the Code or Section 502 of ERISA, and (iv) there has been no "reportable event" (within the meaning of Section 4043(b) of ERISA) with respect to any such plan. All of such plans which constitute, are intended to constitute, or have been treated by the Company as "employee pension benefit plans" or other plans within Section 3 of ERISA have been determined by the Internal Revenue Service to be "qualified" under Section 401(a) of the Code, and have been administered and are in compliance with ERISA and the Code; and the Principal Stockholders has no knowledge of any state of facts, conditions or occurrences such as would impair the "qualified" status of any of such plans. (f) Except for the group insurance programs listed in Schedule 4.17, the Company does not maintain any medical, health, life, dental, short- or long-term disability, hospitalization, accident, death benefits, or other employee benefit insurance programs, or sick leave or vacation or holiday or leave policies, or any welfare plans (within the meaning of Section 3(1) of ERISA) for the benefit of any current of former employees, and, except as required by law, the Company has no liability, fixed or contingent, for health or medical benefits to any former employee. 4.18 No Breach of Statute, Decree or Other Instrument. (a) Except as set forth in Schedule 4.18 annexed hereto: (i) neither the execution and delivery of this Agreement by the Company and/or the Principal Stockholders, nor the performance of, or compliance with, the terms and provisions of this Agreement on the part of the Company and/or the Principal Stockholders, will violate or conflict with any term of the Certificate of Incorporation or By-Laws of the Company or any statute, law, rule or regulation of any governmental authority affecting the Company, its properties or assets, or its business, condition (financial or otherwise), or prospects, or will cause or permit the material modification of the effect of, the imposition of any Lien in respect of, or the acceleration of any obligations or terms or the termination of any rights or imposition of any burdens under, or conflict with, result in a breach of, or constitute a default under, any of the terms, conditions or provisions of any judgment, order, award, injunction, decree, contract, lease, agreement, indenture or other instrument to which the Company or any of the Principal Stockholders is a party or by which the Company or any of the Principal Stockholders is bound; (ii) no consent, authorization or approval of or filing with any governmental authority or agency, or any third party, will be required on the part of the Company or the Principal Stockholders in connection 14 with the consummation of the transactions contemplated hereby; and (iii) the Company will not be required, whether by law, regulation, or administrative practice, to reapply for or refile to obtain any of the licenses, permits or other authorizations presently held by the Company and required for the operation of its business as conducted on the date hereof. (b) In connection with and as respects the Merger, the Company and each Principal Stockholder of the Company has waived any and all rights which it or any such Principal Stockholder may have (by way of right of first refusal, right of first offer, or otherwise) to purchase any of the Stock by reason of the proposed disposition thereof by any Principal Stockholder pursuant to the Merger. 4.19 Compliance with Laws. (a) Except as set forth in Schedule 4.19 to this Agreement, the Company has been, and is now in compliance (except to the extent, disclosed on Schedule 4.19, that incidental and non-material non-compliance has not had and can not reasonably be expected to have a material adverse effect on the Company, properties or assets, its business, its condition (financial or otherwise), or its prospects) with each of the following which is applicable to or binding upon or affecting the Company or its property, assets, or business, or to which the Company, or its property, assets, or business are subject: every statute, ordinance, code or other law, treaty, rule, regulation, order, technical or other standard, requirement or procedure existing, enacted, adopted, administered, enforced, or promulgated, by any Governmental Authority (as such term is hereinafter defined), including, without limitation, any of the foregoing enacted, adopted or promulgated prior to the Closing Date but not yet effective (each of the foregoing, a "Law"), and every Permit, and every order, judgment, writ, injunction, award, decree, demand, assessment or determination of any arbitrator and of every Governmental Authority (each of the foregoing, an "Order"; each Law, Permit, and Order being sometimes hereinafter referred to as a "Requirement of Law"). Neither the Company or nor its properties, assets, or business are subject to or directly affected by any Requirement of Law of any Governmental Authority, other than those similarly affecting similar enterprises engaged in a material way in the same business activities; the Company's operations and Permits are not subject to any unduly burdensome restrictions and will not be subjected to any unduly burdensome restrictions as of the consummation of the transactions contemplated under this Agreement. (b) The Company has not, at any time, (i) acquired, handled, utilized, stored, generated, processed, transported, or disposed of any hazardous or toxic substances, whether in violation of any foreign, federal, state, or local environmental or occupational health and safety laws or regulations or otherwise, (ii) otherwise committed any violation of any foreign, federal, state, or local environmental or occupational health and safety laws or regulations (including, without limitation, the provisions of the Environmental Protection Act and other applicable environmental statutes and regulations) or any violation of the Occupational Safety and Health Act, or (iii) been in violation of any requirements of its insurance carriers from time to time. 15 (c) Neither the Company nor any of its directors, officers or employees has received any written notice of default or violation, nor, to the best of the knowledge of the Company and each of the Principal Stockholders, is the Company or any of its directors, officers or employees in default or violation, with respect to any judgment, order, writ, injunction, decree, demand or assessment issued by any court or any federal, state, local, municipal, or other governmental agency, board, commission, bureau, instrumentality or department, domestic or foreign, relating to any aspect of the Company's business, affairs, properties, or assets. Neither the Company nor any of its directors, officers or employees, has received written notice of, been charged with, or is under investigation with respect to, any violation of any provision of any federal, state, local, municipal, or other law or administrative rule or regulation, domestic or foreign, relating to any aspect of the Company's business, affairs, properties or assets, which violation would have a material adverse effect on the Company, properties or assets, its business, its condition (financial or otherwise), or its prospects. (d) Schedule 4.19 sets forth the date(s) of the last known audits or inspections (if any) of the Company conducted by or on behalf of the Environmental Protection Agency, the Occupational Safety and Health Administration, and any other Governmental Authority. 4.20 Litigation. Except as disclosed in Schedule 4.20 annexed hereto, there are no private or governmental orders, claims, actions, suits, arbitrations, administrative or other proceedings (including, without limitation, any claim alleging the invalidity, infringement or interference of any patent, patent application, or rights thereunder owned or licensed by the Company) or investigations (as to which investigations, the Company or any of the Principal Stockholders is aware of the same) pending or, to the knowledge of the Company or any of the Principal Stockholders, threatened, against the Company or relating to its business or properties, at law or in equity or before or by any court or any Governmental Authority. Neither the Company or any of the Company's officers, directors, or employees in their respective capacities as such is a named party subject to any continuing court or administrative order, writ, injunction or decree applicable to any of them or to the Company's business or properties which (i) is not similar in effect to restrictions applicable to other participants in the industry or other businesses similarly situated, or (ii) has or would have a material adverse effect on the Company, its business, or its properties. Except as disclosed in Schedule 4.20 annexed hereto, neither the Company or any of the Principal Stockholders is aware of any state of facts, events, conditions or occurrences which might properly constitute grounds for or the basis of any meritorious suit, action, arbitration, proceeding or investigation against or with respect to the Company. No action, suit or proceeding by or before any court or any governmental body or authority, against the Company or any of the Principal Stockholders or pertaining to the transactions contemplated by this Agreement or their consummation, have been instituted or, to the best of their knowledge, threatened, which action, suit or proceeding would, if determined adversely, have a material adverse effect on the Company, its business or any material portion of its assets, or impair the ability of any of the stockholders of the Company to deliver in the Merger all of their respective shares of Stock free and clear of all pledges, Liens, claims, charges, options, calls, 16 encumbrances, restrictions and assessments whatsoever (except any restrictions which may be created by operation of state or federal securities laws). 4.21 Patents, Licenses and Trademarks. Schedule 4.21 annexed hereto correctly sets forth a list and brief description of the nature and ownership of: (a) all patents, patent applications, copyright registrations and applications, registered trade names, service marks, and trademark registrations and applications, both domestic and foreign, which are presently owned, filed or held by the Company and/or any of its directors, officers, stockholders or employees and which in any way relate to or are used in the business of the Company; (b) all licenses, both domestic and foreign, which are owned or controlled by the Company and/or any of its directors, officers, stockholders or employees and which in any way relate to or are used in the business of the Company; and (c) all franchises, licenses and/or similar arrangements granted to the Company by others and/or to others by the Company. None of the patents, patent applications, copyright registrations or applications, registered trade names, trademark registrations or applications, service marks, franchises, licenses or other arrangements set forth or required to be set forth in Schedule 4.21 (all of the foregoing being sometimes hereinafter referred to as "Intellectual Property") is subject to any pending challenge known to any of the Principal Stockholders, infringes on or misappropriates the rights of any others, or is subject to loss or expiration in the near future (or the threat of such loss or expiration). The Intellectual Property owned by the Company constitutes all of the same necessary for the operation of the business of the Company as currently conducted and contemplated, and the Company owns good and marketable title to the same free and clear of any Liens. 4.22 Transactions with Affiliates. No material asset employed in the business of the Company is owned by, leased from or leased to any of the stockholders of the Company, any of their respective Affiliates, members of their families or any partnership, corporation or trust for their benefit, or any other officer, director or employee of the Company or any Affiliate of the Company. 4.23 Bank Accounts. Annexed hereto as Schedule 4.23 is a correct and complete list of all bank accounts and safe deposit boxes maintained by or on behalf of the Company, with indication of all persons having signatory, access or other authority with respect thereto. 4.24 Schedules Incorporated by Reference. The making of any recitation in any Schedule hereto shall be deemed to constitute a representation and warranty that such recitation is an accurate statement and disclosure of the information required by the corresponding Section(s) of this Agreement (or taken as a whole), as, to the extent, and subject to the qualifications and limitations, set forth in such corresponding Section(s). 4.25 Disclosure to Stockholders. The Principal Stockholders acknowledge receipt of the statements and reports referred to in Schedule 5.9 to this Agreement. 17 5. REPRESENTATIONS AND WARRANTIES OF MERGERCO AND AUGI. Mergerco and AUGI hereby jointly and severally represent and warrant to the Principal Stockholders, as follows, it being understood and agreed that none of the Principal Stockholders is or will be required to undertake any independent investigation to determine the truth, accuracy and completeness of the representations and warranties made by AUGI or Mergerco in this Agreement and that no due diligence investigation undertaken by the Principal Stockholders shall in any way be deemed to ascribe any knowledge to any of the Principal Stockholders different from, or in addition to, the following representations and warranties made to the Principal Stockholders, or to reduce, effect, or eliminate their complete reliance upon such representations and warranties, and it being further understood and agreed that the survival of each such representation and warranty shall be as set forth in Section 12.2(d) of this Agreement: 5.1 Organization, Good Standing and Qualification. Each of Mergerco and AUGI is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and Delaware, respectively, with all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. True and complete copies of the Articles of Incorporation and By-Laws of Mergerco and of AUGI (including all amendments thereto), and a correct and complete list of the officers and directors of Mergerco and of AUGI, are annexed hereto as Schedule 5.1. 5.2 Authorization of Agreement. The execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions contemplated hereby by Mergerco and AUGI have been duly and validly authorized by the Board of Directors and sole stockholder of Mergerco, and by the Board of Directors of AUGI; and Mergerco and AUGI have the full corporate right, power and authority to execute and deliver this Agreement, to perform their respective obligations hereunder, and to consummate the transactions contemplated hereby. No further corporate authorization is necessary on the part of Mergerco or AUGI to consummate the transactions contemplated hereby. 5.3 Valid and Binding Agreement. This Agreement constitutes the legal, valid and binding obligation of Mergerco, enforceable against Mergerco in accordance with its terms, and this Agreement and, when executed and delivered by AUGI, the Registration Rights Agreement, constitute and will constitute the legal, valid and binding obligations of the Surviving Corporation and AUGI (as the case may be), enforceable against the Surviving Corporation and AUGI in accordance with their respective terms. 5.4 No Breach of Statute or Contract. Neither the execution and delivery of this Agreement by Mergerco or AUGI, nor compliance with the terms and provisions of this Agreement on the part of Mergerco or AUGI, will: (a) violate any statute or regulation of any Governmental Authority affecting Mergerco or AUGI; (b) require the issuance of any authorization, license, consent or approval of any Governmental Authority; or (c) conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, 18 injunction, decree, note, indenture, loan agreement or other agreement or instrument to which Mergerco or AUGI is a party, or by which Mergerco or AUGI is bound, or constitute a default thereunder. 5.5 Capitalization of AUGI AUGI is (i) authorized to issue 20,000,000 shares of Common Stock, $.01 par value per share ("AUGI Common Stock"); (ii) 5,689,749 shares of AUGI Common Stock were issued and outstanding at January 31, 1996: (iii) 750,000 shares of AUGI Common Stock are reserved for issuance pursuant to AUGI's 1991 Employee Incentive Stock Option Plan, of which approximately 620,000 options were outstanding at July 31, 1995; (iv) 171,000 stock options were reserved for certain key employees under AUGI's Stock Option Bonus Plan, of which 114,000 options were outstanding at July 31, 1995; (v) 38,496 options were reserved for certain employs under a 1991 Transfer Plan, of which options to purchase 24,328 shares of AUGI Common Stock were outstanding at July 31, 1995; (vi) 1,000,000 options are reserved for issuance (subject to AUGI stockholder ratification) pursuant to a 1996 qualified and non-qualified stock option plan, of which options to purchase 650,000 shares of AUGI Common Stock were granted in April 1996; and (vii) warrants to purchase an aggregate of 920,000 shares of AUGI Common Stock at $7.50 per share were issued and outstanding at July 31, 1995. Subsequent to January 31, 1996, AUGI (i) has acquired 100% of the capital stock of ConnectSoft, Inc. ("ConnectSoft") pursuant to which it issued 1,000,000 of its convertible preferred stock which is convertible into a maximum of 3,000,000 shares of AUGI Common Stock; and (ii) has entered into a letter of intent to acquire Datacom Communications, Inc., a true copy of which letter of intent has been furnished to the Principal Stockholders. Except as aforesaid, and as disclosed in the preliminary proxy statement of AUGI filed with the Securities and Exchange Commission on August 22, 1996 (the "AUGI 1996 Proxy Statement"), a true copy of which has been furnished to the Principal Stockholders, there are no options, warrants, preferred stock, or other securities convertible or exchangeable for or into AUGI shares of Common Stock. Subsequent to the August 22, 1996, AUGI was notified by the stockholders of Datacom Communications, Inc. that merger discussions were terminated. Except as disclosed in the AUGI 1996 Proxy Statement and a possible transaction with Seattle Online, Inc., AUGI has not entered into any letters of intent or understandings with respect to any acquisition. 5.6 Investment. AUGI will be acquiring ownership of the outstanding capital stock of the Surviving Corporation for its own account, for investment purposes only, and not with a view to the resale or distribution thereof. 5.7 Business of Mergerco. Mergerco has been formed solely for the purposes of consummating the transactions contemplated by this Merger Agreement, has not conducted and will not conduct any independent business operations until the Closing Date of the Merger. 5.8 Absence of Litigation. No action, suit or proceeding by or before any court or any governmental body or authority, against Mergerco or AUGI or pertaining to the transactions contemplated by this Agreement or their consummation, have been instituted or, to 19 their knowledge, threatened, which action, suit or proceeding would, if determined adversely, have a material adverse effect on AUGI, its business or any material portion of its assets, or impair the ability of Mergerco or AUGI to deliver in the Merger the Merger Consideration free and clear of all pledges, Liens, claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever (except any restrictions which may be created by operation of state or federal securities laws). Except as disclosed in Schedule 5.8 hereto, AUGI is not aware of any state of facts, events, conditions or occurrences which would properly constitute grounds for the basis of any meritorious suit, action, arbitration, investigation against or with respect to AUGI or any of its subsidiaries, which would, if determined adversely to AUGI or any of its subsidiaries, would have a material adverse effect upon the business, financial condition or prospects of AUGI and its subsidiaries when taken as a consolidated whole. 5.9 Securities Filings and Disclosures. AUGI has furnished to the Principal Stockholders the statements and reports listed on Schedule 5.9 to this Agreement, together with all exhibits and schedules thereto, which statements and reports (i) complied, as of their respective dates, as to form and substance in all material respects with the requirements pertaining to the filing thereof under the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, whichever is applicable, and (ii) as of their respective dates did not contain any material misstatement of fact or state or omit to state any material fact whose omission, in light of the circumstances under which such statement was made or omitted, would result in the statements made therein being materially misleading. AUGI shall supplement Schedule 5.9 through the Closing Date. The financial statements of AUGI and its consolidated subsidiaries as set forth in the securities filings listed on Schedule 5,9 fairly present the financial condition and results of operations of AUGI and its consolidated subsidiaries as at the dates and for the periods reflected therein. Since the date of AUGI's filing of its Form 10-Q for the quarter ended April 30, 1996, there has been no material adverse change in the business, financial condition or prospects of AUGI and its subsidiaries, when taken as a consolidated whole. 5.10 No Registration. The shares of AUGI Common Stock constituting the Merger Consideration have been issued pursuant to an available exemption from registration under the Securities Act of 1933, as amended, and the securities laws of the State of Washington, provided, that such issuance was made in the good faith belief that such exemption from registration is available in reliance upon investment, suitability, financial capacity, and investment sophistication representations made by the Principal Stockholders to AUGI in Subscription Agreements furnished by each of them to AUGI in connection with the consummation of the transactions contemplated hereby. 5.11 Schedules Incorporated by Reference. The making of any recitation in any Schedule hereto shall be deemed to constitute a representation and warranty that such recitation is an accurate statement and disclosure of the information required by the corresponding Section(s) of this Agreement, as, to the extent, and subject to the qualifications and limitations, set forth in such corresponding Section(s). 20 6. NOTICES. 6.1 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the third day after mailing if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed as follows: (a) If to the Company or the Principal Stockholders: Interglobe Networks, Incorporated 1520 Fourth Avenue, Suite 200 Seattle, Washington 98101 Attn: Artour Baganov, President with a copy sent concurrently to: Davis Wright Tremaine 2600 Century Square, 1501 Fourth Avenue Seattle, Washington, 98101 Attn: Joseph Weinstein, Esq. (b) If to Mergerco, the Surviving Corporation or AUGI: American United Global, Inc. 25 Highland Boulevard Dix Hills, New York 11747 Attention: Robert M. Rubin, President with a copy sent concurrently to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel 153 East 53rd Street New York, New York 10022 Attention: Stephen Weiss, Esq. and Andrew Cosentino, Esq. or to such other address as any party shall have specified by notice in writing given to all other parties. 21 7. ADDITIONAL AGREEMENTS OF THE PARTIES. 7.1 Accuracy of Representations and Warranties to Mergerco or AUGI. All representations and warranties made by the Principal Stockholders in this Agreement, in any Schedule(s) hereto, and/or in any written statement delivered to Mergerco or AUGI under, pursuant to, or in connection with, this Agreement are true and correct on and as of the date hereof. 7.2 Performance by the Company and the Principal Stockholders. The Company and the Principal Stockholders have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them on or before the date hereof. 7.3 Accuracy of Representations and Warranties to the Company and the Principal Stockholders. All representations and warranties made by the Mergerco and/or AUGI in this Agreement, in any Schedule(s) hereto, and/or in any written statement delivered to the Company or the Principal Stockholders under, pursuant to, or in connection with, this Agreement are true and correct on and as of the date hereof. 7.4 Performance by Mergerco and AUGI. Mergerco and AUGI have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them on or before the date hereof. 7.5 Certification. By executing and delivering this Agreement, the Principal Stockholders are certifying to Mergerco and to AUGI that Sections 7.1 and 7.2 of this Agreement are true and correct, and Mergerco and AUGI are certifying to the Principal Stockholders that Sections 7.3 and 7.4 of this Agreement are true and correct. 7.6 Resolutions; Incumbency; Certified Bylaws and Certificates of Incorporation; Good Standing Certificates. On the date hereof, each of the corporate parties hereto has delivered to each of the other parties hereto the following: (i) copies of resolutions of such corporate parties Board of Directors and, to the extent reasonably requested, stockholders of the corporate entity, in form reasonably satisfactory to counsel for the other parties to this Agreement, authorizing such corporate party's execution, delivery and performance of this Agreement and the Merger, and all actions to be taken by such corporate party hereunder, certified by the Secretary of such corporate party as of the date hereof to be in accurate and complete and in full force and effect; (ii) certificates evidencing the incumbency and signatures of relevant officers of such corporate party, certified by the Secretary of such corporate party as of the date of this Agreement to be complete and accurate; (ii) a copy of the bylaws and of the certificate of incorporation of such corporate party, certified by the Secretary of such corporate party to be complete and accurate and in full force and effect as of the date hereof; and (iv) certificates, dated as of a date not more than five (5) days prior to the date hereof, by the Secretary of State of the state of incorporation of such corporate party, evidencing in long form the good standing of such corporate party in such state. 22 7.7 Opinion of Counsel. Each party to this Agreement has received the opinion of counsel to each other party to this Agreement, dated as of the date hereof, as to such matters incident to the transactions contemplated hereby as may reasonably be requested by the other parties to this Agreement. 7.8 Execution and Delivery of Certificate of Merger. The Company and Mergerco and, to the extent necessary or appropriate, their respective officers and directors, have executed and delivered the Certificate of Merger in the form of Exhibit A to this Agreement for filing with the appropriate governmental authority immediately upon execution and delivery of this Agreement. 7.9 Execution and Delivery of Registration Rights Agreement. AUGI and each of the Principal Stockholders have executed and delivered into escrow for delivery to each of the Principal Stockholders upon the consummation of the Merger, their respective Registration Rights Agreements in the form of Exhibit C to this Agreement. 7.10 Execution and Delivery of Subscription Agreements. Each of the Principal Stockholders have executed and delivered to AUGI a Subscription Agreement in the form of Exhibit B to this Agreement. 7.11 Execution and Delivery of Offeree Questionnaires. Each of the Principal Stockholders have completed, executed and delivered to AUGI an Offeree Questionnaire in the form of Exhibit E to this Agreement. 7.12 Execution and Delivery of Non-Competition and Non-Disclosure Agreements. AUGI, the Company, and each of the Principal Stockholders have executed and delivered into escrow for delivery to AUGI upon consummation of the Merger, their respective Non-Competition and Non-Disclosure Agreements, in the form of Exhibit D to this Agreement. 7.13 Execution and Delivery of Employment Agreements with Principal Stockholders. The Principal Stockholders and the Company shall have executed and delivered into escrow for delivery to AUGI upon consummation of the Merger their respective employment agreements in the forms of Exhibits F, G, and H hereto. 7.14 Settlement of Affiliated Obligations. The Principal Stockholders have caused all debts, liabilities and other monetary obligations (if any), including, without limitation, any accrued cash compensation payable, which shall be owed by the Company to any of the Principal Stockholders or owed to the Company by any of the Principal Stockholders of the Company and/or any of their respective Affiliates to be fully paid and satisfied as at the Closing Date, such than no such debts, liabilities or obligations shall remain outstanding. 7.15. ConnectSoft Agreement. The Company, AUGI, and Mergerco have executed and delivered into escrow an agreement with ConnectSoft, Inc. ("ConnectSoft"), in form and substance reasonably satisfactory to the parties hereto (the "ConnectSoft Agreement"), 23 pursuant to which, substantially contemporaneously with the consummation of the Merger, AUGI shall cause its affiliate, ConnectSoft, Inc. ("ConnectSoft"), to provide to the Company, free of charge for two years following the Closing Date, use of all hardware networking equipment, computers and software relating to ConnectSoft's central telecommunications network center located in Seattle, Washington (the "CNOC Center"), including all telecommunication, switching, and related equipment used in the CNOC Center (the "CNOC Assets"). Following one year after the Merger, Artour Baganov and AUGI shall mutually agree upon the use or disposition of the CNOC Assets and what charge, if any, the Surviving Corporation shall pay for the continued use of such equipment. The Surviving Corporation shall be obligated to pay immediately following consummation of the Merger all of the operating costs (in the nature of office rent, telephone lines, utilities, and other ongoing operating charges) associated with such Assets as the same may become due from and after the date of closing of the Merger. 7.16 Votes of the Principal Stockholders; Proxy. By their execution and delivery of this Agreement, each of the Principal Stockholders does hereby irrevocably and unconditionally vote all of each such Principal Stockholder's shares of capital stock of the Company IN FAVOR of the Merger and all of the other transactions contemplated by this Agreement. 7.17 Corporate Structure and Related Matters. (a) Surviving Corporation a Subsidiary. Upon completion of the Merger, the Surviving Corporation will become a wholly-owned subsidiary of AUGI. (b) Officers and Directors. (i) The Surviving Corporation. Robert M. Rubin shall be Chairman of the Surviving Corporation. Artour Baganov shall be President and Chief Executive Officer of the Company. Brian Bursch shall be Vice President of Sales of the Company. Ali Marashi shall be Vice President of Engineering of the Company. A full-time Chief Financial Officer of the Surviving Corporation acceptable to AUGI will be recruited and shall be hired upon such terms and conditions as shall be determined by AUGI and the Board of Directors of the Surviving Corporation. The Board of Directors of the Surviving Corporation shall initially consist of Robert M. Rubin, Howard Katz, C. Dean McLain, Artour Baganov, and Ali Marashi. AUGI shall, at all times, designate a majority of the Board of Directors of the Surviving Corporation, but Artour Baganov and Ali Marashi shall have the right to be designated as two of the Directors of the Surviving Corporation for so long as they shall continue to be employed on a full-time basis with the Company. (ii) AUGI. As soon as is reasonably practicable without undue expense to AUGI but, in any event, not later than ninety days following consummation of the Merger, cause Artour Baganov shall be elected to the Board of Directors of AUGI. For so long as Robert M. Rubin shall continue to remain as a principal stockholder and executive officer of AUGI, at the request of Artour Baganov, AUGI shall undertake to continue to designate Artour 24 Baganov as a Director of AUGI for a period equal to the greater of (A) four years following the Closing Date, or (B) so long as the Principal Stockholders shall in the aggregate hold a sufficient number of shares of AUGI Common Stock to represent one of largest individual shareholders of AUGI. (c) Management of the Surviving Corporation. The management of the Surviving Corporation will be subject to the direction of its Board of Directors; provided that during the Measuring Period (as such term is hereinafter defined), the Surviving Corporation shall not, and AUGI shall not permit the Surviving Corporation to, do any of the following without the prior written consent of Artour Baganov: (i) sell any material assets or securities of the Company (other than assets sold in the ordinary course of business), (ii) incur indebtedness for borrowed money (other than in the ordinary course of business in accordance with the Company's past practices), (iii) effect any merger, sale, or acquisition of securities, assets, or business of any third party, or (iv) otherwise materially change the nature of the Surviving Corporation's business from the nature of the business conducted by the Company immediately prior to the consummation of the Merger (except for the natural growth of the business as a consequence of the financing by AUGI which is contemplated by the parties to this Agreement). 7.18 Employee Incentive Programs. Upon consummation of the Merger, AUGI's Board of Directors shall promptly take all necessary steps in order to make other key employees of the Surviving Corporation (excluding the Principal Stockholders) eligible to participate in AUGI's stock option and related employee compensation plans available to employees of AUGI at similar management levels, as the same may exist from time to time, upon such terms and conditions as AUGI's Board of Directors may determine. Options for at least 200,000 shares of AUGI Common Stock shall be available for future grant and issuance pursuant to such plans at the outset of eligibility for participation by such key employees of the Surviving Corporation. Such stock options shall provide, inter alia, (a) terms of between three and five years, (b) exercise prices equal to the closing price of AUGI Common Stock, as traded on NASDAQ National Market or other national securities exchange on the date of grant, (C) annual vesting in percentages ranging from 20% to 33-1/3% per annum, and (d) a requirement that any vested options not exercised will terminate unless exercised within 90 days following termination of employment of such employee for any reason. 7.19 Financing of the Company. Subject to the provisions of this Section 7.19 and after the consummation of the Merger, during the period of time from August 1, 1996 through July 31, 2000 (the "Measuring Period") AUGI shall make available to the Surviving Corporation certain inter-company loans and advances (the "AUGI Financing") to fund working capital requirements of the Company, in accordance with the "Corporation's Budget" referred to in Section 7.19(c) below. (a) Form of AUGI Financing. All AUGI Financing shall be in the form of intercompany loans and advances (each such loan or advance, an "Advance") from 25 AUGI to the Surviving Corporation reflected on the books of the Surviving Corporation as either loans or as the issuance of shares of preferred stock of the Surviving Corporation having liquidation preferences equal to the aggregate amount of the Advances, the form of each such Advance to be determined by AUGI in its sole discretion, and on such other terms and conditions as may be determined by AUGI in its sole discretion, including, without limitation, the following: (i) each Advance shall bear interest (or, in the case of preferred stock, cumulative dividends) at the rate of ten percent (10%) per annum; and (ii) each Advance shall be payable, as to principal (or, in the case of preferred stock, redeemed), on a date which shall be the earlier to occur of (A) completion of the first public offering of the Surviving Corporation's securities (either debt or equity), (B) the sale of all or substantially all of the stock or assets of the Surviving Corporation, and (C) the applicable maturity date (each Advance shall have a term agreeable to AUGI of not less than five (5) years). (b) Use of Proceeds of AUGI Financing. All AUGI Financing shall be spent and allocated to working capital and such business, technology and marketing efforts and other corporate purposes as the Boards of Directors of AUGI and the Surviving Corporation shall, from time to time determine; provided, that the expenditure of such funds shall be based upon the following. (c) Annual Budgets and Forecasts. AUGI has determined to make the Advances available to the Surviving Corporation on the basis of annual budgets and forecasts previously supplied to AUGI by the Company and the Principal Stockholders; provided, that (i) the annual budgets and forecasts shall be updated by the Company and the Principal Stockholders for the forty-eight (48) month period (based on AUGI's fiscal year ending July 31st) commencing on August 1, 1996 and ending on July 31, 2000, (ii) such updated annual budgets and forecasts for such period (the "Corporation's Budget"), which shall be satisfactory to AUGI in form and detail and in substance, shall have been received by AUGI prior to the date of this Agreement, and (iii) the timing of any Advance to the Surviving Corporation shall be based upon satisfaction of the requirements established in the Corporation's Budget unless otherwise mutually agreed by the Surviving Corporation's Board of Directors and AUGI's Board of Directors, it being understood and agreed that drawings of Advances which are not in accordance with the terms and conditions of the Corporation's Budget will not be made available by AUGI without the prior written approval of AUGI's Board of Directors. In determining Pre- Tax Income (as such term is hereinafter defined), no consideration shall be given to interest or dividends accrued or payable with respect to any Advances made by AUGI; provided, that such Pre-Tax Income shall be after deduction of all interest paid or accrued on money borrowed by the Surviving Corporation from any unaffiliated third party. As used herein, the term "Pre-Tax Income" shall mean the net income of the Surviving Corporation after deduction of all expenses 26 paid or accrued for the appropriate period in accordance with GAAP (including compensation paid to the Principal Stockholders under their respective employment agreements with the Surviving Corporation), but before application of all federal, state, and local income taxes, for the four fiscal years ending July 31, 2000, and also as modified pursuant to the preceding sentence, all as determined by the auditors engaged to audit the financial statements of the Surviving Corporation and AUGI. AUGI acknowledges that neither the budgets, the projections and information underlying the same, nor any other matter in connection with such budgets and projections, shall constitute a representation or warranty by the Principal Stockholders. 7.20 Release of Guarantees. On the Closing Date, AUGI shall either: (a) cause the personal guarantees of the Stockholders to be released from the furniture leases listed on Schedule 7.20 annexed hereto; or (b) if such guarantees are not released by the lessor, indemnify, defend and hold the Stockholders harmless from and 8. AMENDMENTS AND MODIFICATIONS. 8.1 Amendments and Modifications. No amendment or modification of this Agreement or any Exhibit or Schedule hereto shall be valid unless made in writing and signed by the party to be charged therewith. 9. NON-ASSIGNABILITY; BINDING EFFECT. 9.1 Non-Assignability; Binding Effect. Neither this Agreement, nor any of the rights or obligations of the parties hereunder, shall be assignable by any party hereto without the prior written consent of all other parties hereto. Otherwise, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. 10. CLOSING. 10.1 Place and Date of Closing. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Messrs. Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, counsel to Mergerco and AUGI, located at 153 East 53rd Street - 35th floor, New York, New York 10022, at 10:30 A.M. local time on a date which shall be not more than ten (10) business days following the date hereof; provided, that parties may participate in the closing by telephonic conference call if they so desire. The effectiveness of the Merger shall occur on the Closing Date simultaneous with the Closing. 10.2 Filing of Merger Certificate. Immediately upon the execution and delivery of this Agreement, Mergerco and the Company shall file or cause to be filed the Certificate of Merger with the Secretary of State of Washington. 27 11. GOVERNING LAW; JURISDICTION. 11.1 Governing Law; Jurisdiction. This Agreement shall be construed and interpreted and the rights granted herein governed in accordance with the laws of the State of Washington applicable to contracts made and to be performed wholly within such State. Except as otherwise provided in Section 12.2(c) below, any claim, dispute or controversy arising under or in connection with this Agreement or any actual or alleged breach hereof shall be settled exclusively by arbitration to be held before a single arbitrator in Seattle, Washington, or in any other locale or venue as legal jurisdiction may otherwise be had over the party against whom the proceeding is commenced, in accordance with the commercial arbitration rules of the American Arbitration Association then obtaining. The parties hereto hereby agree to submit to the jurisdiction of such an arbitrator in Seattle, Washington for such purpose, and waive all objections to venue, forum non conveniens, and related objections in connection therewith. As part of his or her award, the arbitrator shall make a fair allocation of the fee of the American Arbitration Association, the cost of any transcript, and the parties' reasonable attorneys' fees, taking into account the merits and good faith of the parties' claims and defenses. Judgment may be entered on the award so rendered in any court having jurisdiction. Any process or other papers hereunder may be served by registered or certified mail, return receipt requested, or by personal service, provided that a reasonable time for appearance or response is allowed. 12. INDEMNIFICATION. 12.1 General. (a) By the Company and the Principal Stockholders. Without prejudice to any rights of contribution as between the Principal Stockholders, from and after the Closing Date: each of the Principal Stockholders shall jointly and severally defend, indemnify and hold harmless the Surviving Corporation and AUGI and their respective officers, directors, agents, representatives, and controlling persons (all of the foregoing, the "AUGI Group") from, against and in respect of any and all claims, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorneys' fees (collectively, "Losses") that the AUGI Group may incur, sustain or suffer as a result of any breach of, or failure by the Company or any such Principal Stockholder(s) to perform, any of the representations, warranties, covenants or agreements of the Company or such Principal Stockholder(s) contained in this Agreement or in any Exhibit or any Schedule(s) furnished by or on behalf of the Company or such Principal Stockholder(s) under this Agreement. (b) By the AUGI Group. From and after the Closing Date, AUGI and Mergerco, jointly and severally, shall indemnify, defend and hold harmless the Principal Stockholders from, against and in respect of any and all Losses that such person may incur, sustain or suffer as a result of any breach of, or failure by Mergerco or AUGI to perform, any of the representations, warranties, covenants or agreements of Mergerco or AUGI contained in 28 this Agreement or in any Exhibit or any Schedule(s) furnished by or on behalf of Mergerco or AUGI under this Agreement. 12.2 Limitations on Certain Indemnities. (a) The Basket. Notwithstanding any other provision of this Agreement to the contrary, no Principal Stockholder shall be liable to AUGI or Mergerco with respect to Losses, and neither AUGI or Mergerco shall be liable to any Principal Stockholder with respect to Losses, unless and until the aggregate amount of all Losses incurred by the Surviving Corporation or AUGI in the aggregate, on the one hand (in the case of indemnification by any Principal Stockholder), or by any of the Principal Stockholders, on the other hand (in the case of indemnification by AUGI or Mergerco), shall exceed the sum of $250,000 (the "Basket"). The applicable indemnifying party shall thereafter be liable, jointly and severally, for performance of its indemnification obligations under this Agreement in respect of all Losses in excess of the Basket, provided that the maximum aggregate liability of each Principal Stockholder in respect of all Losses of AUGI or Mergerco, on the one hand, and the maximum aggregate liability of AUGI and Mergerco in respect of all Losses of the Principal Stockholders, on the other hand, shall not, in the absence of proven fraud by such indemnifying party in respect of any particular Losses, in any event exceed the limitations set forth in Section 12.2(b) below; provided, that nothing contained in this Agreement shall be deemed to limit the rights and remedies of the Principal Stockholders under applicable federal or state securities laws. (b) Limitation on Amount of Indemnity. Except with respect to any Losses involving proven fraud by the indemnifying party, no indemnifying party hereunder found liable for any Losses by any indemnified party under this Agreement shall be required to pay indemnification hereunder, after application of the Basket against the aggregate amount of claims against any or all of the Principal Stockholders, on the one hand, or against AUGI and Mergerco, on the other hand, up to a maximum amount equal to twenty (20%) percent of the aggregate value of the Merger Consideration received by such Principal Stockholders pursuant to this Agreement (with AUGI Common Stock, or the common stock of the Company for which such AUGI Common Stock was issued in the Merger, to be valued for such purposes at a per share price equal to the closing price of a share of AUGI Common Stock, as reported on The NASDAQ National Market, on the Closing Date of the Merger (the "Per Share Value"); provided, that if any such indemnifying party shall have been found by any court of competent jurisdiction (which may include affirmation of the findings of the arbitrators in any arbitration provided for herein) from which no appeal can or shall be taken, to have committed fraud, the maximum indemnified amount under this Agreement shall be 100% of the aggregate value of the Merger Consideration, as calculated above. Each such Principal Stockholder shall have the option to satisfy, in whole or in part, any claims for indemnification hereunder by transferring and returning to AUGI any or all of the Principal Stockholder's AUGI Common Stock, which, for purposes hereof, shall (regardless of any intervening fluctuations in market price) be deemed to have a value equal to the Per Share Value, subject only to appropriate adjustment to reflect any stock splits, stock dividends, recapitalizations or other such events relating to the Common Stock of AUGI occurring after the date hereof. Nothing herein 29 contained, however, shall be deemed to preclude the Surviving Corporation and/or AUGI from seeking and obtaining payment of indemnification from the Principal Stockholder(s) in question in any other manner, subject to such Principal Stockholder's option to pay any claim (in whole or in part) in the foregoing manner. (c) Damages and Equitable Relief. Notwithstanding the provisions of Section 12.2(b) above, nothing contained in this Agreement shall be deemed to limit or restrict the right of any party hereto from seeking such monetary damages and/or equitable remedies (including injunctive relief) as may be available from any court of competent jurisdiction in the event of a breach by any other party or parties of any material covenant on its or their part contained in the Registration Rights Agreement, the Non-Competition and Non- Disclosure Agreement and/or the Employment Agreements. (d) Time Limitation on Indemnity for Breach of Representations, Warranties, Agreements, and Covenants. AUGI and Mergerco shall be entitled to indemnification by a Principal Stockholder, and each Principal Stockholder shall be entitled to indemnification by AUGI or Mergerco, pursuant to this Agreement for Losses relating to: (i) breach of any representation or warranty or agreement or covenant hereunder only in respect of claims for which notice of claim shall have been given to the indemnifying party on or before August 31, 1997, or (ii) with respect to Losses relating to a breach of any representations or warranties under Section 4.8 above, the expiration of the final statute of limitations for those tax returns covered by the warranties under Section 4.8 above. (e) Prejudice of Rights to Defend. No party shall be entitled to indemnification pursuant to this Agreement in the event that the subject claim for indemnification relates to a third-party claim and the party seeking such indemnification delayed giving notice thereof to the party from whom it seeks such indemnification to such an extent as to cause material prejudice to the defense of such third-party claim. (f) Insurance Coverage. Notwithstanding any other term or provision of this Section 12.2, absent only a finding by a court of competent jurisdiction from which no appeal can or shall be taken that an indemnifying party shall have committed statutory or common law fraud, no indemnifying party shall be required to indemnify any indemnified party hereunder for Losses to the extent that such Losses shall have been reimbursed by insurance proceeds. In the event that insurance does not cover the full amount of such Losses, the indemnifying party shall remain liable for the full amount of the difference between the insurance payment as described above and the amount of the Losses, subject to the limitations set forth above. 12.3 Claims for Indemnity. Whenever a claim shall arise for which any party shall be entitled to indemnification hereunder, the indemnified party shall notify the indemnifying party in writing within sixty (60) days of the indemnified party's first receipt of notice of, or the indemnified party's obtaining actual knowledge of, such claim, and in any event within such shorter period as may be necessary for the indemnifying party or parties to take appropriate 30 action to resist such claim. Such notice shall specify all facts known to the indemnified party giving rise to such indemnity rights and shall estimate (to the extent reasonably possible) the amount of potential liability arising therefrom. If the indemnifying party shall be duly notified of such dispute, the parties shall attempt to settle and compromise the same or may agree to submit the same to arbitration or, if unable or unwilling to do any of the foregoing, such dispute shall be settled by appropriate litigation, and any rights of indemnification established by reason of such settlement, compromise, arbitration or litigation shall promptly thereafter be paid and satisfied by those indemnifying parties obligated to make indemnification hereunder. 12.4 Right to Defend. If the facts giving rise to any claim for indemnification shall involve any actual or threatened action or demand by any third party against the indemnified party or any of its Affiliates, the indemnifying party or parties shall be entitled (without prejudice to the indemnified party's right to participate at its own expense through counsel of its own choosing), at their expense and through a single counsel of their own choosing, to defend or prosecute such claim in the name of the indemnifying party or parties, or any of them, or if necessary, in the name of the indemnified party. In any event, the indemnified party shall give the indemnifying party advance written notice of any proposed compromise or settlement of any such claim. If the remedy sought in any such action or demand is solely money damages, the indemnifying party shall have fifteen (15) days after receipt of such notice of settlement to object to the proposed compromise or settlement, and if it does so object, the indemnifying party shall be required to undertake, conduct and control, though counsel of its own choosing and at its sole expense, the settlement or defense thereof, and the indemnified party shall cooperate with the indemnifying party in connection therewith. 13. COSTS. 13.1 Finder's or Broker's Fees. Except as set forth herein, each of Mergerco and AUGI (on the one hand) and the Company and the Principal Stockholders (on the other hand) represents and warrants that neither they nor any of their respective Affiliates have dealt with any broker or finder in connection with any of the transactions contemplated by this Agreement, and no broker or other person is entitled to any commission or finder's fee in connection with any of these transactions. 13.2 Expenses. Mergerco and AUGI, on one hand, and the Company or the Principal Stockholders, on the other hand, shall each pay all of their own respective costs and expenses incurred or to be incurred by them, respectively, in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement, except that AUGI will be responsible for the costs and expenses incurred in obtaining the audit opinion on the Financial Statements. Anything elsewhere contained in this Agreement to the contrary notwithstanding, no expenses of the transactions contemplated by this Agreement shall be attributed to the Company, except for those expenses which would have been incurred by the Company in the ordinary course of its business in the absence of the transactions contemplated by this Agreement. Notwithstanding the foregoing, the Surviving Corporation shall pay the fees 31 and disbursements of counsel to the Principal Stockholders in excess of $15,000; provided that such obligation of the Surviving Corporation shall not exceed a maximum of $10,000. 14. FORM OF AGREEMENT. 14.1 Effect of Headings. The Section headings used in this Agreement and the titles of the Schedules hereto are included for purposes of convenience only, and shall not affect the construction or interpretation of any of the provisions hereof or of the information set forth in such Schedules. 14.2 Entire Agreement; Waivers. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof, and supersedes all prior agreements or understandings as to such subject matter. No party hereto has made any representation or warranty or given any covenant to the other except as set forth in this Agreement and the Schedules and Exhibits hereto. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 14.3 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15. PARTIES. 15.1 Parties in Interest. Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liability of any third persons to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement. The balance of this page intentionally left blank. 32 IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the date first set forth above. AMERICAN UNITED GLOBAL, INC. By:_____________________________ Robert M. Rubin, President I-GLOBE ACQUISITION CORP. By:_____________________________ Robert M. Rubin, President INTERGLOBE NETWORKS, INC. By:_____________________________ Artour Baganov, President THE PRINCIPAL STOCKHOLDERS: -------------------------------- ARTOUR BAGANOV -------------------------------- BRIAN BURSCH -------------------------------- ALI MARASHI 33 EX-10.23 4 EXHIBIT 10.23 ASSET PURCHASE AGREE Exhibit 10.23 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (this "Agreement"), entered into this 17th day of October, 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE ACQUISITION CORP., a Washington corporation ("Purchaser"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE, INC., a Washington corporation (the "Company", which is also sometimes hereinafter referred to as the "Seller"), having its principal offices at 1417 4th Avenue, Third Floor, Seattle, Washington 98101-2219; and CRAIG DIEFFENBACH ("Dieffenbach", who is also sometimes hereinafter referred to as the "SO Stockholder"), the principal stockholder of the Company. W I T N E S S E T H: The Company is engaged in the production of regional web sites that showcase metropolitan areas and, in connection therewith, the development of web sites for individual businesses to represent them on the regional web sites and, also in connection therewith, the sale of advertising on the aforesaid regional web sites (the foregoing being hereinafter defined as the "Business"). Seller desires to sell and, to the extent applicable, assign to Purchaser certain assets and properties of the Company, and Purchaser desires to acquire certain assets and properties, but no liabilities of, the Company. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree as follows: 1. Purchase and Sale of Assets. 1.1 Sale of Assets. On the terms and conditions of this Agreement, at the Closing (as defined in Section 2.1 hereof), Seller shall sell, convey, transfer, deliver, assign and set over to Purchaser and Purchaser shall purchase and accept from Seller, all of the properties, assets, rights and interests of the Company of every kind and description whatsoever and wherever located, tangible and intangible, real, personal and mixed, as they shall exist at the time of the Closing including, without limitation, the following, free and clear of any Lien (as such term is hereinafter defined) whatsoever, but excluding all "Retained Assets" (as such term is defined in Section 1.2 hereof) (the "Assets"): (a) the parcels of land owned by Seller, if any, and all buildings, improvements, fixtures, fixed assets and personalty owned by Seller annexed, affixed or attached to such land (the "Real Property"); (b) all machinery and other equipment, tools and dies, furniture, fixtures, vehicles and other transportation equipment, office supplies and all other fixed assets which are not included within the Real Property but are carried on the books and records of the Seller or are primarily utilized in the conduct of the Business; (c) all packaging and shipping materials, all raw materials (whether in transit or otherwise), in process and finished goods and products inventory, and consigned goods of the Seller and its Business; (d) the full benefit subject to burden (so far as same are capable of assignment) of all leases and other agreements and contracts to which the Seller is a party or a third party beneficiary, including all purchase orders, purchase con tracts, sales orders and sales contracts (other than this Agreement); (e) all rights to the extent the Seller has prepaid expenses; (f) all permits and authorizations (so far as same are capable of assignment) owned by the Seller; (g) certain insurance policies owned by the Seller set forth on Schedule 1.1(g) hereto; (h) all patents and patent applications owned by the Seller; (i) all trademarks, trademark applications, service marks, trade names and trade name applications owned or (if any) licensed by the, including all rights to use the name "Seattle Online" and all other names, logos and slogans used by the Seller; (j) all intellectual property rights not otherwise covered by Sections l.l(h) and l.l(i) hereof, including, without limita tion, all know-how, copyrights, copyright registrations, copyright applications for registration, trade secrets, techniques, formulas, inventions, drawings, processes, engineering data, directions, software, computer programs, databases and other technical information and specifications owned by the Seller or used in the operation of the Business (the assets described in Sections 1.1(h), (i) and (j) are sometimes hereinafter referred to as "Proprietary Rights"); (k) all notes receivable and accounts receivable owned by the Seller; Page 2 - Asset Purchase Agt- (l) all claims, refunds, causes of action, causes in action, rights of recovery and rights of set-off of every kind and nature, except those relating to liabilities which (i) are not included within the "Assumed Liabilities" (as such term is defined in Section 1.3 hereof) or (ii) are related to the Retained Assets; (m) all surety bonds, performance bonds, guarantees and letters of credit; and (n) subject to the obligations of Seller pursuant to Section 5.6 hereof, all books and records of the Seller pertaining to the Assets. 1.2 Retained Assets. Any provision of this Agreement to the contrary notwithstanding, the following properties, assets, rights and interests (the "Retained Assets") are expressly excluded from the purchase and sale contemplated hereby and, as such, are not included in the Assets: (a) all monies to be received by Seller under this Agreement and all other rights of Seller hereunder; (b) all tax refunds and other rights (including, without limitation, rights to indemnification) and claims of the Seller in respect of or relating to (i) tax liabilities not assumed by Purchaser and any other liabilities not assumed by Purchaser or (ii) any other Retained Assets; (c) the cash and cash equivalents of the Seller on hand, in banks or wherever located, certificates of deposit, commercial paper and securities that do not constitute prepayments or security deposits or bondings by Seller; (d) all other assets, properties and rights, if any, identified on Schedule 1.2 hereto; (e) the employment agreements between the Seller and any employee of Seller; and (f) any other properties, assets, rights and interests of the Company which Purchaser, by written notice to Seller on the Closing Date (as defined in Section 2.1 hereof), shall advise Seller are not included in the Assets. 1.3 Assumption of Liabilities. Purchaser, upon the sale and purchase of the Assets, shall not assume, and shall not be obligated, primarily, secondarily, or otherwise, to pay and discharge any liabilities of any type or nature whatsoever, absolute, contingent or otherwise, of the Seller or associated with any of the Assets or the Business, other than those liabilities, if Page 3 - Asset Purchase Agt- any, expressly set forth on Schedule 1.3 to this Agreement (the "Assumed Liabilities"). 1.4 Limitations on Assumption. Any provision of this Agreement to the contrary notwithstanding, Purchaser will not and does not assume the following liabilities and obligations (the "Retained Liabilities") of Seller even if, to any extent, they arose in connection with, were incurred by or were related to, the Assets or the use of the Assets in connection with the Business: (a) any indebtedness (the "Debt") of Seller for borrowed money; (b) any obligation or liability of Seller to Purchaser created by this Agreement; (c) any obligation or liability of Seller arising out of or incurred in respect of any transaction occurring on or after the Closing Date unrelated to the Assets or Purchaser's operation of the Business; (d) unpaid fees and expenses of Seller's investment bankers, brokers, counsel, accountants or other experts incurred in connection with the negotiation of this Agreement and related documentation and the execution and delivery of the same and the closing of the transactions contemplated hereby and thereby; (e) any obligation or liability of Seller for any of the following: (i) federal, state, local or foreign income Taxes incurred for periods through the date of Closing ("pre-Closing Periods"); (ii) federal, state, local or foreign Taxes payable with regard to any sale, conveyance, assignment, transfer or delivery by Seller to Purchaser at the Closing pursuant to this Agreement including, without limitation, with regard to the Assets; (iii) any other Taxes incurred by the Seller for pre-Closing Periods; and (iv) interest, additions and penal ties incurred in respect of any of the Taxes referred to in clauses (i), (ii) or (iii) of this paragraph (f); and (f) the liabilities associated with the agreements referred to in Sections 1.2(e) and (f), if any. For purposes of this Agreement, "Tax" shall mean any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, Page 4 - Asset Purchase Agt- registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever. 1.5 Purchase Price. (a) In consideration of the sale and transfer of the Assets by Seller to Purchaser, at Closing Purchaser shall assume the Assumed Liabilities, if any, and pay to Seller the following (the "Purchase Price"): (i) the sum of $300,000 (the "Cash Sum"); and (ii) 25,000 shares (being sometimes hereinafter referred to as the "Creditor Shares") of the common stock, $0.01 par value per share ("AUGI Common Stock"), of American United Global, Inc., a Delaware corporation ("AUGI"). (b) At Closing, the Cash Sum shall be transferred by Purchaser by certified bank check or by wire transfer of immediately available funds, and the Creditor Shares shall be delivered by hand, to the creditors of Seller as directed by Seller in full settlement of their claims, as set forth on Schedule 1.5(b), against Seller, the Assets and the Business and against receipt of a pay-off, release and settlement letter by such creditors satisfactory to Seller and to Purchaser and receipt by Purchaser, in form and substance satisfactory to Purchaser, from each acquiror of Creditor Shares of a Subscription Agreement and an Offeree Questionnaire in the forms of Exhibits G and H hereto. 1.6 Discharge of Indebtedness. At the Closing, upon payment of the Purchase Price Seller shall cause all documents and instruments, in recordable form as appropriate, necessary to fully release and discharge the Debt, if any, owed on the Closing Date and any other liabilities of Seller, together with all liens, mortgages, deeds of trust, security interests, pledges and other encumbrances securing the same, to be executed, delivered and/or filed, as the case may be, all in form and in substance satisfactory to Purchaser. 1.7 Personnel, Labor and ERISA Matters (a) Employee Benefit Plans. All the plans, benefits, and programs of Seller of the nature or type referred to in Section 3.17 shall be terminated by Seller on and as of Closing and, in any event, Purchaser shall have no obligations whatsoever in respect of such plans or to continue the employment of any person whatsoever. (b) Welfare Plans; Employees. The employment of each employee of the Seller in respect of the Business shall Page 5 - Asset Purchase Agt- terminate on and as of the Closing, and Purchaser shall have no obligation whatsoever to hire any such employees. However, it is Purchaser's present intention to extend an offer of new employment with Purchaser, on terms and conditions to be determined by Purchaser, to substantially all of the current full-time employees of Seller. 1.8 Pre-Closing Purchase Price Adjustment; Additional Closing Condition. The parties hereto expressly acknowledge and agree that notwithstanding any other provision of this Agreement to the contrary, on the terms and conditions set forth in this Section 1.8 the Purchase Price may be adjusted by the parties prior to the Closing and a special Closing condition may arise, as follows: (a) In the event that from the date hereof through the Closing Date, an event or condition, should occur which results in a material breach of Seller's representations or warranties hereunder, Purchaser shall promptly give Seller notice of the same in substantially the same manner as notice would be given for indemnification claims pursuant to Article 12 hereof. In addition to whatever other information is included in such notice to Seller, Purchaser, to the best of its ability, shall advise Seller of the dollar value of Purchaser's claim with respect to such breach. (b) Within two (2) days of receipt of such notice (assuming, for this purpose, that the same is received prior to the Closing Date), Seller shall respond to Purchaser's notice. Such response may include an acceptance or a rejection of the validity of Purchaser's claim or the valuation thereof or a request for additional information. (c) To the extent that the parties agree on the value and validity of any such claim on or prior to the Closing Date, if the aggregate agreed value of any such claims between the date hereof and the Closing Date is greater than Ten Thousand Dollars ($10,000) but less than One Hundred Thousand Dollars ($100,000), Seller agrees that with respect to each such claim Seller shall pay the amount of such claim to Purchaser. In the event that the aggregate agreed value of such claims exceeds One Hundred Thousand Dollars ($100,000), Seller shall also have the option to pay the amount of the same to Purchaser but may elect instead not to complete the Closing. Any payments by Seller pursuant to this Section shall be made by wire transfer of immediately available funds to Purchaser's account. 1.9 Taxes on Sale. Seller shall bear the burden and be responsible for the payment of all Taxes payable with respect to the sale, conveyance, assignment, transfer or delivery of the Assets to Purchaser at Closing pursuant to this Agreement. Page 6 - Asset Purchase Agt- 2. Closing. 2.1 Time and Place. The consummation of the purchase and sale of the Assets and the other transactions contemplated hereby (the "Closing") shall take place at 10:00 A.M. on October 22, 1996 (the "Closing Date") at the offices of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, 153 East 53rd Street, New York, New York, or at such other time and place as the parties hereto may agree in writing. 2.2 Obligations of Purchaser at Closing. At the Closing, if the conditions to Purchaser's obligations set forth in Section 1.6 and 6 hereof have been satisfied or waived by Purchaser, then, against tender by Seller of the documents set forth in Section 2.3 hereof, Purchaser shall perform its obligations to be performed under this Agreement on or prior to Closing and shall pay and deliver the Purchase Price as set forth in Section 1.5 of this Agreement. 2.3 Obligations of Seller at Closing. At the Closing, if the conditions to Seller's obligations set forth in Section 7 hereof have been satisfied or waived by Seller, then, against tender by Purchaser of the Purchase Price and the other items, if any, set forth in Section 2.2 hereof, Seller shall execute and deliver or cause to be executed and delivered to Purchaser all of the following and such other documentation as is necessary to consummate the transactions contemplated hereunder: (i) with respect to the Real Property, if any, special warranty deeds conveying title to Purchaser satisfactory in form and in substance to the Purchaser; (ii) with respect to the lease listed in Schedule 3.10 hereto (the "Lease"), an assignment and assumption agreement satisfactory to Purchaser in form and in substance; (iii) assignments of all of Seller's rights under all contracts and agreements (exclusive of the Lease) which are included in the Assets (other than those covering Retained Assets) satisfactory to Purchaser in form and in substance; (iv) assignments to Purchaser of that portion of the Assets which consist of Proprietary Rights and any other intangible property of an intellectual property nature satisfactory to Purchaser in form and in substance; (v) a bill of sale from Seller and such other assignments, endorsements, and instruments of conveyance and transfer as shall be necessary in order to sell, assign and transfer the Assets not covered by clauses (i) through (iv) and (x) of this Section 2.3 to Purchaser, in each case Page 7 - Asset Purchase Agt- satisfactory to Purchaser in form and in substance; (vi) all documents and instruments necessary to release of record or otherwise evidence the satisfaction of the mortgages, liens, security interests and encumbrances listed in Schedule 2.3(vi) hereto, if any; (vii) the letters of instruction described in Section 5.4 hereof, if any; (viii) the pay-off letter described in Section 1.6 hereof, if applicable; (ix) the instrument described in Section 5.4 hereof authorizing Purchaser and its representatives to endorse Seller's name on checks, drafts, notes and other documents received in payment of any accounts receivable or other property included in the Assets sold to Purchaser under this Agreement; and (x) all documents necessary to effectuate the assignment of the insurance policies covered by Section 1.1(g) hereof, if any. 3. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SO STOCKHOLDER. The Seller and the SO Stockholder, jointly and severally, hereby represent and warrant to the Purchaser and AUGI as follows, it being understood and agreed that neither AUGI nor the Purchaser is or will be required to undertake any independent investigation to determine the truth, accuracy and completeness of the representations and warranties made by the Seller or the SO Stockholder in this Agreement and that no due diligence investigation undertaken by AUGI or the Purchaser shall in any way be deemed to ascribe any knowledge to AUGI or the Purchaser different from, or in addition to, the following representations and warranties made to AUGI and the Purchaser, or to reduce, effect, or eliminate their complete reliance upon such representations and warranties, and it being further understood and agreed that the survival of each such representation and warranty shall be as set forth in Section 12.2(d) of this Agreement: 3.1 Ownership of the Stock. (a) The type and number of shares of outstanding securities of the Company on a fully-diluted basis (that is, after giving effect to: (a) the exercise of all outstanding options and warrants to purchase shares of the common stock of the Company (the "Company Common Stock"), (b) the conversion into Company Common Stock of all convertible notes, convertible debentures, shares of Page 8 - Asset Purchase Agt- convertible preferred stock of all series, or other securities convertible into shares of Company Common Stock, and (c) the exercise of all other rights and privileges to receive or acquire shares of Company Common Stock; and (d) there being no other capital stock of the Company issued or outstanding other than the Company Common Stock; and (e) there being no options, warrants, subscription rights, rights of first refusal, convertible securi ties, or other rights to purchase or receive shares of any of the securities referred to in (a), (b), (c), or (d) preceding), such securities being sometimes hereinafter referred to as the "Stock" or the "Fully Diluted Equity", the record owners thereof, and the record addresses and social security number or tax identification number of each of the stockholders of the Company, are as set forth on Schedule 3.1 annexed hereto. Each stockholder of the Company is the legal and beneficial owner of such stockholder's shares of the Stock enumerated next to such stockholder's name on Schedule 3.1 hereto, free and clear of all pledges, Liens, claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever, except any restrictions which may be created by operation of state or federal securities laws (which restrictions are set forth on such Schedule). For purposes of this Agreement, a "Lien" shall mean any mortgage, deed of trust, trust, pledge, vendors' or other lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature of any of the foregoing, any claim, security interest, assignment, or encumbrance of any kind, any negative lien and the filing of or agreement to give any financing statement or similar notice of security interest. (b) Schedule 3.1 accurately sets forth the number of shares of Stock owned of record and beneficially by each SO Stockholder, and all of the Stock has been duly authorized and validly issued, and is fully paid and non-assessable. 3.2 Valid and Binding Agreement. (a) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company have been duly and validly authorized by the Board of Directors of the Company and the stockholders of the Company, and the Company has the full corporate right, power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. This Agreement constitutes the legal, valid and binding obligation of the Company and of Dieffenbach, enforceable against the Company and Dieffenbach in accordance with its terms. (b) Dieffenbach has full legal right, power and authority to execute and deliver this Agreement and to consummate Page 9 - Asset Purchase Agt- the transactions contemplated hereby. This Agreement and, when executed and delivered by each applicable party thereto, the Registration Rights Agreement, the Non-Competition and Non-Disclosure Agreement and the Employment Agreement of Dieffenbach (as such terms are hereinafter defined), constitutes and will constitute the legal, valid and binding obligations of such Dieffenbach (if he is a party to the same), enforceable against such Dieffenbach in accordance with their respective terms. 3.3 Organization, Good Standing and Qualification. (a) The Company: (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington; (ii) has all necessary corporate power and authority to carry on its business and to own, lease and operate its properties; and (iii) is not required, by the nature of its properties or business, to be qualified to do business as a foreign corporation in any other foreign jurisdiction in which the failure to be so qualified would have a material adverse effect on the Company, its properties or assets, its business, or its condition (financial or otherwise). (b) The Company has no subsidiary corporations. (c) True and complete copies of the Articles of Incorporation and By-Laws of the Company (including all amendments thereto), and a correct and complete list of the officers and directors of the Company, are annexed hereto as Schedule 3.3. 3.4 Capital Structure; Stock Ownership. (a) The authorized and outstanding shares of capital stock of the Company, and the record owners of such shares of capital stock, and all outstanding options, warrants and other securities convertible, exchangeable or exercisable for shares of Company Common Stock, if any, are as set forth on Schedule 3.4 annexed hereto. Other than as set forth on Schedule 3.4, no other shares of capital stock of the Company are issued or outstanding. (b) Except for the agreements and commitments, if any, specifically and expressly set forth in Schedule 3.4 annexed hereto (all of which agreements and commitments will be terminated and canceled as of the Closing Date, without any payment by the Company), if there are any at the date hereof, there are no outstanding subscriptions, options, rights, warrants, convertible securities or other agreements or calls, demands or commitments: (i) obligating the Company to issue, transfer or purchase any shares of its capital stock, or (ii) obligating Dieffenbach or any other stockholder of the Company to transfer any shares of the Stock owned by such stockholder. Other than in respect of the stock purchase rights described in Schedule 3.4, if any, (all of Page 10 - Asset Purchase Agt- which shall be terminated and canceled as of the Closing Date, without any payment by the Company), if there are any at the date hereof, no shares of capital stock of the Company are reserved for issuance pursuant to stock options, warrants, agreements or other rights to purchase capital stock. 3.5 Investments. The Company does not own, directly or indirectly, any stock or other equity securities of any corporation or entity, or have any direct or indirect equity or ownership interest in any person, firm, partnership, corporation, venture or business other than the business conducted by the Company. 3.6 Financial Information. (a) Annexed hereto as Schedule 3.6(a) are the unaudited financial statements of the Company as at August 31, 1996, including balance sheets, statements of operations, statements of stockholders' equity, and statements of cash flow, (the "August Financial Statements"). Schedule 3.6(a) also includes the unaudited financial statements of the Company as at September 30, 1996 and for the one month then ended, including balance sheets and statements of operations for the fiscal periods then ended (the "September Financial Statements"). Such August Financial Statements and September Financial Statements are herein collectively referred to as the "Financial Statements". (b) The Financial Statements: (i) are true, complete and correct in all respects and present fairly the financial position of the Company as of the dates thereof and for the periods reflected therein, all in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis; (ii) make full and adequate provision, in accordance with generally accepted accounting principles applied on a consistent basis, for the various assets and liabilities of the Company, and the results of its operations and transactions in its accounts, as of the dates and for the periods referred to therein; (iii) reflect only assets and liabilities and results of operations and transactions of the Company, and do not include or reflect any assets, liabilities or transactions of any corporation or entity except the Company; and (iv) were prepared from, and are consistent with, the books and records of the Company, which accurately and consistently reflect all transactions to which the Company was and is a party; provided, that the Financial Statements omit footnote disclosures required under GAAP and are subject to fiscal year end audit adjustments which would not, individually or in the aggregate, be material. (c) Except as expressly set forth in the Financial Statements and/or in the Schedules to this Agreement, or arising in the normal course of the Company's business since September 30, 1996 (the "Stub Period End"), there are as at the date hereof, no Page 11 - Asset Purchase Agt- liabilities or obligations (including, without limitation, any tax liabilities or accruals) of the Company, whether absolute, accrued, contingent or otherwise and whether due or to become due, that are, singly or in the aggregate, material. (d) Schedule 3.6(d) annexed hereto contains: (i) an aging schedule of accounts receivable and accounts payable of the Company as at the "Stub Period Date" (ii) a list of the outstanding principal balance of and approximate accrued interest on all indebtedness (other than accounts payable), loans and/or notes payable of the Company as of the Stub Period Date; (iii) a list of any leasehold or other contractual obligations of the Company to any of the stockholders of the Company (if any), and/or any of their respective Affiliates on the date hereof; (iv) a list of all obligations of the Company guaranteed by any of the stockholders of the Company (if any), and/or any of their respective Affiliates on the date hereof, and the terms of such guarantees; (v) a list reflecting the nature and amount of all obligations owed to the Company on the date hereof by any of the stockholders of the Company (if any), and/or any of their respective Affiliates; and (vi) a list reflecting the nature and amount of all obligations owed by the Company on the date hereof to any of the stockholders of the Company (if any), and/or any of their respective Affiliates. Wherever used in this Agreement, the term "Affiliate" means, with respect to any person or entity, any other person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the first person or entity. 3.7 No Material Changes; Absence of Undisclosed Liabilities. (a) Except as and to the extent described in Schedule 3.7 annexed hereto (which Schedule may make reference to specific portions of any other Schedule hereto or to any other document(s) referred to in this Agreement which has heretofore been delivered to Purchaser provided that the facts so referred to and their relevance to this representation and warranty shall be apparent upon review of the portion of the Schedule to which such reference is made without review of underlying documentation), since the Stub Period End, the business of the Company has continued to be operated only in the ordinary course, and there has not been: (i) Any material adverse change in the condition (financial or otherwise), operations, business, properties, or prospects of the Company from that shown in the most recent August Financial Statements, or any material transaction or commitment effected or entered into outside of the normal course of the Company's business; (ii) Any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting the Page 12 - Asset Purchase Agt- business, operations, assets, properties, condition (financial or otherwise), or prospects of the Company; (iii) Any declaration, setting aside or payment of any dividend or other distribution with respect to the Stock, any other payment of any kind by the Company to any of its stockholders or any of their respective Affiliates outside of the ordinary course of business, any forgiveness of any debt or obligation owed to the Company by any of its stockholders or any of their respect ive Affiliates, or any direct or indirect redemption, purchase or other acquisition by the Company of any capital stock of the Company; (iv) Any claim or liability incurred by the Company for any damages, material to the Business or the Assets, taken as a whole, for negligence or other tort or breach of contract, or the occurrence of any act or omission or condition which might reasonably be expected to be a basis for the same; (v) (a) Any increase in the benefits of or compensation payable or to become payable to officers or employees (including any such increase pursuant to any welfare bonus, pension, profit-sharing or other plan or commitment) of the Company or any grant of any severance or termination pay to any officer or employee of the Company, or (b) any employment agreement or consulting agreement entered into by the Company with any person or entity; (vi) Any write down in the value of any material amount of inventory included in the Assets other than in the ordinary course of business and in amounts consistent with the Company's practice; (vii) Any write off as uncollectible or forgiveness of any notes or accounts receivable included in the Assets other than in the ordinary course of business and in amounts consistent with the Company's practice; (viii) Any change in any method of accounting or accounting practice employed by the Seller; (ix) Any contract or agreement entered into other than in the ordinary course of business or as otherwise permitted by this Agreement; (x) Any purchase order or contract accepted or entered into for the sale of any product or service with the intention or reasonable expectation to sell the same at a loss; (xi) Any sale, other disposition of, or acquisition of inventory except in the ordinary course of business or as Page 13 - Asset Purchase Agt- permitted by this Agreement; (xii) Commission of any act or omission to do anything which would cause a breach of any contract to which Seller is a party or by which it is bound, which breach would be materially adverse to the Business or the Assets, taken as a whole; or (xiii) Any other event or condition arising from or out of or in connection with the operation of the Company which has materially and adversely affected, or may reasonably be expected to materially and adversely affect, the Company, its assets or properties, its business, condition (financial or otherwise), or prospects. (b) Except as and to the extent expressly disclosed in Schedule 3.7 hereto, if at all, as of the Closing Date neither the Business nor the Assets are subject to any liabilities or obligations, whether absolute, accrued, contingent or otherwise and whether due or to become due. 3.8 Tax Returns and Tax Audits. (a) Except as and to the extent disclosed in Schedule 3.8 annexed hereto: (i) on the date hereof, all foreign, federal, state, and local tax returns and tax reports required to be filed by the Company on or before the date of this Agreement have been timely filed with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed, except for such prior failures to file in timely fashion as have been subsequently followed by complete and proper filing and payment of all amounts due in respect thereof, including interest and penalties, if any; (ii) all foreign, federal, state, and local income, franchise, sales, use, property, excise, and other taxes (including interest and penalties and including estimated tax installments where required to be filed and paid) due from or with respect to the Company as of the date hereof have been fully paid, and appropriate accruals shall have been made on the Company's books for taxes not yet due and payable; (iii) as of the date hereof, all taxes and other assessments and levies which the Company is required by law to withhold or to collect on or before the date hereof have been duly withheld and collected, and have been paid over to the proper governmental authorities to the extent due and payable on or before the date hereof; (iv) there are no outstanding or pending claims, deficiencies or assessments for taxes, interest or penalties with respect to any taxable period of the Company, except claims for taxes not yet due and payable; and (v) no tax Liens have been filed on the Company's assets. At and after the date hereof, the Company will have no liability for any foreign, federal, state, or local income tax with respect to any taxable period ending on or before the date hereof, except as and Page 14 - Asset Purchase Agt- to the extent disclosed in Schedule 3.8, if any. (b) There are no audits pending or, to the knowledge of the Company and Dieffenbach, threatened, with respect to any foreign, federal, state, or local tax returns of the Company, and no waivers of statutes of limitations have been given or requested with respect to any tax years or tax filings of the Company. No presently pending assessments of tax deficiencies have been made against the Company or with respect to its income, receipts or net worth, and no extensions of time are in effect for the assessment of deficiencies against the Company. The Company has not received notice of any claim by any authority in a jurisdiction in which the Company does business and does not file tax returns that the Company or its income, receipts or net worth may be subject to tax in that jurisdiction. The Company is not a party to any tax-sharing or allocation agreement, nor does the Company owe any amount under any tax-sharing or allocation agreement. The Company has no liability for unpaid taxes because it once was a member of an "affiliated group" within the meaning of Section 1502 of the Code. 3.9 Personal Property; Liens. On the date hereof, the Company has and owns good and marketable title to all of its personal property, free and clear of all Liens whatsoever, except for: (a) Liens securing the Company's indebtedness for money borrowed, if any, as reflected in the Financial Statements, pursuant to the security agreements listed in Schedule 3.9 annexed hereto; (b) Liens securing the deferred purchase price of machinery, equipment, vehicles and/or other fixed assets, if any, as reflected in the Financial Statements or as incurred after the date thereof in the ordinary course of business of the Company, pursuant to security agreements listed in Schedule 3.9; and (c) materialmen's, workmen's and other similar statutory liens arising in the ordinary course of business, none of which are material singly or in the aggregate, each of the Liens described in (a), (b), and (c) of this sentence being hereinafter referred to as "Permitted Liens". On the Closing Date, the Company shall have and own good and marketable title to all of its personal property, free and clear of all Liens whatsoever. The aggregate book value of all items of machinery, equipment, vehicles, and other fixed assets owned or leased by the Company does not exceed $100,000, and all of such fixed assets are in good operating condition and repair (reasonable wear and tear excepted) and are adequate for their use in the Company's business as presently conducted. 3.10 Real Property. (a) The Company neither owns nor has any interest of any kind (whether ownership, lease or otherwise) in any real property except to the extent of the Company's leasehold interests under the lease for its business premises, true and complete copies Page 15 - Asset Purchase Agt- of which lease (including all amendments thereto) are annexed hereto as Schedule 3.10 (the "Lease"). (b) The Company and the landlords thereunder are presently in compliance in all material respects with all of their respective obligations under the Lease, and the premises leased thereunder are in good condition (reasonable wear and tear excepted) and are adequate for the operation of the Company's current and presently contemplated business. (c) The Company is in actual possession of the properties demised under the Lease and has good and marketable title to the leasehold estates conveyed under the Lease, free and clear of any Lien or any sublease or right of occupancy, except as set forth on Schedule 3.10 hereto, if at all. (d) The Company has the right of ingress and egress through a public road or street, to and from the properties demised under the Lease. (e) The properties demised under the Lease and the improvements thereon constitute all of the real property and leases currently used exclusively or materially for the business of the Company and are adequate and sufficient for the current and currently anticipated operations of the Company and its business. (f) There is no pending proceeding for the taking or condemnation of all or any portion of the properties demised under the Lease or pending taking or condemnation proceeding which would result in a termination of any Lease of real property and, to the knowledge of the Company and the SO Stockholder, none of the same is threatened. (g) There are no material items of maintenance that have been materially deferred with respect to any of the improve ments on the real property demised under the Lease. (h) The Company has received no uncured notice from applicable governmental authorities of any outstanding violations of any building or zoning laws, codes or regulations, or govern mental or judicial orders issued pursuant thereto, with respect to the real property and the improvements thereon demised under the Lease, and there are no such violations. 3.11 Accounts Receivable. All accounts receivable shown on the balance sheet as of the Stub Period Date included in the Financial Statements (the "Balance Sheet"), and all accounts receivable thereafter created or acquired by the Company prior to the Closing Date, (a) have arisen or will arise in the ordinary course of the Company's business, (b) are and will be subject to no counterclaims, set-offs, allowances or discounts of any kind, Page 16 - Asset Purchase Agt- except to the extent of the allowance for doubtful accounts as of the Stub Period Date reflected in the Balance Sheet, and (c) have been, are and will be bona fide receivables due to the Company, valid and collectible in the ordinary course of business within three (3) months after the Closing Date (subject to the aforesaid allowance for doubtful accounts), without necessity of instituting any legal proceedings for collection. 3.12 Inventories. All supplies and other inventories shown on the Balance Sheet, and all inventories thereafter acquired by the Company prior to the Closing Date, have been and will be valued at the lower of cost or market, and consisted and will consist of items which are of a quality and quantity which are useable in the ordinary course of the Company's business for customary commercial purposes, and are substantially at the Company's normal working levels of the same in the current conduct of its business in the ordinary course. 3.13 Insurance Policies. Schedule 3.13 annexed hereto contains a true and correct schedule of all insurance coverages held by the Company concerning its business and properties (including but not limited to professional liability insurance). All such policies are in full force and effect and the Company is not in default thereunder. Such policies provide adequate insurance coverage for the Company, its properties and its business and are sufficient for compliance with all requirements of law. 3.14 Permits and Licenses; Consents. The Company possesses and is in material compliance with every license, permit, franchise, clearance, waiver, certificate, registration, order, authorization, consent, approval, administrative finding or directive of, or release by (each of the foregoing, a "Permit") any Governmental Authority (as such term is hereinafter defined) having jurisdiction over the Company, or its business, properties, or assets, necessary in order to operate its business in the manner presently conducted and currently planned to be conducted except for any such Permits the failure to hold does not and is not reasonably expected to have a material adverse effect on the Company, its business, properties, or assets; all of the Company's Permits are valid, current and in full force and effect; and none of such Permits will be voided, revoked or terminated, or are voidable, revocable or terminable, upon and by reason of the consummation of the transactions contemplated by this Agreement. Schedule 3.14 hereto lists all of the Permits of or in respect of any Governmental Authority or any other Person (as such term is hereinafter defined) which are required for the execution and delivery by the Company and Dieffenbach of this Agreement and the consummation of the transactions contemplated hereby. For purposes of this Agreement, the term "Governmental Authority" shall mean any nation or government, foreign or domestic, and any territory, possession, protectorate, province, state, county, parish, regional Page 17 - Asset Purchase Agt- authority, metropolitan authority, city, town, village, other locality, or other political subdivision or agency, regulatory body, or other authority, commission, tribunal, representative or official thereof, and any Person (as such term is hereinafter defined) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. For purposes of this Agreement, the term "Person" shall mean any natural person, corporation, partnership, joint venture, trust or unincorporated organization, joint stock company or other similar organization, Governmental Authority or any other legal entity, whether acting in an individual, fiduciary or other capacity. 3.15 Contracts and Commitments. (a) Schedule 3.15 annexed hereto lists all material contracts, leases, commitments, technology agreements, software development agreements, software licenses, indentures and other agreements to which the Company is a party or by which the Business or the Assets are bound or affected (collectively, "Material Contracts") including, without limitation, the following: (i) any contract for the purchase of equipment, supplies, other materials, or other inventory items other than purchase orders for supplies entered into in the ordinary course of business; (ii) any contract related to the purchase or lease of any capital asset involving aggregate payments of more than $5,000 per annum; (iii) all technology agreements, software development agreements and software licenses involving the Company or any Affiliate, regardless of the duration thereof or the amount of payments called for or required thereunder; (iv) any guarantee, make-whole agreement, or similar agreement or undertaking to support, directly or indirectly, the financial or other condition of any other person or entity; (v) each contract for or relating to the employment of any officer, employee, technician, agent, consultant, or advisor to or for the Company that is not cancelable by the Company without penalty, premium or liability (for severance or otherwise) on less than thirty (30) days' prior written notice; (vi) license, royalty, franchise, distributorship, dealer, manufacturer's representative, agency and advertising agreements; (vii) any contract with any collective bargaining unit; (viii) any mortgage of real property; (ix) any factoring agreement with respect to the accounts receiv able of the Company; (x) any pledge or other security agreement by the Company other than guaranties entered into in the ordinary course of business which are not material to the Company, (xi) any joint venture agreement or similar arrangement; (xii) any non-competition agreement or similar arrangement; and (xiii) any contract, lease, commitment, indenture, or other agreement to which the Company is a party that may not be terminated without penalty, premium or liability by the Company on not more than thirty (30) days' prior written notice. (b) Except as set forth in Schedule 3.15: (i) all Page 18 - Asset Purchase Agt- Material Contracts are in full force and effect; (ii) the Company and, to the best knowledge of the Company and Dieffenbach, the other parties thereto, each are in compliance with all of their respective obligations under the Material Contracts in all material respects, and are not in breach or default thereunder, nor has there occurred any condition or event which, after notice or lapse of time or both, would constitute a default thereunder; and (iii) none of the Material Contracts will be voided, revoked or terminated, or voidable, revocable or terminable, in whole or in part, upon and by reason of execution, delivery or performance of this Agreement. (c) No purchase commitment by the Company is in excess of the normal, ordinary and usual requirements of the business of the Company. (d) There is no outstanding power of attorney granted by the Company to any person, firm or corporation for any purpose whatsoever. 3.16 Customers and Suppliers. Neither Dieffenbach nor the Company is aware of any existing, announced or anticipated changes in the policies of, or the relationships with, or the business of, any material clients, customers, or suppliers of the Company which will materially adversely affect the Company or its condition, financial or otherwise, business, or prospects. 3.17 Labor, Benefit and Employment Agreements. (a) Except as set forth in Schedule 3.17 annexed hereto, the Company is not a party to any agreement with respect to the employment or compensation of any non-hourly and/or non-union employee(s). The Company is not now, and never has been, a party to or subject to any collective bargaining agreement or other labor agreement. Schedule 3.17 sets forth the amount of all compensation or remuneration (including any discretionary bonuses) paid by the Company during the 1995 calendar year or to be paid by the Company during the 1996 calendar year to officers, directors, employees or consultants who presently receive aggregate compensation or remuneration at an annual rate in excess of $25,000. (b) No union is now certified or, to the best of the knowledge of the Company and Dieffenbach, claims to be certified as a collective bargaining agent to represent any employees of the Company, and there are no labor disputes existing or, to the best of the knowledge of the Company and Dieffenbach, threatened, involving strikes, slowdowns, work stoppages, job actions or lockouts of any employees of the Company. (c) There are no unfair labor practice charges or petitions for election pending or being litigated before the Page 19 - Asset Purchase Agt- National Labor Relations Board or any other federal or state labor commission relating to any employees of the Company. The Company has not received any written notice of any actual or alleged violation of any law, regulation, order or contract term affecting the collective bargaining rights of employees, equal opportunity in employment, or employee health, safety, welfare, or wages and hours. (d) The Company has not, at any time, been and is not now required to make contributions to, be a party to or covered by (or had any of its employees covered by), and has not withdrawn from (partially or otherwise), and has not had and does not have any obligations to or in respect of any "multiemployer plan" (as defined in Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")). (e) Except as disclosed in Schedule 3.17, the Company does not maintain, or have any liabilities or obligations of any kind with respect to, any bonus, commission, deferred compensation, excess benefits, pension, thrift, savings, employee ownership, salary continuation, severance, profit sharing, retirement, supplemental retirement, or other such benefit plan, and does not have any potential or contingent liability in respect of any actions or transactions relating to any such plan other than to make contributions thereto if, as, and when due in respect of periods subsequent to the date hereof. Without limitation of the foregoing, (i) the Company has made all required contributions to or in respect of any and all such benefit plans, (ii) no "accumu lated funding deficiency" (as defined in Section 412 of the Internal Revenue Code of 1986, as amended (the "Code")) has been incurred in respect of any of such benefit plans, and the present value of all vested accrued benefits thereunder does not, on the date hereof, exceed the assets of any such plan allocable to the vested accrued benefits thereunder, (iii) there has been no "prohibited transaction" (as defined in Section 4975 of the Code) with respect to any such plan, and no transaction which could give rise to any tax or penalty under Section 4975 of the Code or Section 502 of ERISA, and (iv) there has been no "reportable event" (within the meaning of Section 4043(b) of ERISA) with respect to any such plan. All of such plans which constitute, are intended to constitute, or have been treated by the Company as "employee pension benefit plans" or other plans within Section 3 of ERISA have been determined by the Internal Revenue Service to be "qualified" under Section 401(a) of the Code, and have been administered and are in compliance with ERISA and the Code; and the SO Stockholder has no knowledge of any state of facts, conditions or occurrences such as would impair the "qualified" status of any of such plans. (f) Except for the group insurance programs listed in Schedule 3.17, if any, the Company does not maintain any Page 20 - Asset Purchase Agt- medical, health, life, dental, short- or long-term disability, hospitalization, accident, death benefits, or other employee benefit insurance programs, or sick leave or vacation or holiday or leave policies, or any welfare plans (within the meaning of Section 3(1) of ERISA) for the benefit of any current or former employees, and, except as required by law, the Company has no liability, fixed or contingent, for health or medical benefits to any former employee. 3.18 No Breach of Statute, Decree or Other Instrument. Except as set forth in Schedule 3.18 annexed hereto: (i) neither the execution and delivery of this Agreement by the Company and/or Dieffenbach, nor the performance of, or compliance with, the terms and provisions of this Agreement on the part of the Company and/or Dieffenbach, will violate or conflict with any term of the Articles of Incorporation or By-Laws of the Company or any statute, law, rule or regulation of any governmental authority affecting the Company, its properties or assets, or its business, condition (financial or otherwise), or prospects, or will cause or permit the material modification of the effect of, the imposition of any Lien in respect of, or the acceleration of any obligations or terms or the termination of any rights or imposition of any burdens under, or conflict with, result in a breach of, or constitute a default under, any of the terms, conditions or provisions of any judgment, order, award, injunction, decree, contract, lease, agreement, indenture or other instrument to which the Company is a party or by which the Company is bound; (ii) no consent, authorization or approval of or filing with any governmental authority or agency, or any third party, will be required on the part of the Company in connection with the consummation of the transactions contemplated hereby; and (iii) the Company will not be required, whether by law, regulation, or administrative practice, to reapply for or refile to obtain any of the licenses, permits or other authorizations presently held by the Company and required for the operation of its business as conducted on the date hereof. 3.19 Compliance with Laws. (a) Except as set forth in Schedule 3.19 to this Agreement, the Company has been, and is now in compliance (except to the extent, disclosed on Schedule 3.19, if at all, that incidental and non-material non-compliance has not had and can not reasonably be expected to have a material adverse effect on the Company, properties or assets, its business, its condition (financial or otherwise), or its prospects) with each of the following which is applicable to or binding upon or affecting the Company or its property, assets, or business, or to which the Company, or its property, assets, or business are subject: every statute, ordinance, code or other law, treaty, rule, regulation, order, technical or other standard, requirement or procedure existing, enacted, adopted, administered, enforced, or promulgated, Page 21 - Asset Purchase Agt- by any Governmental Authority (as such term is hereinafter defined), including, without limitation, any of the foregoing enacted, adopted or promulgated prior to the Closing Date but not yet effective (each of the foregoing, a "Law"), and every Permit, and every order, judgment, writ, injunction, award, decree, demand, assessment or determination of any arbitrator and of every Governmental Authority (each of the foregoing, an "Order"; each Law, Permit, and Order being sometimes hereinafter referred to as a "Requirement of Law"). Neither the Company or nor its proper ties, assets, or business are subject to or directly affected by any Requirement of Law of any Governmental Authority, other than those similarly affecting similar enterprises engaged in a material way in the same business activities; the Company's operations and Permits are not subject to any unduly burdensome restrictions and will not be subjected to any unduly burdensome restrictions as of the consummation of the transactions contemplated under this Agreement. (b) The Company has not, at any time, (i) acquired, handled, utilized, stored, generated, processed, transported, or disposed of any hazardous or toxic substances, whether in violation of any foreign, federal, state, or local environmental or occupa tional health and safety laws or regulations or otherwise, (ii) otherwise committed any violation of any foreign, federal, state, or local environmental or occupational health and safety laws or regulations (including, without limitation, the provisions of the Environmental Protection Act and other applicable environmental statutes and regulations) or any violation of the Occupational Safety and Health Act, or (iii) been in violation of any require ments of its insurance carriers from time to time. (c) Neither the Company nor any of its directors, officers or employees has received any written notice of default or violation, nor, to the best of the knowledge of the Company and Dieffenbach, is the Company or any of its directors, officers or employees in default or violation, with respect to any judgment, order, writ, injunction, decree, demand or assessment issued by any court or any federal, state, local, municipal, or other governmental agency, board, commission, bureau, instrumentality or department, domestic or foreign, relating to any aspect of the Company's business, affairs, properties, or assets. Neither the Company nor any of its directors, officers or employees, has received written notice of, been charged with, or is under investigation with respect to, any violation of any provision of any federal, state, local, municipal, or other law or administra tive rule or regulation, domestic or foreign, relating to any aspect of the Company's business, affairs, properties or assets, which violation would have a material adverse effect on the Company, properties or assets, its business, its condition (financial or otherwise), or its prospects. Page 22 - Asset Purchase Agt- (d) Schedule 3.19 sets forth the date(s) of the last known audits or inspections (if any) of the Company conducted by or on behalf of the Environmental Protection Agency, the Occupational Safety and Health Administration, and any other Governmental Authority. 3.20 Litigation. Except as disclosed in Schedule 3.20 annexed hereto, there are no private or governmental orders, claims, actions, suits, arbitrations, administrative or other proceedings (including, without limitation, any claim alleging the invalidity, infringement or interference of any patent, patent application, or rights thereunder owned or licensed by the Company) or investigations (as to which investigations, the Company or Dieffenbach is aware of the same) pending or, to the knowledge of the Company or Dieffenbach, threatened, against the Company or relating to its business or properties, at law or in equity or before or by any court or any Governmental Authority. Neither the Company or any of the Company's officers, directors, or employees in their respective capacities as such is a named party subject to any continuing court or administrative order, writ, injunction or decree applicable to any of them or to the Company's business or properties which (i) is not similar in effect to restrictions applicable to other participants in the industry or other business es similarly situated, or (ii) has or would have a material adverse effect on the Company, its business, or its properties. Except as disclosed in Schedule 3.20 annexed hereto, neither the Company or Dieffenbach is aware of any state of facts, events, conditions or occurrences which might properly constitute grounds for or the basis of any meritorious suit, action, arbitration, proceeding or investigation against or with respect to the Company. No action, suit or proceeding by or before any court or any governmental body or authority, against the Company or Dieffenbach or pertaining to the transactions contemplated by this Agreement or their consummation, have been instituted or, to the best of their knowledge, threatened, which action, suit or proceeding would, if determined adversely, have a material adverse effect on the Company, its business or any material portion of its assets, or impair the ability of any the parties to this Agreement to consummate the transactions contemplated hereby. 3.21 Patents, Licenses and Trademarks; Proprietary Rights. Schedule 3.21 annexed hereto correctly sets forth a list and brief description of the nature and ownership of: (a) all patents, patent applications, copyright registrations and applications, registered trade names, service marks, and trademark registrations and applications, both domestic and foreign, which are presently owned, filed or held by the Company and/or any of its directors, officers, stockholders or employees and which in any way relate to or are used in the Business; (b) all licenses, both domestic and foreign, which are owned or controlled by the Company and/or any of its directors, officers, stockholders or employees Page 23 - Asset Purchase Agt- and which in any way relate to or are used in the Business; (c) all franchises, licenses and/or similar arrangements granted to the Company by others and/or to others by the Company; and (d) all other Proprietary Rights of the Company (the items referred to in (a), (b), (c), and (d) are all Proprietary Rights). None of the Proprietary Rights is subject to any pending challenge known to the Seller or Dieffenbach with regard to use, enforceability, validity or otherwise, infringes on or misappropriates the rights of any others, or is subject to loss or expiration in the near future (or the threat of such loss or expiration) nor, to the best of the Company's and Dieffenbach's knowledge, is there any basis for any of the same. The Proprietary Rights owned by the Company constitutes all of the same necessary for the operation of the business of the Company as currently conducted and contemplated, and the Company owns good and marketable title to the same free and clear of any Liens. 3.22 Transactions with Affiliates. No material asset employed in the business of the Company is owned by, leased from or leased to any of the stockholders of the Company, any of their respective Affiliates, members of their families or any partner ship, corporation or trust for their benefit, or any other officer, director or employee of the Company or any Affiliate of the Company. 3.23 [intentionally omitted] 3.24 Schedules Incorporated by Reference. The making of any recitation in any Schedule hereto shall be deemed to constitute a representation and warranty that such recitation is an accurate statement and disclosure of the information required by the corresponding Section(s) of this Agreement (or taken as a whole), as, to the extent, and subject to the qualifications and limita tions, set forth in such corresponding Section(s). 3.25 Finders and Investment Bankers. Neither Seller nor Dieffenbach has dealt with or employed any broker, finder, investment banker or financial advisor as to whom Purchaser may have an obligation to pay any broker's or finder's fee in connection with the origin, negotiation, execution or performance of this Agreement. 3.26 Absence of Certain Payments. Neither Seller, nor any person acting with Seller's knowledge, has made any payment to or conferred any benefit, directly or indirectly, on suppliers, customers, employees or agents of suppliers or customers, or officials or employees of any government or agency or instrumental ity of any government (domestic or foreign) or any political parties or candidates for office, which is or was unlawful. 3.27 Warranty Policies. The written warranties which Page 24 - Asset Purchase Agt- have been established by the Seller from time to time, whether or not currently in effect, are attached to Schedule 3.27 hereto. 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND AUGI. Purchaser and AUGI hereby jointly and severally represent and warrant to the Seller as follows, it being understood and agreed that the Seller is not and will not be required to undertake any independent investigation to determine the truth, accuracy and completeness of the representations and warranties made by AUGI or Purchaser in this Agreement and that no due diligence investigation undertaken by the Seller shall in any way be deemed to ascribe any knowledge to the Seller different from, or in addition to, the following representations and warranties made to the Seller, or to reduce, effect, or eliminate their complete reliance upon such representations and warranties, and it being further understood and agreed that the survival of each such representation and warranty shall be as set forth in Section 12.2(d) of this Agreement: 4.1 Organization, Good Standing and Qualification. Each of Purchaser and AUGI is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and Delaware, respectively, with all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contem plated hereby. True and complete copies of the Articles of Incorporation and By-Laws of Purchaser and of AUGI (including all amendments thereto), and a correct and complete list of the officers and directors of Purchaser and of AUGI, are annexed hereto as Schedule 4.1. 4.2 Authorization of Agreement; Sufficient Securities Reserved. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by Purchaser and AUGI have been duly and validly authorized by the Board of Directors and sole stockholder of Purchaser, and by the Board of Directors of AUGI; and Purchaser and AUGI have the full corporate right, power and authority to execute and deliver this Agreement, to perform their respective obligations hereunder, and to consummate the transactions contemplated hereby. No further corporate authorization is necessary on the part of Purchaser or AUGI to consummate the transactions contemplated hereby. AUGI has sufficient authorized and unissued securities in order to issue the Creditor Shares and the Warrants (as hereinafter defined) which are to be issued by AUGI at Closing, as well as sufficient shares of AUGI Common Stock to permit exercise of said Warrants. 4.3 Valid and Binding Agreement. This Agreement constitutes the legal, valid and binding obligation of Purchaser and of AUGI, enforceable against AUGI and Purchaser in accordance with its terms, and, when executed and delivered, the Employment Page 25 - Asset Purchase Agt- Agreement will constitute the legal, valid and binding obligation of the Purchaser, and the Registration Rights Agreement will constitute the legal, valid and binding obligation of AUGI, in each case enforceable against Purchaser and AUGI in accordance with their respective terms. 4.4 No Breach of Statute or Contract. Neither the execution and delivery of this Agreement by Purchaser or AUGI, nor compliance with the terms and provisions of this Agreement on the part of Purchaser or AUGI, will: (a) violate any statute or regulation of any Governmental Authority affecting Purchaser or AUGI; (b) require the issuance of any authorization, license, consent or approval of any Governmental Authority; or (c) conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree, note, indenture, loan agreement or other agreement or instrument to which Purchaser or AUGI is a party, or by which Purchaser or AUGI is bound, or constitute a default thereunder. 4.5 Capitalization of AUGI AUGI is (i) authorized to issue 20,000,000 shares of Common Stock, $.01 par value per share ("AUGI Common Stock"); (ii) 7,166,382 shares of AUGI Common Stock were issued and outstanding at October 14, 1996; (iii) options to acquire 126,550 shares of AUGI Common Stock are outstanding under AUGI's 1991 Employee Incentive Stock Option Plan, of which options to acquire approximately 550,000 shares have been exercised at or prior to September 30, 1996; (iv) stock options to acquire 171,000 shares of AUGI Common Stock were reserved for certain key employees under AUGI's Stock Option Bonus Plan, of which options to acquire 171,000 shares have been granted at October 14, 1996, and under which option plan no further options can be granted; (v) at September 30, 1996, options to acquire approximately 15,000 shares of AUGI Common Stock were outstanding under a 1991 Transfer Plan, of which options to acquire approximately 38,000 shares were originally reserved for issuance, with no further options being available for grant under such plan; (vi) at September 30, 1996, options to acquire 2,000,000 shares of AUGI Common Stock were reserved for issuance pursuant to a 1996 qualified and non-qualified stock option plan, of which options to purchase approximately 1,425,000 shares of AUGI Common Stock were granted at October 14, 1996; (vii) warrants to purchase an aggregate of 920,000 shares of AUGI Common Stock at $7.50 per share were issued and outstanding at October 14, 1996; and (viii) additional options and warrants to acquire an aggregate of approximately 500,000 shares of AUGI Common Stock were also issued and outstanding at October 14, 1996. On August 8, 1996, AUGI acquired 100% of the capital stock of ConnectSoft, Inc. ("ConnectSoft") pursuant to which it issued 1,000,000 of its convertible preferred stock which is convertible into a maximum of 3,000,000 shares of AUGI Common Stock. On September 20, 1996, AUGI Page 26 - Asset Purchase Agt- acquired 100% of the capital stock of Interglobe Networks, Inc. ("Interglobe"), pursuant to which Interglobe stockholders were issued 800,000 shares of AUGI Common Stock, and were granted options to acquire an additional 800,000 share of AUGI Common Stock under the terms of employment agreements. Except as aforesaid, and as disclosed in the proxy statement of AUGI filed with the Securities and Exchange Commission on August 22, 1996 (the "AUGI 1996 Proxy Statement"), a true copy of which has been furnished to the parties who will acquire Creditor Shares and Warrants from AUGI in connection with the closing contemplated under this Agreement, as of the date of this Agreement there are no options, warrants, preferred stock, or other securities convertible or exchangeable for or into AUGI shares of Common Stock. Except as disclosed in the AUGI 1996 Proxy Statement and a possible transaction with the Seller, AUGI does not have any outstanding letters of intent or understandings with respect to any acquisition, other than a signed letter of intent, dated October 14, 1996, with Broadcast Tower Sites, Inc. and Spectrum Tech, Inc., pursuant to which both such companies are proposed to be acquired by AUGI in consideration for 700,000 shares of AUGI Common Stock, options to acquire 300,000 shares of AUGI Common Stock and $1,000,000 in cash at closing. 4.6 Business of Purchaser. Purchaser has been formed solely for the purposes of consummating the transactions contem plated by this Agreement, has not conducted and will not conduct any independent business operations until the Closing Date. 4.7 Absence of Litigation. No action, suit or proceed ing by or before any court or any governmental body or authority, against Purchaser or AUGI or pertaining to the transactions contemplated by this Agreement or their consummation, have been instituted or, to their knowledge, threatened, which action, suit or proceeding would, if determined adversely, have a material adverse effect on AUGI, its business or any material portion of its assets, or impair the ability of Purchaser to deliver the Purchase Price free and clear of all pledges, Liens, claims, charges, options, calls, encumbrances, restrictions and assessments whatsoever (except any restrictions which may be created by operation of state or federal securities laws). Except as disclosed in Schedule 4.7 hereto, AUGI is not aware of any state of facts, events, conditions or occurrences which would properly constitute grounds for the basis of any meritorious suit, action, arbitration, investigation against or with respect to AUGI or any of its subsidiaries, which would, if determined adversely to AUGI or any of its subsidiaries, would have a material adverse effect upon the business, financial condition or prospects of AUGI and its subsidiaries when taken as a consolidated whole. 4.8 Securities Filings and Disclosures. AUGI has furnished to the Seller and to the parties who will receive Creditor Shares and Warrants from AUGI in connection with the Page 27 - Asset Purchase Agt- Closing, the statements and reports listed on Schedule 4.8 to this Agreement, together with all exhibits and schedules thereto, which statements and reports (i) complied, as of their respective dates, as to form and substance in all material respects with the requirements pertaining to the filing thereof under the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, whichever is applicable, and (ii) as of their respective dates did not contain any material misstatement of fact or state or omit to state any material fact whose omission, in light of the circumstances under which such statement was made or omitted, would result in the statements made therein being materially misleading. AUGI shall supplement Schedule 4.8 through the Closing Date. The financial statements of AUGI and its consolidated subsidiaries as set forth in the securities filings listed on Schedule 4.8 fairly present the financial condition and results of operations of AUGI and its consolidated subsidiaries as at the dates and for the periods reflected therein. Since the date of AUGI's filing of its most recent Form 10-Q, there has been no material adverse change in the business, financial condition or prospects of AUGI and its subsidiaries, when taken as a consolidated whole. 4.9 No Registration. The Creditor Shares and the Warrants to be issued in connection with the Closing and, when issued, the shares of AUGI Common Stock which may be issued upon exercise of the Warrants, when so issued, will have been issued, pursuant to an available exemption from registration under the Securities Act of 1933, as amended, and the securities laws of the State of Washington, provided, that such issuance was made in the good faith belief that such exemption from registration is available in reliance upon investment, suitability, financial capacity, and investment sophistication representations made by the acquirors of such Creditor Shares and Warrants to AUGI in Subscription Agreements and Offeree Questionnaires furnished by each of them to AUGI in connection with the consummation of the transactions contemplated hereby. 4.10 Schedules Incorporated by Reference. The making of any recitation in any Schedule hereto shall be deemed to constitute a representation and warranty that such recitation is an accurate statement and disclosure of the information required by the corresponding Section(s) of this Agreement, as, to the extent, and subject to the qualifications and limitations, set forth in such corresponding Section(s). 4.11 Finders and Investment Bankers. Neither Purchaser nor AUGI has dealt with or employed any broker, finder, investment banker or financial advisor as to whom Seller may have an obligation to pay any broker's or finder's fee in connection with the origin, negotiation, execution or performance of this Agreement. Page 28 - Asset Purchase Agt- 5. CERTAIN COVENANTS 5.1 Conduct of Business. Except as set forth in Schedule 5.1 hereto or as otherwise required or permitted by this Agreement, from the date hereof through the Closing Seller, in respect of the Business and the Assets, will: (i) not cancel or permit any insurance carried primarily in respect of the Business to lapse or terminate, unless renewed or replaced by like coverage; (ii) not commit any act or permit the occurrence of any event or the existence of any condition of the type described in Section 3.7 hereof; (iii) not enter into any contract, agreement or other commitment involving obligations for expenditures on its part in excess of $5,000 for any individual contract (exclusive of purchase orders for materials used in the Business); (iv) not acquire any additional real property or interest therein or enter into any lease for additional real property; (v) not merge or consolidate with or into any other business, person or entity; (vi) conduct the Business only in the usual and ordinary course of business in accordance with past custom and practice; (vii) keep in full force and effect all material rights, franchises and intellectual property relating or pertaining to the Business, except those which expire by their terms, and, if any material right, franchise or intellectual property expires by its terms, renew the same if such renewal is in the ordinary course of business and consistent with past custom and practice; (viii) maintain the Assets in customary repair, order and condition; (ix) administer each employee benefit or welfare plan of or maintained by Seller, if any, in accordance with the provisions thereof and the Code and ERISA in all material respects; and (x) maintain its books, accounts and records in accor dance with past custom and practice. 5.2 Other Transactions. Prior to the Closing, without the Page 29 - Asset Purchase Agt- prior written consent of Purchaser, Seller will not, nor will it authorize or permit any of its officers or employees or any attorney or other representative retained by Seller to, solicit any inquiries from or the making of any proposal by a third person which constitutes, or may reasonably be expected to lead to an offer ("Offer") concerning the sale, directly or indirectly, to such third person of all or any part of the Business or the Assets. 5.3 Consents and Approvals. Seller will use its best efforts (but shall be under no obligation to make any payments to any third party or to incur any expenses, which payments and expenses together in the aggregate, are material) to obtain the approvals, consents and releases of other persons or entities necessary or appropriate to consummate the transactions contemplated by this Agreement. 5.4 Endorsements; Bank Accounts. After the Closing, Purchaser shall have the right and authority to endorse, without recourse, the name of Seller on any check or any other evidence of indebtedness received by Purchaser on account of any Asset sold by Seller to Purchaser pursuant hereto. Seller will deliver to Purchaser at the Closing letters of instruction sufficient to permit Purchaser to deposit such checks or other evidences of indebtedness in bank accounts in the name of Purchaser. Any moneys received by Seller after the Closing Date on account of any Assets sold by Seller to Purchaser pursuant hereto, including on account of accounts receivable, will be promptly paid over to Purchaser. 5.5 Additional Instruments. Seller and Purchaser, as the case may be, at the request of the other, at or after the Closing, will execute and deliver, or cause to be executed and delivered, to the other such documents and instruments, in addition to those specifically required by the provisions of this Agreement, in form and substance reasonably satisfactory to the other, as may reasonably be necessary to carry out or implement any provision of this Agreement. With respect to any Assets sold hereunder which can not be physically delivered to Purchaser because they are in possession of third parties, in connection with the Closing Seller shall give irrevocable instructions to the parties in possession thereof that all right, title and interest in and to the same have been vested in Purchaser and that the same are to be held for Purchaser's exclusive use and benefit from and after the Closing. The form of the irrevocable instructions, and the procedures for obtaining acknowledgment of the same from the parties in possession in connection with the Closing, shall be as mutually agreed by Seller and Purchaser. 5.6 Possession and Control of Assets; Access to Information. At the Closing, Seller shall take all requisite steps to put Purchaser in actual possession and operating control of the Assets and all of the Seller's records, books and other data relating to Page 30 - Asset Purchase Agt- the Assets, provided that Seller may retain copies of the same to the extent necessary for Seller to fulfill its obligations under law and, in the case of records, if any, which the Seller is required by law to maintain or which are not readily separable from the Seller's own records, Seller shall maintain the originals thereof and furnish copies of the same to Purchaser. If Purchaser shall determine to dispose of any such original records during the three (3) years from and after the Closing Date, Purchaser shall first offer in writing to deliver the same to Seller and shall give Seller reasonable opportunity to obtain possession of the same. During the period of three (3) years following the Closing Date, Purchaser shall grant to Seller, at Seller's request expense, access to the Assets and appropriate officers of the Purchaser during normal business hours and without unreasonable disruption of the Purchaser's business as may be reasonably necessary for Seller to address tax matters, potential liabilities and claims (other than claims against Seller or Dieffenbach, if any, by Purchaser or its successors and assigns), accounting matters or for any other purpose incident to this Agreement. 5.7 Taxes. After the Closing Date, Purchaser will cooperate with Seller, at Seller's expense, in connection with the prepara tion of all tax returns to be filed by Seller, to facilitate the filing of such returns by Seller in a timely manner, and will cooperate with Seller, at Seller's expense, in connection with any audit by the IRS or any other tax authority of any tax return relating to the operations of the Seller during any pre-Closing Period. Purchaser shall so cooperate for so long as Seller may be required to file any such returns or may be subject to any such audit. Seller will have the sole right, at its expense, to prepare and file any amended tax return, claim for refund or tax court petition, to prosecute any such claim and to select counsel, to engage in litigation and to consent to any settlement in connection therewith with respect to any taxes for any such pre-Closing Period which Seller has paid or for which Seller may be liable. Notwithstanding the foregoing, to the extent that Purchaser may be liable for taxes for any such period Purchaser shall be entitled to participate in any of the litigation with respect to any such claim or may employ its own separate counsel, in either event at its own expense, and in such circumstances, the Seller and Purchaser shall only be entitled to settle that portion of the claim for which it may be liable provided further, that if Seller or Purchaser is entitled to take any of the foregoing actions, each will deliver, or cause to be delivered, to the other or its designee all information reasonably requested by the other in order to implement the provisions of this Section 5.7. Neither Seller nor Purchaser will dispose of any financial records or other records relating to the Business which may be necessary to resolve any tax dispute for three (3) years after the Closing Date unless each has first Page 31 - Asset Purchase Agt- offered possession of such records to the other or its designee and the other party or its designee has refused possession. 5.8 Certain Notices. Prior to the Closing, each of Seller and Purchaser, as the case may be, shall promptly notify the other in the event it discovers any fact or matter constituting a breach of any representation or warranty contained herein, or any change relating to any fact or matter which, pursuant to the terms of this Agreement, should either appear in any Schedule hereto or be an exception to a representation or warranty contained herein in order that the representations and warranties contained herein are true and complete on the Closing Date. Each party to this Agreement shall notify the other party promptly if it should become aware of any fact or condition which may represent a material impediment to consummation of the Closing hereunder. 5.9 Continuing Due Diligence. From and after the date hereof through the Closing, Seller shall furnish Purchaser with such additional financial and operating data and other information as to the operations, business, properties and assets of the Seller, reasonably available to Seller, as Purchaser shall from time to time reasonably require and, to the extent that such data and information is not otherwise available, Seller shall give and afford to the Purchaser access at reasonable times during the Seller's normal business hours to the facility, properties and books and records relating to the Seller, the Business and the Assets, in order that Purchaser may have a continuing opportunity to familiarize itself with the affairs of the Seller and conduct an appraisal of the Assets; provided, however, that the foregoing shall be conducted in such manner and at such times as not to interfere unreasonably with the operations of the Seller or adversely effect the Seller, the Business or the Assets. 5.10 [intentionally omitted] 6. CONDITIONS TO OBLIGATIONS OF PURCHASER The obligation of Purchaser to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions on or before the Closing Date, which are exclusively for the benefit of Purchaser and may be waived in writing by Purchaser in its sole discretion. 6.1 Accuracy of Representations and Warranties to Purchaser or AUGI. All representations and warranties made by the Seller and Dieffenbach in this Agreement, in any Schedule(s) hereto, and/or in any written statement delivered to Purchaser or AUGI under, pursuant to, or in connection with, this Agreement shall be true and correct on and as of the Closing Date. 6.2 Performance by the Company and the SO Stockholder. Page 32 - Asset Purchase Agt- The Company and Dieffenbach shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them on or before the Closing Date. 6.3 Certification. The Seller and Dieffenbach shall have executed and delivered to the Purchaser and AUGI certificates certifying that the conditions set forth in Sections 6.1 and 6.2 of this Agreement exist at the Closing Date. 6.4 Resolutions; Incumbency; Certified Bylaws and Certificates of Incorporation; Good Standing Certificates. On the Closing Date, the Seller shall have delivered to the Purchaser and to AUGI the following: (i) copies of resolutions of the Seller's Board of Directors and stockholders of the Seller, in form reasonably satisfactory to counsel for the Purchaser, authorizing the Seller's execution, delivery and performance of this Agreement, and all actions to be taken by such corporate party hereunder, certified by the Secretary of the Seller as of the Closing Date to be accurate and complete and in full force and effect; (ii) certificates evidencing the incumbency and signatures of relevant officers of the Seller, certified by the Secretary of the Seller as of the Closing Date to be complete and accurate; (iii) a copy of the bylaws and of the articles of incorporation of such corporate party, certified by the Secretary of such corporate party to be complete and accurate and in full force and effect as of the Closing Date; and (iv) certificate, dated as of a date not more than five (5) days prior to the Closing Date, by the Secretary of State of the state of incorporation of such corporate party, evidencing the good standing of such corporate party in such state. 6.5 Execution and Delivery of Subscription Agreements. Each person or entity which is to receive Creditor Shares or Warrants in connection with the consummation of the transactions contemplated by this Agreement (each such person or entity, an "Offeree") shall have executed and delivered to AUGI a Subscription Agreement in the form of Exhibit G to this Agreement. 6.6 Execution and Delivery of Offeree Questionnaires. Each Offeree shall have completed (in a fashion satisfactory to AUGI), executed and delivered to AUGI an Offeree Questionnaire in the form of Exhibit H to this Agreement. 6.7 Execution and Delivery of Registration Rights Agreement. AUGI and each of the Offerees shall have executed and delivered their respective Registration Rights Agreements in the form of Exhibit I to this Agreement, the rights under which shall be non-transferable by the Offerees. 6.8 Execution and Delivery of Non-Competition and Non-Disclosure Agreements. AUGI, the Purchaser, the Company, and Page 33 - Asset Purchase Agt- Dieffenbach, Robert Manning, Jeff MacDonald, Joann Visconti, Robe Goheen, Marc Lanendoerfer, Hanno (John Henery) Ginne, and Rich Maltby shall have executed and delivered to AUGI their respective Non-Competition and Non-Disclosure Agreements, in the form of Exhibit J to this Agreement. 6.9 Execution and Delivery of Employment Agreements with Key Employees. Craig Dieffenbach shall have entered into an Employment Agreement with Purchaser satisfactory in form and in substance to Dieffenbach and to Purchaser and substantially in the form last furnished to Dieffenbach by Purchaser. 6.10 Settlement of Affiliated Obligations. All debts, liabilities and other monetary obligations (if any), including, without limitation, any accrued cash compensation payable, which shall be owed by the Company to any of its officers, directors, employees, or consultants or owed to the Company by any of its officers, directors, employees, or consultants and their respective Affiliates shall have been fully paid and satisfied as at the Closing Date, such than no such debts, liabilities or obligations shall remain outstanding. 6.11. Settlement of Certain Other Debts. The indebtedness of the Company on and as of the Closing Date, which shall amount to not more than $345,000 as of such date, shall have been settled by application out of the Purchase Price of up to $300,000 in cash and the Creditor Shares, against receipt from all such creditors of pay-off, release and settlement letters satisfactory in form and in substance to Purchaser and the other documents required of any such creditors that are Offerees. 6.12 Corporate Structure and Related Matters. On and as of the Closing Date, Robert M. Rubin shall be Chairman of the Purchaser, Anthony Romano shall be the President and Chief Executive Officer of the Purchaser, and Craig Dieffenbach shall be the Vice President of Sales and Marketing of the Purchaser. The Board of Directors of the Purchaser as of the Closing Date shall consist of Robert M. Rubin, Howard Katz, C. Dean McLain, and Artour Baganov. 6.13 Evidence of Absence of Liens, Judgments, etc.. Purchaser shall have received from Seller satisfactory evidence of the absence of liens, judgments, etc., encumbering the Assets. 6.14 Releases from Directors, Officers, Shareholders, and Employees of the Company. Seller shall have obtained and Purchaser shall have received from Seller satisfactory evidence of the absence of liens, judgments, etc., encumbering the Assets. 6.15 Approval by AUGI's Board of Directors and Purchaser's Board of Directors. The Boards of Directors of the Page 34 - Asset Purchase Agt- Purchaser and AUGI shall have approved the execution, delivery and performance of this Agreement. 7. CONDITIONS TO OBLIGATIONS OF SELLER AND DIEFFENBACH The obligations of the Seller and of Dieffenbach to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions on or before the Closing Date, which are exclusively for the benefit of the Seller and Dieffenbach and may be waived in writing by them in their sole discretion. 7.1 Accuracy of Representations and Warranties by Purchaser and AUGI. All representations and warranties made by the Purchaser and AUGI to the Seller in this Agreement, in any Schedule(s) hereto, and/or in any written statement delivered to Seller under, pursuant to, or in connection with, this Agreement shall be true and correct on and as of the Closing Date. 7.2 Performance by the Purchaser and AUGI. The Purchaser and AUGI shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them on or before the Closing Date. 7.3 Certification. The Purchaser and AUGI shall have executed and delivered to the Seller certificates certifying that the conditions set forth in Sections 7.1 and 7.2 of this Agreement exist at the Closing Date. 7.4 Resolutions; Incumbency; Certified Bylaws and Certificates of Incorporation; Good Standing Certificates. On the Closing Date. the Purchaser and AUGI shall have delivered to the Seller the following: (i) copies of resolutions of such corporate party's Board of Directors and stockholders of the corporate entity, in form reasonably satisfactory to counsel for the Seller, authorizing such corporate party's execution, delivery and performance of this Agreement, and all actions to be taken by such corporate party hereunder, including the execution and delivery of other agreements and documents pursuant hereto, certified by the Secretary of such corporate party as of the Closing Date to be accurate and complete and in full force and effect; (ii) certificates evidencing the incumbency and signatures of relevant officers of such corporate party, certified by the Secretary of such corporate party as of the Closing Date to be complete and accurate; (iii) a copy of the bylaws and of the certificate of incorporation of such corporate party, certified by the Secretary of such corporate party to be complete and accurate and in full force and effect as of the Closing Date; and (iv) certificates, dated as of a date not more than five (5) days prior to the date hereof, by the Secretary of State of the state of incorporation of Page 35 - Asset Purchase Agt- such corporate party, evidencing the good standing of such corporate party in such state. 7.5 Execution and Delivery of Registration Rights Agreement. AUGI and each of the Offerees shall have executed and delivered their respective Registration Rights Agreements in the form of Exhibit I to this Agreement. 7.6 Execution and Delivery of Employment Agreement with Dieffenbach. Craig Dieffenbach shall have entered into an Employment Agreement with Purchaser satisfactory in form and in substance to Dieffenbach and to Purchaser and substantially in the form last furnished to Dieffenbach by Purchaser. 7.7. Payment of Purchase Price. The Purchaser shall have paid the Purchase Price in accordance with, the terms and conditions of this Agreement including, without limitation, Section 1.5 hereof. 7.8. Delivery of Warrants to Dieffenbach. If, and only if, Dieffenbach executes and delivers the Non-Disclosure and Non-Competition Agreement on or prior to the Closing Date and the other conditions to Purchaser's obligation to close hereunder are satisfied in full, and in order to induce Dieffenbach to execute, deliver, and perform the Non-Disclosure and Non-Competition Agreement, AUGI shall issue to Dieffenbach at the Closing common stock purchase warrants (the "Warrants") entitling the holder thereof to exercise the same to purchase Three Hundred Five Thousand (305,000) shares of AUGI Common Stock, such Warrants to be substantially on the terms and conditions of Section 8.4 to this Agreement. 7.9. Delivery of Warrants to Manning. If, and only if, Robert Manning executes and delivers the Non-Disclosure and Non-Competition Agreement on or prior to the Closing Date and the other conditions to Purchaser's obligation to close hereunder are satisfied in full, and in order to induce Robert Manning to execute, deliver, and perform the Non-Disclosure and Non-Competition Agreement, AUGI shall issue to Manning at the Closing common stock purchase warrants (the "Warrants") entitling the holder thereof to exercise the same to purchase Twenty Eight Thousand Three Hundred Thirty Three (28,333) shares of AUGI Common Stock, such Warrants to be substantially on the terms and conditions of Section 8.4 to this Agreement. 7.10 Approval by the Company's Board of Directors and Shareholders. The Board of Directors and the shareholders of the Company shall have approved the execution, delivery and performance of this Agreement. 8. CERTAIN POST-CLOSING COVENANTS Page 36 - Asset Purchase Agt- 8.1 Corporate Structure and Related Matters. Promptly on or after the Closing, the parties shall take such actions as may be necessary or appropriate, and shall execute and deliver and/or file, such documents as may be necessary, in order that for so long as it is a stockholder, directly or indirectly, of the Purchaser, AUGI shall, at all times, designate a majority of the Board of Directors of the Purchaser, but at least two of the members of the Purchaser's Board of Directors shall also be senior executive officers of the Purchaser. Furthermore, promptly after the Closing, a full-time Chief Financial Officer of the Purchaser acceptable to AUGI will be recruited and shall be hired upon such terms and conditions as shall be determined by AUGI and the Board of Directors of the Purchaser. 8.2 Employee Incentive Programs. (a) AUGI Stock Options. Promptly after the Closing, AUGI's Board of Directors shall authorize for issuance stock options to the key employees of the Purchaser entitling such employees to purchase up to 50,000 shares of AUGI Common Stock, at an exercise price equal to the closing market price of AUGI's Common Stock, as traded on the NASDAQ National Market ("Nasdaq") on the Closing Date. Such options issued to each such employee shall vest on a cumulative basis, 25% of the options granted to each employee to vest after the completion of each year that such employee remains in the full-time employ of the Purchaser and/or its subsidiaries following the consummation of the Closing. Options shall be immediately exercisable upon vesting. Such options shall expire on the date which is thirty (30) days after the fourth (4th) anniversary of the Closing Date. Such options shall only be issued against completion, execution and delivery by each optionee of a subscription agreement, an offeree questionnaire, and a non-disclosure and non-competition agreement to be furnished to the Purchaser to each such optionee, such agreements to be substantially in the forms of the Subscription Agreement, the Offeree Questionnaire, and the Non-Disclosure and Non-Competition Agreement. Unexercised options shall be forfeited upon termination of employment of any optionee by the Purchaser, whether or not vested, for cause. Unvested options shall be forfeited upon termination of employment of any optionee by the Purchaser for any other reason. (b) Stock Options in Stock of the Purchaser. If, and only if, the Purchaser consummates an initial public offering of its common stock after the Closing, the Board of Directors of the Purchaser may also issue to key employees of the Purchaser stock options of the Purchaser, in such amounts as the Board of Directors of the Purchaser shall then determine to be appropriate, and on terms otherwise no less favorable to the participants than the terms of the then-existing AUGI stock option plan for key employees; provided, that the exercise price shall be no lower than Page 37 - Asset Purchase Agt- 120% of the initial public offering price. (c) Cash Bonuses. Within thirty (30) days after the Closing, the Board of Directors of the Purchaser shall, in consultation with key executive officers of the Purchaser, establish an annual cash incentive bonus plan targeted to operating performance of the Purchaser. Dieffenbach will not be entitled to participate in any such bonus plan. 8.3 Financing of the Purchaser. Subject to the provisions of this Section 8.3 and after the Closing, AUGI shall make available to the Purchaser certain inter-company loans and advances (the "AUGI Financing") to fund working capital requirements of the Purchaser, in accordance with the "Corporation's Budget" referred to in Section 8.3(c) below. (a) Form of AUGI Financing. All AUGI Financing shall be in the form of intercompany loans and advances (each such loan or advance, an "Advance") from AUGI to the Purchaser reflected on the books of the Purchaser as either loans or as the issuance of shares of preferred stock of the Purchaser having liquidation preferences equal to the aggregate amount of the Advances, the form of each such Advance to be determined by AUGI in its sole discretion, and on such other terms and conditions as may be determined by AUGI in its sole discretion, including, without limitation, the following: (i) each Advance shall bear interest (or, in the case of preferred stock, cumulative dividends) at the rate of the Citibank, N.A. reported prime rate plus two percent (2%) per annum; and (ii) each Advance shall be payable, as to principal (or, in the case of preferred stock, redeemed), on a date which shall be the earlier to occur of (A) completion of the first public offer ing of the Purchaser's securities (either debt or equity), (B) the sale of all or substantially all of the stock or assets of the Purchaser, and (C) the applicable maturity date (each Advance shall have a term agreeable to AUGI of not less than one (1) year). The AUGI Financing shall be furnished up to the maximum aggregate amount of $400,000, to be funded $100,000 upon consummation of the Closing, $50,000 on the date which shall be thirty days after such date, and $50,000 at the end of every other seven (7) day period thereafter until the aggregate sum of $400,000 shall have been so furnished. Page 38 - Asset Purchase Agt- (b) Use of Proceeds of AUGI Financing. All AUGI Financing shall be spent and allocated to working capital and such business, technology and marketing efforts and other corporate purposes as the Boards of Directors of AUGI and the Purchaser shall, from time to time determine; provided, that the expenditure of such funds shall be based upon the following. (c) Annual Budgets and Forecasts. AUGI has determined to make the Advances available to the Purchaser on the basis of annual budgets and forecasts previously supplied to AUGI by the Company and Dieffenbach; provided, that (i) the annual budgets and forecasts shall be updated by the Company and Dieffenbach for the forty-eight (48) month period (based on AUGI's fiscal year ending July 31st) commencing on August 1, 1996 and ending on July 31, 2000, (ii) such updated annual budgets and forecasts for such period (the "Corporation's Budget"), which shall be satisfactory to AUGI in form and detail and in substance, shall have been received by AUGI prior to the Closing Date, and (iii) the timing of any Advance to the Purchaser shall be based upon satisfaction of the requirements established in the Corporation's Budget unless otherwise mutually agreed by the Purchaser's Board of Directors and AUGI's Board of Directors, it being understood and agreed that drawings of Advances which are not in accordance with the terms and conditions of the Corporation's Budget will not be made available by AUGI without the prior written approval of AUGI's Board of Directors. AUGI acknowledges that neither the budgets, the projections and information underlying the same, nor any other matter in connection with such budgets and projections, shall constitute a representation or warranty by the Seller or Dieffenbach. 8.4 The Warrants. The Warrants to be issued by AUGI at Closing shall contain substantially the following terms and conditions: (a) Each Warrant shall initially entitle its holder to acquire one share of AUGI Common Stock. (b) Each Warrant shall be exercisable at the closing price of AUGI Common Stock as reported on the NASDAQ National Market on the Closing Date, provided, that the exercise price shall be reduced to $6.00 per share in the event that the Pre-Tax Income (as such term is hereinafter defined) of the Purchaser for the Purchaser's fiscal year ending July 31, 1997 is at least $150,000. (c) The Warrants issued to any offer shall become exercisable as follows: one-third on the date which is one year after the Closing Date; one-third on the date which is two years after the Closing Date; and one-third on the date which is three years after the Closing Date. Each Warrant Page 39 - Asset Purchase Agt- shall expire, to the extent not theretofore exercised, on a date which shall be three years following the Closing Date. (d) Each Warrant shall contain certain anti-dilution provisions as set forth on Exhibit K to this Agreement. (e) If, and only if, the exercise price of the Warrants is reduced to $6.00 per share of AUGI Common Stock to be acquired thereby pursuant to Section 8.4(b) hereof, then each Warrant shall provide for a form of value price adjustment as hereinafter set forth. (i) In the event that the net income of the Purchaser, after deduction of all expenses paid or accrued for the period in question in accordance with GAAP, consistently applied, but before deduction for (x) costs associated with the settlement of debt (if any) incurred by the Purchaser prior to the Closing, (y) acquisition of capital assets, and (z) federal, state and local income taxes (the foregoing is hereinafter referred to as "Pre-Tax Income") for the Purchaser's fiscal years ending July 31, 1997 and July 31, 1998 (the "Measuring Years") shall equal or exceed $340,000 of Pre-Tax Income for the fiscal year ending July 31, 1997 and $2,650,000 of Pre-Tax Income for the fiscal year ending July 31, 1998 (the "Target Income"), AUGI shall provide a form of value guaranty adjustment to the Warrant holders based upon the premise that the average closing price of AUGI Common Stock, as traded on the NASDAQ National Market or other national securities exchanges (whichever is then the primary market for AUGI Common Stock) for the ninety (90) day period commencing October 1, 1998 and ending December 31, 1998 (the "Trading Price") shall exceed the then exercise price of the Warrants by $6.00 per share (the "Minimum Value Amount"). (ii) In the event that the accumulated Pre-Tax Income of the Purchaser for the two Measuring Fiscal Years ending July 31, 1998 shall equal or exceed $2,990,000, the Warrant holders shall be entitled to the full benefit of the Minimum Value Amount as hereinafter provided; provided, that the Pre-Tax Income for the fiscal year ended July 31, 1998 shall exceed the Pre-Tax Income for the fiscal year ended July 31, 1997. (iii) In the event that the Pre-Tax Income of the Purchaser in each fiscal year ended July 31, 1997 and July 31, 1998 shall equal or exceed at least 50% of the Target Income for such year, the Minimum Value Amount shall be appropriately pro-rated. There shall, however, Page 40 - Asset Purchase Agt- be no Minimum Value Amount whatsoever in the event that (x) the Purchaser does not achieve at least 50% of the Target Income in any one or more fiscal year, or (ii) the actual Pre-Tax Income in the fiscal year ending July 31, 1998 shall be less than 80% of the actual Pre-Tax Income in the fiscal year ending July 31, 1997. (iv) In the event that the Purchaser's Pre-Tax Income in both of the two Measuring Fiscal Years shall exceed $2,990,000, then the Minimum Value Amount shall be subject to pro-rata increase as follows: assuming that the aggregate of the Minimum Value Amounts for all of the Warrants is $2,000,000, the increase in such aggregate Minimum Value Amounts for all of the Warrants shall be increased by $1.00 (to be divided and applied proportionately across all of the Warrants) for each $1.495 of accumulated Pre-Tax Income in excess of $2,990,000; provided, that the maximum aggregate amount of the Minimum Value Amounts shall be $4,000,000, irrespective of the Purchaser's accumulated Pre-Tax Income in both Measuring Fiscal Years. (v) In the event that a Warrant holder shall be entitled to receive a Minimum Value Amount as calculated hereunder (because the Trading Price does not exceed the Warrant exercise price by at least the applicable Minimum Value Amount, if any), then AUGI shall have the right, at its sole option, to pay the dollar amount of such earned Minimum Value Amount to the Warrant holder by either (x) reducing the exercise price of the Warrants in whole or in part to an amount per share as shall, when compared to the Trading Price, equal the dollar amount of the applicable Minimum Value Amount, and/or (y) purchasing the unexercised Warrants at such a price per Warrant as shall equal the dollar amount of the applicable Minimum Value Amount. (vi) The value price adjustment (and the application of the Minimum Value Amount) shall be applicable only to unexercised Warrants, and shall not apply to any Warrant shares purchased upon any full or partial exercise of Warrants. (f) If, at any time on or prior to July 31, 1999, AUGI shall elect, at its option, to cause the Purchaser to effect an initial public offering of common stock of the Purchaser (a "Purchaser IPO"), each Warrant holder shall have the right, but not the obligation, to exchange all, but not less than all of the Warrants and the shares of AUGI Common Stock acquired by such Warrant holder upon exercise of the Warrants (provided, that each such exchanging Warrant holder, Page 41 - Asset Purchase Agt- in the aggregate, shall then own not less than eighty percent (80%) of such Warrants originally issued to such Warrant holder and the shares of AUGI Common Stock acquired upon exercise of such Warrants by such Warrant holder (collectively, the "AUGI Securities")), on the basis hereinafter described, for shares of the common stock of the Purchaser. Each of the Warrant holders shall make such exchange election within ten (10) days following notice by AUGI to such Warrant holder of the Warrant holder's opportunity to make such an election (which notice shall be furnished prior to the filing by the Purchaser of its initial registration statement with the Securities and Exchange Commission in connection with such Purchaser IPO). Notwithstanding the foregoing, no Warrant holder will be required to retain eighty percent (80%) of the AUGI Securities in order for such Warrant holder to make such an exchange in the event that the Purchaser shall have earned at least $2,990,000 of Pre-Tax Income prior to the date of the Purchaser IPO. The maximum amount of shares that the Warrant holders, in the aggregate, may so exchange AUGI Securities for shall be ten percent (10%) of the fully diluted common stock of the Purchaser immediately prior to giving effect to pro-rata dilution to all stockholders of the Purchaser (including AUGI) resulting from the Purchaser IPO. This maximum 10% pool will be reduced proportionately, however, to the extent that Warrant holders, in the aggregate, exchange less than eighty percent (80%) of the original AUGI Securities for the IPO stock. Each exchanging Warrant holder may only receive in such an exchange the proportion of the 10% pool, as adjusted which the AUGI Securities the Warrant holder is exchanging constitute out of 80% of all of the original AUGI Securities. (g) The Warrant holder shall forfeit his unexercised Warrants and rights to registration of his Warrants and Warrant Shares upon either (i) material breach by the Offeree to which the same were issued of such Offeree's Non-Disclosure and Non-Competition Agreement with the Purchaser or (ii) termination of such Offeree's employment by the Purchaser for "cause" if such Offeree becomes an employee of the Purchaser subsequent to the Closing. 8.5 Maintenance and Reservation of Sufficient Securities to Perform Obligations. From and after the Closing Date, AUGI shall take such steps as are necessary to cause AUGI to continue to have sufficient authorized and unissued shares of AUGI Common Stock reserved in order to permit the exercise of all outstanding Warrants. 9. AMENDMENTS AND MODIFICATIONS. 9.1 Amendments and Modifications. No amendment or Page 42 - Asset Purchase Agt- modification of this Agreement or any Exhibit or Schedule hereto shall be valid unless made in writing and signed by the party to be charged therewith. 10. NON-ASSIGNABILITY; BINDING EFFECT. 10.1 Non-Assignability; Binding Effect. Neither this Agreement, nor any of the rights or obligations of the parties hereunder, shall be assignable by any party hereto without the prior written consent of all other parties hereto. Otherwise, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, adminis trators, personal representatives, successors and permitted assigns. 11. NOTICES. 11.1 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the third day after mailing if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed as follows: (a) If to the Company or Dieffenbach: Seattle Online, Inc. 1417 4th Avenue, Third Floor Seattle, Washington 98101-2219 Attn: Craig Dieffenbach with a copy sent concurrently to: Bogle & Gates P.L.L.C. Two Union Square 601 Union Street Seattle, Washington, 98101-2346 Attn: Steven B. Winters, Esq. (b) If to Purchaser or AUGI: American United Global, Inc. 25 Highland Boulevard Dix Hills, New York 11747 Attention: Robert M. Rubin, President with a copy sent concurrently to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel Page 43 - Asset Purchase Agt- 153 East 53rd Street New York, New York 10022 Attention: Andrew J. Cosentino, Esq. or to such other address as any party shall have specified by notice in writing given to all other parties. 12. INDEMNIFICATION. 12.1 General. (a) By the Company and Dieffenbach. Without prejudice to any rights of contribution as between them, from and after the Closing Date: each of the Seller and Dieffenbach shall jointly and severally defend, indemnify and hold harmless the Purchaser and AUGI and their respective officers, directors, agents, representatives, and controlling persons (all of the foregoing, the "AUGI Group") from, against and in respect of any and all claims, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorneys' fees (collectively, "Losses") that the AUGI Group may incur, sustain or suffer as a result of any breach of, or failure by the Company or Dieffenbach to perform, any of the representations, warranties, covenants or agreements of the Company or Dieffenbach contained in this Agreement or in any Exhibit or any Schedule(s) furnished by or on behalf of the Company or Dieffenbach under this Agreement. (b) By the AUGI Group. From and after the Closing Date, AUGI and the Purchaser, jointly and severally, shall indemnify, defend and hold harmless the Seller and Dieffenbach, from, against and in respect of any and all Losses that such person may incur, sustain or suffer as a result of any breach of, or failure by the Purchaser or AUGI to perform, any of the representa tions, warranties, covenants or agreements of the Purchaser or AUGI contained in this Agreement or in any Exhibit or any Schedule(s) furnished by or on behalf of the Purchaser or AUGI under this Agreement. 12.2 Limitations on Certain Indemnities. (a) The Basket. Notwithstanding any other provision of this Agreement to the contrary, neither the Seller nor Dieffenbach shall be liable to AUGI or the Purchaser with respect to Losses, and neither AUGI or the Purchaser shall be liable to the Seller or Dieffenbach with respect to Losses, unless and until the aggregate amount of all Losses incurred by the Purchaser or AUGI in the aggregate, on the one hand (in the case of indemnification by the Seller or Dieffenbach), or by the Seller or Dieffenbach in the aggregate, on the other hand (in the case of indemnification by AUGI or the Purchaser), shall exceed the sum of $10,000 (the Page 44 - Asset Purchase Agt- "Basket"). The applicable indemnifying party shall thereafter be liable, jointly and severally, for performance of its indemnifica tion obligations under this Agreement in respect of all Losses in excess of the Basket, provided that the maximum aggregate liability of the Seller and Dieffenbach in respect of all Losses of AUGI or the Purchaser, on the one hand, and the maximum aggregate liability of AUGI and the Purchaser in respect of all Losses of the Seller and Dieffenbach, on the other hand, shall not, in the absence of proven fraud by such indemnifying party in respect of any particu lar Losses, in any event exceed the limitations set forth in Section 12.2(b) below; provided, that nothing contained in this Agreement shall be deemed to limit the rights and remedies of the parties hereto under applicable federal or state securities laws. (b) Limitation on Amount of Indemnity. Except with respect to any Losses involving proven fraud by the indemnifying party, no indemnifying party hereunder found liable for any Losses by any indemnified party under this Agreement shall be required to pay indemnification hereunder, after application of the Basket against the aggregate amount of claims against any or all of the Seller and Dieffenbach, on the one hand, or against AUGI and the Purchaser, on the other hand, in excess of a maximum amount equal to twenty (20%) percent of the aggregate value of the Indemnifiable Consideration received by such party pursuant to this Agreement (which term shall include the Purchase Price and any other Warrants issued to an Offeree, with Warrants received by any Offeree being assumed to have been exercised at the Closing Date, and such Warrants, or the shares of AUGI Common Stock acquired upon exercise of such Warrants, being valued for such purpose at a price per share of AUGI Common Stock equal to the closing price per share of AUGI Common Stock, as reported on The NASDAQ National Market, on the Closing Date (the "Per Share Value")); provided, that if any such indemnifying party shall have been found by any court of competent jurisdiction (which may include affirmation of the findings of the arbitrators in any arbitration provided for herein) from which no appeal can or shall be taken, to have committed fraud, the maximum indemnified amount under this Agreement shall be 100% of the aggregate value of the Indemnifiable Consideration, as calculated above. Dieffenbach shall have the option to satisfy, in whole or in part, any claims for indemnification hereunder by transferring and returning to AUGI any or all of the AUGI Common Stock he shall have acquired upon exercise of Warrants, which, for purposes hereof, shall (regardless of any intervening fluctuations in market price) be deemed to have a value equal to the Per Share Value, subject only to appropriate adjustment to reflect any stock splits, stock dividends, recapitalizations or other such events relating to the AUGI Common Stock occurring after the date hereof. Nothing herein contained, however, shall be deemed to preclude the Purchaser and/or AUGI from seeking and obtaining payment of indemnification from Dieffenbach in any other manner, subject to Dieffenbach's option to pay any claim (in whole or in part) in the Page 45 - Asset Purchase Agt- foregoing manner. (c) Damages and Equitable Relief. Notwithstanding the provisions of Section 12.2(b) above, nothing contained in this Agreement shall be deemed to limit or restrict the right of any party hereto from seeking such monetary damages and/or equitable remedies (including injunctive relief) as may be available from any court of competent jurisdiction in the event of a breach by any other party or parties of any material covenant on its or their part contained in the Registration Rights Agreement, the Non-Competition and Non-Disclosure Agreement and/or the Employment Agreement. (d) Time Limitation on Indemnity for Breach of Representations, Warranties, Agreements, and Covenants. AUGI and the Purchaser shall be entitled to indemnification by the Seller and Dieffenbach, and the Seller and Dieffenbach shall be entitled to indemnification by AUGI or the Purchaser, pursuant to this Agreement for Losses relating to: (i) breach of any representation or warranty or agreement or covenant hereunder only in respect of claims for which notice of claim shall have been given to the indemnifying party on or before the date which is one year after the Closing Date, or (ii) with respect to Losses relating to a breach of any representations or warranties by the Seller or Dieffenbach with respect to tax matters, the expiration of the final statute of limitations for the tax returns covered by the applicable representations and warranties. (e) Prejudice of Rights to Defend. No party shall be entitled to indemnification pursuant to this Agreement in the event that the subject claim for indemnification relates to a third-party claim and the party seeking such indemnification delayed giving notice thereof to the party from whom it seeks such indemnification to such an extent as to cause material prejudice to the defense of such third-party claim. (f) Insurance Coverage. Notwithstanding any other term or provision of this Section 12.2, absent only a finding by a court of competent jurisdiction from which no appeal can or shall be taken that an indemnifying party shall have committed statutory or common law fraud, no indemnifying party shall be required to indemnify any indemnified party hereunder for Losses to the extent that such Losses shall have been reimbursed by insurance proceeds. In the event that insurance reimbursement has not covered the full amount of such Losses, the indemnifying party shall remain liable for the full amount of the difference between the insurance payment as described above and the amount of the Losses, subject to the limitations set forth above. 12.3 Claims for Indemnity. Whenever a claim shall arise for which any party shall be entitled to indemnification hereunder, Page 46 - Asset Purchase Agt- the indemnified party shall use its best efforts to notify the indemnifying party in writing within sixty (60) days of the indemnified party's first receipt of notice of, or the indemnified party's obtaining actual knowledge of, such claim, and in any event within such shorter period as may be necessary for the indemnifying party or parties to take appropriate action to resist such claim. Such notice shall set forth in reasonable detail for purposes of such notice the facts known to the indemnified party giving rise to such indemnity rights and shall estimate (to the extent then reasonably possible) the amount of potential liability arising therefrom. If the indemnifying party shall be so duly notified of such dispute, the parties shall attempt to settle and compromise the same or may agree to submit the same to arbitration or, if unable or unwilling to do any of the foregoing, such dispute shall be settled by appropriate litigation, and any rights of indemnifi cation established by reason of such settlement, compromise, arbitration or litigation shall promptly thereafter be paid and satisfied by those indemnifying parties obligated to make indemni fication hereunder. 12.4 Right to Defend. If the facts giving rise to any claim for indemnification shall involve any actual or threatened action or demand by any third party against the indemnified party or any of its Affiliates, the indemnifying party or parties shall be entitled (without prejudice to the indemnified party's right to participate at its own expense through counsel of its own choos ing), at their expense and through a single counsel of their own choosing, to defend or prosecute such claim in the name of the indemnifying party or parties, or any of them, or if necessary, in the name of the indemnified party. In any event, the indemnified party shall give the indemnifying party advance written notice of any proposed compromise or settlement of any such claim. If the remedy sought in any such action or demand is solely money damages, the indemnifying party shall have fifteen (15) days after receipt of such notice of settlement to object to the proposed compromise or settlement, and if it does so object, the indemnifying party shall be required to undertake, conduct and control, though counsel of its own choosing and at its sole expense, the settlement or defense thereof, and the indemnified party shall cooperate with the indemnifying party in connection therewith. 13. COSTS. 13.1 Finder's or Broker's Fees. Except as set forth herein, each of the Purchaser and AUGI (on the one hand) and the Company and Dieffenbach (on the other hand) represents and warrants that neither they nor any of their respective Affiliates have dealt with any broker or finder in connection with any of the transac tions contemplated by this Agreement, and no broker or other person is entitled to any commission or finder's fee in connection with any of these transactions. Page 47 - Asset Purchase Agt- 13.2 Expenses. The Purchaser and AUGI, on one hand, and the Company or Dieffenbach, on the other hand, shall each pay all of their own respective costs and expenses incurred or to be incurred by them, respectively, in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement, except that AUGI will be responsi ble for the costs and expenses incurred in obtaining the audit opinion on the Financial Statements, if any. 14. FORM OF AGREEMENT. 14.1 Effect of Headings. The Section headings used in this Agreement and the titles of the Schedules hereto are included for purposes of convenience only, and shall not affect the construction or interpretation of any of the provisions hereof or of the information set forth in such Schedules. 14.2 Entire Agreement; Waivers. This Agreement consti tutes the entire agreement between the parties pertaining to the subject matter hereof, and supersedes all prior agreements or understandings as to such subject matter. No party hereto has made any representation or warranty or given any covenant to the other except as set forth in this Agreement and the Schedules and Exhibits hereto. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 14.3 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15. PARTIES. 15.1 Parties in Interest. Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liability of any third persons to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement. 16. GOVERNING LAW; JURISDICTION. 16.1 Governing Law; Jurisdiction. This Agreement shall be construed and interpreted and the rights granted herein governed Page 48 - Asset Purchase Agt- in accordance with the laws of the State of Washington applicable to contracts made and to be performed wholly within such State. Except as otherwise provided in Section 12.2(c) above, any claim, dispute or controversy arising under or in connection with this Agreement or any actual or alleged breach hereof shall be settled exclusively by arbitration to be held before a single arbitrator in Seattle, Washington, or in any other locale or venue as legal jurisdiction may otherwise be had over the party against whom the proceeding is commenced, in accordance with the commercial arbitration rules of the American Arbitration Association then obtaining. The parties hereto hereby agree to submit to the jurisdiction of such an arbitrator in Seattle, Washington for such purpose, and waive all objections to venue, forum non conveniens, and related objections in connection therewith. As part of his or her award, the arbitrator shall make a fair allocation of the fee of the American Arbitration Association, the cost of any tran script, and the parties' reasonable attorneys' fees, taking into account the merits and good faith of the parties' claims and defenses. Judgment may be entered on the award so rendered in any court having jurisdiction. Any process or other papers hereunder may be served by registered or certified mail, return receipt requested, or by personal service, provided that a reasonable time for appearance or response is allowed. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the date first set forth above. AMERICAN UNITED GLOBAL, INC. By:____________________________________ SEATTLE ONLINE ACQUISITION CORP. By:____________________________________ SEATTLE ONLINE, INC. By:____________________________________ Name: Craig Dieffenbach Title: President -------------------------------- CRAIG DIEFFENBACH Page 49 - Asset Purchase Agt- AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT Reference is made to the ASSET PURCHASE AGREEMENT (the "Asset Purchase Agreement"), entered into the 17th day of October, 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE ACQUISITION CORP., a Washington corporation ("Purchaser"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE, INC., a Washington corporation (the "Company", which is also sometimes hereinafter referred to as the "Seller"), having its principal offices at 1417 4th Avenue, Third Floor, Seattle, Washington 98101-2219; and CRAIG DIEFFENBACH ("Dieffenbach", who is also sometimes hereinafter referred to as the "SO Stockholder"), the principal stockholder of the Company. Capitalized terms not otherwise defined herein shall have the meanings set forth in or by reference in the Asset Purchase Agreement. Seller and Dieffenbach desire additional time in order to satisfy certain conditions to Closing, and AUGI and Purchaser are willing to permit Seller and Dieffenbach a limited amount of additional time for such purposes. The parties to the Asset Purchase Agreement also desire to correct a typographical error therein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree as follows: 1. Section 2.1 of the Asset Purchase Agreement is hereby amended to provide that the "Closing Date" shall be October 25, 1996. 2. Section 8.4 (c) of the Asset Purchase Agreement is hereby amended so that the word "offer" on the first line thereof is corrected to be "Offeree". 3. The Asset Purchase Agreement continues to be in full force and effect and, except as expressly amended hereby, without any amendment or modification therein or waiver of any term thereof. 4. This Amendment No. 1 to the Asset Purchase Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the 22nd day of October, 1996. AMERICAN UNITED GLOBAL, INC. By:_____________________________ SEATTLE ONLINE ACQUISITION CORP. By:_____________________________ SEATTLE ONLINE, INC. By:_____________________________ Name: Craig Dieffenbach Title: President -------------------------------- CRAIG DIEFFENBACH Page 2 - Asset Purchase Agt- AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT Reference is made to the ASSET PURCHASE AGREEMENT (the "Asset Purchase Agreement"), entered into the 17th day of October, 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE ACQUISITION CORP., a Washington corporation ("Purchaser"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE, INC., a Washington corporation (the "Company", which is also sometimes hereinafter referred to as the "Seller"), having its principal offices at 1417 4th Avenue, Third Floor, Seattle, Washington 98101-2219; and CRAIG DIEFFENBACH ("Dieffenbach", who is also sometimes hereinafter referred to as the "SO Stockholder"), the principal stockholder of the Company. Capitalized terms not otherwise defined herein shall have the meanings set forth in or by reference in the Asset Purchase Agreement. Reference is also made to Amendment No. 1 to the Asset Purchase Agreement, dated October 22, 1996. Seller and Dieffenbach desire additional time in order to satisfy certain conditions to Closing, and AUGI and Purchaser are willing to permit Seller and Dieffenbach a limited amount of additional time for such purposes. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree as follows: 1. Section 2.1 of the Asset Purchase Agreement is hereby amended to provide that the "Closing Date" shall be October 29, 1996. 2. The Asset Purchase Agreement continues to be in full force and effect and, except as expressly amended hereby, without any amendment or modification therein or waiver of any term thereof. 3. This Amendment No. 2 to the Asset Purchase Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the 25nd day of October, 1996. AMERICAN UNITED GLOBAL, INC. By:_____________________________ SEATTLE ONLINE ACQUISITION CORP. By:_____________________________ SEATTLE ONLINE, INC. By:_____________________________ Name: Craig Dieffenbach Title: President -------------------------------- CRAIG DIEFFENBACH Page 2 - Asset Purchase Agt- AMENDMENT NO. 3 TO ASSET PURCHASE AGREEMENT Reference is made to the ASSET PURCHASE AGREEMENT (the "Asset Purchase Agreement"), entered into the 17th day of October, 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE ACQUISITION CORP., a Washington corporation ("Purchaser"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE, INC., a Washington corporation (the "Company", which is also sometimes hereinafter referred to as the "Seller"), having its principal offices at 1417 4th Avenue, Third Floor, Seattle, Washington 98101-2219; and CRAIG DIEFFENBACH ("Dieffenbach", who is also sometimes hereinafter referred to as the "SO Stockholder"), the principal stockholder of the Company. Capitalized terms not otherwise defined herein shall have the meanings set forth in or by reference in the Asset Purchase Agreement. Seller, Dieffenbach, AUGI, and Purchaser have heretofore executed and delivered Amendments No. 1 and 2 to the Asset Purchase Agreement. Seller, Dieffenbach, AUGI, and Purchaser desire to further amend the Asset Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree as follows: 1. Amendments No. 1 and 2 to the Asset Purchase Agreement are hereby superseded in their entirety by this Amendment No. 3 and shall be of no further force and effect. 2. Section 2.1 of the Asset Purchase Agreement is hereby amended to provide that the "Closing Date" shall be November 1, 1996, unless postponed to November 4th, 5th, or 6th by AUGI. 3. The Seller has been unable to secure all of the payoff, release, and settlement letters from creditors required to be delivered to Purchaser at the Closing. Consequently, the parties to the Asset Purchase Agreement hereby agree that, notwithstanding Section 1.5 of the Asset Purchase Agreement and any related provisions to the contrary, the Purchaser shall only be required to deliver to Seller at Closing such portions of the Creditor Shares and the Cash Sum as are covered by the payoff, release, and settlement letters delivered to Purchaser, provided, that Purchaser shall be entitled to withhold a sufficient amount of the Cash Sum and the Creditor Shares for application to the balance of the creditors upon delivery to the Purchaser of payoff, release, and settlement letters from such creditors, such amount being held to be paid after the Closing as a deferred purchase price payment, without interest, against delivery of such payoff, release, and settlement letters satisfactory to Purchaser. 4. Exhibit J to the Asset Purchase Agreement is hereby amended to be in the forms of the Exhibit J annexed hereto for use in connection with Robert P. Manning and the Exhibit J annexed hereto for use with regard to all other persons who are to execute and deliver the same in connection with the Closing. 5. Section 7.8 of the Asset Purchase Agreement is hereby amended by striking the words "substantially on the terms and conditions of Section 8.4 to this Agreement" and substituting therefor the words "in the form furnished to Dieffenbach by AUGI on November 1, 1996." 6. Section 7.9 of the Asset Purchase Agreement is hereby amended by striking the words "substantially on the terms and conditions of Section 8.4 to this Agreement" and substituting therefor the words "in the form of the Exhibit to the form of Non-Competition and Non-Disclosure Agreement executed and delivered by Robert P. Manning and AUGI." 7. All references in the Asset Purchase Agreement to "Robert L. Manning" are hereby corrected to be references to "Robert P. Manning." 8. The text of Section 8.4 of the Asset Purchase Agreement is deleted in its entirety and, in place thereof, the following is inserted: "[intentionally omitted]". 9. Exhibit K to the Asset Purchase Agreement is hereby omitted in its entirety. 10. Article 5 of the Asset Purchase Agreement is hereby amended by adding the following new Section 5.11: Name Change. Within five (5) business days after the Closing Date, the Seller shall change its name to any name not including or being similar to "Seattle OnLine, Inc.", and shall facilitate any efforts by the Purchaser to change its name to "Seattle OnLine, Inc." or any similar name or to protect its rights with respect to use of the same. 11. Section 4.1 of the Asset Purchase Agreement is hereby amended to provide that in connection with the closing, AUGI will deliver a copy of its by-laws to Seller and Dieffenbach reasonably promptly upon their request after the Closing. 12. The Asset Purchase Agreement continues to be in full force and effect and, except as expressly amended hereby, without any amendment or modification therein or waiver of any term thereof. Page 2 - Amend. 3 to Agt- 13. This Amendment No. 3 to the Asset Purchase Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the 1st day of November, 1996. AMERICAN UNITED GLOBAL, INC. By:_____________________________ Name: Title: SEATTLE ONLINE ACQUISITION CORP. By:_____________________________ Name: Title: SEATTLE ONLINE, INC. By:_____________________________ Name: Craig Dieffenbach Title: President -------------------------------- CRAIG DIEFFENBACH, individually Page 3 - Amend. 3 to Agt- MODIFICATION TO AMENDMENT NO. 3 TO ASSET PURCHASE AGREEMENT Reference is made to the ASSET PURCHASE AGREEMENT (the "Asset Purchase Agreement"), entered into the 17th day of October, 1996 by and among AMERICAN UNITED GLOBAL, INC., a Delaware corporation ("AUGI"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE ACQUISITION CORP., a Washington corporation ("Purchaser"), having its principal offices at 25 Highland Boulevard, Dix Hills, New York 17746; SEATTLE ONLINE, INC., a Washington corporation (the "Company", which is also sometimes hereinafter referred to as the "Seller"), having its principal offices at 1417 4th Avenue, Third Floor, Seattle, Washington 98101-2219; and CRAIG DIEFFENBACH ("Dieffenbach", who is also sometimes hereinafter referred to as the "SO Stockholder"), the principal stockholder of the Company. Capitalized terms not otherwise defined herein shall have the meanings set forth in or by reference in the Asset Purchase Agreement. Seller, Dieffenbach, AUGI, and Purchaser have heretofore executed and delivered Amendments No. 1, 2 and 3 to the Asset Purchase Agreement. Seller, Dieffenbach, AUGI, and Purchaser desire to modify and further amend Amendment No. 3, dated November 1, 1996, to the Asset Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree to add the following terms to Amendment No. 3 to the Asset Purchase Agreement: A. Section 1.5(a)(ii) shall read "up to 25,000 shares in the aggregate" in place of the words "25,000 shares." B. With respect to Section 2.3 of the Asset Purchase Agreement, the parties agree that: 1. Regarding the lease listed in Schedule 3.10 of the Asset Purchase Agreement, an assignment and assumption agreement will be executed in a form satisfactory to Purchaser and AUGI no later than five (5) business days after Closing; 2. Seller shall deliver, within five (5) business days of Closing, any instruments or letters or other documents which may be required authorizing Seattle Online Acquisition Corporation to endorse Seattle Online, Inc.'s names on checks, drafts, notes and other documents received in payment of any accounts receivable or other property sold, as described in Section 2.3(ix) and Section 5.4 of the Asset Purchase Agreement; 3. Seller shall deliver within five (5) business days of Closing, any documentation necessary to effectuate the assignment of Seattle Online, Inc.'s insurance policies, as described in Section 2.3(x) of the Asset Purchase Agreement; and 4. Seller shall deliver any other documents and instruments as may be otherwise reasonably necessary to evidence the transfer and sale of assets as described in the Asset Purchase Agreement. C. No later than five (5) business days after Closing, Seller shall effect such corporate action as may be necessary to evidence changing the registered corporate name and any registered trade names from "Seattle Online, Inc." to another corporate name and/or "dba" so long as such name shall not be confusingly similar to "Seattle Online" or any variations thereof; and transfer all registered and reserved domain names from Seattle Online, Inc. as provided for in Disclosure Schedule 3.21 to Seattle Online Acquisition Corporation. D. The reference in Section 6.12 of the Asset Purchase Agreement to Mr. Anthony Romano is hereby corrected to be a reference to Mr. Howard Katz. Unless otherwise modified or amended as provided for herein, the terms of Amendment No. 3 to the Asset Purchase Agreement shall remain valid and fully enforceable. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the _____ day of November, 1996. AMERICAN UNITED GLOBAL, INC. By:_____________________________ Name: Title: SEATTLE ONLINE ACQUISITION CORP. By:_____________________________ Name: Title: SEATTLE ONLINE, INC. By:_____________________________ Name: Craig Dieffenbach Title: President -------------------------------- CRAIG DIEFFENBACH, individually Page 2 EX-21 5 EXHIBIT 21 SUBSIDIARIES Exhibit 21 Exhibit 21 Subsidiaries. ------------- (1) Western Power & Equipment Corp. (a Delaware Corporation) (2) ConnectSoft Holding Corp. (a Delaware Corporation) (3) Interglobe Networks,Inc. (a Washington Corporation) (4) eXodus Technologies, Inc. (a Washington Corporation) (5) Seattle Online Corp. (a Washington Corporation) EX-23 6 EXHIBIT 23 EXHIBIT 23 REPORT OF INDEPENDENT ACCOUNTANTS FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of American United Global, Inc. Our audits of the consolidated financial statements referred to in our report dated November 8, 1996 appearing on page F-2 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 8 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunctin with the related consolidated financial statements. PRICE WATERHOUSE LLP Portland, Oregon November 8, 1996 EX-27 7 EXHIBIT 27
5 YEAR JUL-31-1996 JUL-31-1996 17,086,000 6,268,000 8,118,000 (652,000) 65,697,000 98,521,000 8,878,000 987,000 115,176,000 74,786,000 0 0 0 63,000 21,153,000 115,176,000 106,831,000 106,831,000 94,095,000 0 21,174,000 0 2,148,000 2,083,000 (5,783,000) (11,475,000) 7,775,000 0 0 (3,700,000) (0.64) 0
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