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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 0-15424
VAUGHN COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0626191
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State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
5050 W. 78th Street, Minneapolis, Minnesota 55435
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 832-3200
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Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark 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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Exhibit Index appears on Page 22. Page 1 of 22 Pages.
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The aggregate market value of the registrant's voting shares held by non-
affiliates (based upon the closing sale price therefor on the NASDAQ National
Market System on April 12, 1996) was approximately $20,008,500. As of April 12,
1996, 3,302,748 shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
1. The financial information set forth in the sections captioned
"SELECTED FINANCIAL DATA from Continuing Operations (in Thousands)" to be
included in the Registrant's Annual Report to Shareholders for the Year Ended
January 31, 1996 (the "1996 Shareholder Report") are incorporated herein by
reference in response to Item 6 of Part II hereof.
2. The discussion under the section captioned "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in
the 1996 Shareholder Report is incorporated herein by reference in response to
Item 7 of Part II hereof.
3. The Registrant's audited financial statements to be included in the
1996 Shareholder Report are incorporated herein by reference in response to Item
8 of Part II hereof.
4. The discussions under the sections captioned "COMPLIANCE WITH SECTION
16(a) OF THE SECURITIES EXCHANGE ACT", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and delivered
to the Registrant's shareholders pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of the
Shareholders to be held on June 19, 1996 (the "1996 Proxy Statement") are
incorporated herein by reference in response to Item 10 of Part III hereof.
5. The discussions under the sections captioned "COMPENSATION OF
DIRECTORS" and "EXECUTIVE COMPENSATION" but excluding the discussions included
under the subsections captioned "EXECUTIVE COMPENSATION - "Compensation
Committee Report on Executive Compensation" and "EXECUTIVE COMPENSATION -
Comparative Stock Performance" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to Item 11 of Part III hereof.
6. The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and "TRANSACTIONS
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to Item 12 of Part III hereof.
7. The discussion under the section captioned "TRANSACTIONS WITH
MANAGEMENT" to be included in the 1996 Proxy Statement is incorporated herein by
reference in response to Item 13 of Part III hereof.
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VAUGHN COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT
Table of Contents
and
Cross Reference Sheet
PART 1
Page
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Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . .11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . .11
Item 8. Consolidated Financial Statements and Supplementary Data. . . . .11
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . .12
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . .12
Items 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . .12
ii
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Item 12. Security Ownership of Certain Beneficial Owners and Management. .12
Item 13. Certain Relationships and Related Transactions. . . . . . . . . .12
PART IV
Item 14. Exhibit, Financial Statement Schedule and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . .13
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PART 1
ITEM 1. BUSINESS
GENERAL
The Company was founded under the name Vaughn Displays, Inc. in 1943 and
changed its name to VAUGHN COMMUNICATIONS, INC. in 1987. The Company is engaged
in two business segments. Its Vaughn Communications Division is a high volume
video tape duplicator, accounting for approximately 87% of the Company's sales
in fiscal 1996. Vaughn Products Division is a manufacturer and distributor of
gift and leather products sold by gift shops and western stores, accounting for
approximately 13% of the Company's sales in fiscal 1996.
During the fiscal years ended January 31, 1996, 1995 and 1994, the
percentage of sales of the Vaughn Communications Division and the Vaughn
Products Division as compared to total sales of the Company were as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
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Division 1996 1995 1994
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<S> <C> <C> <C>
Vaughn Communications Division 87% 83% 82%
Vaughn Products Division 13% 17% 18%
</TABLE>
The Company's strategic objective is to grow and expand its two businesses
through internal growth and acquisitions. (See "Former Businesses" and "Recent
Acquisitions" below.) The term "Company" herein refers to the registrant
(VAUGHN COMMUNICATIONS, INC.), including its two operating divisions. The
Company's principal executive offices are located at 5050 West 78th Street,
Minneapolis, Minnesota 55435, and its telephone number is (612) 832-3200.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments for the years ended
January 31, 1996, 1995 and 1994 included in the notes to the Registrant's
audited consolidated financial statements to be included in the 1996 Shareholder
Report are incorporated herein by reference.
VAUGHN COMMUNICATIONS DIVISION
The Company's operations in the communication industry are conducted
through its Vaughn Communications Division. The Communications Division
currently has video tape duplication facilities in Minneapolis, Milwaukee,
Phoenix, Tampa, Portland, Atlanta, Dallas, Houston, Raleigh, Chicago and Denver
and has additional sales offices in St. Louis, New York City, Los Angeles,
Seattle, Nashville and Ft. Lauderdale. It serves markets that are principally
located in the United States.
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PRIMARY PRODUCTS AND SERVICES OF THE VIDEO TAPE DUPLICATION BUSINESS
There are two main formats in the video tape duplication industry regarding
VHS tape -- standard play and extended play. Standard play is currently the
acceptable format for theatrical movies and certain other products. Extended
play is garnering a larger segment of the non-theatrical segment. Promotional
products, "how to" videos and other videos are moving toward extended play
format. The primary reason for this shift in format is that extended play uses
one-third the amount of tape required for standard play and can be done in high
speed duplication which is ultimately less costly than standard play.
In addition to the primary products and services noted above, the
Communications Division offers international standards conversion, graphic
design, product fulfillment, MPEG compression, and rents video production and
editing equipment on a short-term basis. This group of ancillary services
represents approximately 5% of net sales in fiscal 1996.
The Company has continued to expand facilities for the Communications
Division's high volume video tape duplication. During the Company's fiscal year
ended January 31, 1996 ("fiscal 1996"), the Communications Division acquired
Centercom, Inc., which had facilities in Milwaukee, Chicago and Tampa, and
Advanced Audio/Visual Productions, Inc., based in Denver (see also "Purchase of
Centercom and Related Transactions" and "RECENT ACQUISITIONS - Purchase of
Advanced Audio/Video Productions, Inc." below). Expansion has been financed by
cash flow generated from operations, equipment leasing and bank financing.
The Company expended approximately $1,570,000 during fiscal 1996 for
additional video tape duplication equipment. It expects to spend an additional
$1,650,000 in fiscal 1997 to further expand its duplication facilities.
MANUFACTURING PROCESS
The manufacturing process for video cassettes generally utilizes
duplicating machines that copy from a master in "real time" speed, that is the
regular speed of the video being duplicated. In its Minneapolis, Milwaukee and
Atlanta facilities, the Company utilizes high speed machines which allow it to
duplicate a master 150 times faster than in "real time" speed and to utilize
less tape than regular speed machines utilize for the same content. In this
process, high speed tape loaders are used to load tape spliced to specific
program lengths into video shells.
LICENSES
The Victor Company of Japan, Ltd. ("JVC"), which owns the "VHS" logo, has
established standards for the physical characteristics of the video cassette.
Compliance with the JVC standards ensures that the video cassette will be
compatible with any VHS machine. Duplicators whose product conforms to the JVC
standards are permitted to apply the "VHS" logo to such product and pay JVC a
license fee for such privilege. The Communications Division paid JVC a license
fee of approximately $400,000 in fiscal 1996 for the privilege of applying the
"VHS" logo to its video product.
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SIGNIFICANT CUSTOMERS
The Communications Division sells to more than 6,000 accounts in any given
year. Approximately 20% of its sales come from ten customers, none of which
amount to more than 5% of net sales.
Illustrative of the Communications Division's duplication customers are
companies that use videotape to promote their products or instruct their
customers on the use of their products, financial service companies which
produce videotapes to present new financial products to sales personnel and
customers, high technology companies which use videotapes to train sales and
service personnel and corporations with many employees or locations that wish to
communicate a significant Company development to all employees simultaneously.
Such high volume customers are generally those who need 100 or more duplicate
videotapes reproduced, addressed to individual locations and forwarded for
delivery, often within a few hours or on an overnight basis. The Communications
Division also has the capacity to convert one international standard videotape
format to either of two other standard formats used around the world or for
various specific communication applications. Customers for these services
generally require lower volume reproduction.
MARKETING
The Communications Division markets its products nationally through the use
of 61 sales personnel who operate throughout the United States. To a lesser
degree, the Company also uses advertising in trade publications and
participation in trade shows.
SEASONALITY
The Communications Division's products are used consistently throughout the
year except for a slight rise in demand in September, October, and November to
supply extra requirements to customers for the holiday selling season.
COMPETITION
Though it is not possible to reliably state the Communications Division's
relative position in the absence of published statistics, based upon data
generated by its own management, the Company believes it is one of the largest
duplicators of video tape for the non-theatrical, non-music video segment of the
U.S. market. This market is comprised of exercise, educational, corporate,
promotional and instructional videos, etc.
The primary competitive factors in the video tape duplication business are
price, quality of service and range of products. The Communication Division
attempts to compete by offering high volume videotape duplication services, at a
competitive price, emphasizing service and customer support.
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The Company's principal competitors are HHG Digital Technologies (formerly
Allied Film and Video Company) and The Duplication Factory. The video
duplication business is highly competitive, not only with these competitors, but
also with many smaller duplicators.
The Company believes that its regional locations, its wide range of product
offerings, and national marketing capabilities are competitive advantages over
many others in the industry. While selling prices have been declining in recent
years as competitors continue to seek market share by lowering prices, the
Company has been reasonably successful in maintaining its margins by lowering
its material costs and achieving unit volume increases.
VAUGHN PRODUCTS DIVISION
Vaughn Products Division is engaged in the manufacture and sale of leather
and gift items sold primarily to retail merchants located in the United States
and Canada. The Products Division's manufacturing facilities are located in the
Company's Minneapolis, Minnesota plant where it produces a line of over 200
leather items such as purses, billfolds, and personal accessory items. The
Products Division also sells gift products which it purchases for resale. These
gift products are sold at wholesale prices for resale, primarily by gift shops
and western stores, and are marketed under the "Bloom Brothers" name. The
Products Division also has a line of silk screen tom-tom novelties sold under
the name "Cranberry Lake".
Through its recent acquisition of Indian Arts and Crafts, Inc. ("IAAC") the
Products Division has added a line of soft goods to its product offerings,
including custom-designed, silk-screened T-shirts and sweatshirts. These
products are currently being designed for and sold in the Pacific Northwest and
Alaska to retail and gift shops. The manufacturing facility for IAAC is located
in Seattle, Washington. See "RECENT ACQUISITIONS - Purchase of Indian Arts and
Crafts, Inc."
SALES AND DISTRIBUTION
Sales of the Products Division's products are made throughout the United
States and Canada by independent manufacturer's representatives. These
personnel are exclusive of the personnel that recently joined the Products
Division and which are described under "RECENT ACQUISITIONS - Purchase of Indian
Arts and Crafts, Inc." below. The Products Division employs two sales managers
and retains 35 manufacturer's representatives. The products are included in a
Company catalog, periodically sent to prospective and known customers and made
available for use by the sales organization. The Company also participates in
trade shows.
The principal markets for the Products Division's products are gift and
souvenir shops that serve the tourist industry.
The Products Division sells to over 3,000 customers, none of which account
for more than 5% of its sales.
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MANUFACTURING AND RAW MATERIALS
The Products Division's manufacturing operations consists primarily of
assembly, fabricating and converting leather to finished products and silk
screening of T-shirts. Numerous subcontractors are utilized to furnish
components and subassembly. Materials utilized in these products are standard
and readily available from multiple sources at competitive prices.
SEASONAL OPERATIONS
The operations of the Company's Vaughn Products Division are seasonal in
nature. Approximately half of the production and sale of its products are
delivered to customers from March through June.
COMPETITION
The primary competitive factors in the Products Division line of business
are price, product offering, quality and meeting delivery times. The Company
believes that the Products Division is competitive in each of these areas. The
Company does not have a significant share of the overall gift market and
competes for sales with many national and regional companies throughout the
United States and Canada. Many of such competitors have significantly greater
resources than the Company.
FORMER BUSINESSES
The Company originally operated as a manufacturer and distributor of flags
and banners, Christmas and seasonal decorative displays and parade and float
materials. In addition to these businesses and its two current business
segments, in 1986 the Company also entered radio broadcasting. The radio
broadcast business was not profitable for the Company and the Company's original
businesses did not always operate at predictable or acceptable levels of
profitability.
Consequently, in 1990 the Company began to redeploy its corporate and
personnel resources to the more firmly profitable current businesses operated by
the Vaughn Communications and Vaughn Products Divisions. In 1990 and 1991, the
Company sold its radio station interests and its audio and video equipment sales
and engineering businesses. In February 1992, the Company also withdrew from
the Christmas display business.
On March 1, 1994, the Company completed this redeployment by selling its
flag, banner, seasonal decorative display and parade and float products
operations and assets to Chromatic Concepts Co., a Minneapolis, Minnesota based
corporation ("Buyer"). These businesses previously occupied approximately 5,000
square feet of the Company's principal manufacturing plant in Minneapolis,
Minnesota and its 12,000 square foot manufacturing plant in Tampa, Florida, and
employed 21 manufacturing, sales and administrative personnel. The Buyer
reemployed substantially all of these employees. The Company retained its Tampa
plant, subject to a short-term lease to the Buyer which expired October 31,
1994, after which this facility was sold to an unrelated party. The portion of
the Minneapolis plant previously used by these businesses has been rededicated
to use by the Company's Vaughn Communications and Vaughn Products Divisions (see
Item 2 "Properties" below).
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The Purchase and Sale Agreement with the Buyer provided for a purchase
price of $1,500,000, with $800,000 cash paid at closing, plus a $700,000
promissory note payable in installments over seven years with variable interest
at .25% per annum over the prime rate. The Company is also entitled to certain
additional payments of up to $250,000 over fifteen years contingent upon
performance of the businesses sold over this period. These businesses accounted
for approximately $2,904,000 of sales and an operating profit of $145,000 in
fiscal 1994.
BACKLOG
Order backlog is not generally a significant factor in the Company's
business. The Company relies primarily on current selling efforts coupled with
near term delivery or performance.
EMPLOYEES
On March 31, 1996, the Company had 673 employees, including 86 in sales and
marketing, 476 in manufacturing and 111 in executive, finance and administrative
positions. One hundred fifty-eight of the Company's manufacturing and clerical
employees are part-time employees. These personnel are exclusive of the
personnel described under "RECENT ACQUISITIONS" below. The Company's employees
are not represented by a union. The Company considers its employee relations to
be satisfactory.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs associated with the Company's compliance with Federal, state and
local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.
RECENT ACQUISITIONS
PURCHASE OF CENTERCOM AND RELATED TRANSACTIONS
On April 4, 1995, the Company completed the acquisition of all of the
capital stock of Centercom, Inc., a Wisconsin corporation, and Centercom South,
Inc., a Florida corporation (collectively "Centercom") pursuant to a Stock
Purchase Agreement of even date (the "Purchase Agreement"). The effective date
of the acquisition is April 1, 1995. The Company accounted for the acquisition
as a purchase.
The purchase price for the capital stock of Centercom was $6,420,000, which
was paid equally to the two equal former shareholders of Centercom, Jeffrey
Johnson and Robert Harmon (the "Sellers"). The Company paid $5,250,000 in cash
and issued 180,000 shares of the Company's authorized and previously unissued
Common Stock, valued at $6.50 per share ($1,170,000 in the aggregate), equal to
the closing sale price of the stock on NASDAQ on April 3, 1995. Pursuant to the
terms of the Purchase Agreement, the Sellers have been elected as directors of
the Company and appointed as members of the Company's Audit Committee.
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The Sellers will also be paid $100,000 each per year for a period of seven
years under consulting and noncompete agreements. In addition, the Company has
entered into two ten-year leases for the video tape duplication facilities
totaling approximately 38,000 square feet owned by a partnership of the Sellers
in Milwaukee, Wisconsin, at an aggregate annual net rent of $186,353 for the
first three years and $199,225 for the remaining seven years of the lease term.
Management of the Company believes that the facilities leased from Sellers are
necessary for its video tape duplication business and that the lease terms and
conditions are no less favorable to the Company than could be obtained from an
unrelated third party (see "Description of Centercom's Business" below).
FINANCING FOR THE ACQUISITION
The Company borrowed the cash consideration for the Centercom acquisition
from a bank, under an Amended and Restated Loan Agreement entered into as of
March 31, 1995 (the "Loan Agreement"). The Loan Agreement provided a $5,000,000
term loan due March 31, 2000, payable in consecutive quarterly principal
installments of $250,000 commencing July 1, 1995, plus interest at one-quarter
percent over the bank's prime rate. The Loan Agreement also provides a
revolving credit facility of up to $8,000,000 to be used to finance working
capital at the bank's prime interest rate. Three million dollars of the
revolving facility may be used for term loans to replace existing debt or
finance new equipment purchases. The interest rate on these term loans was one-
quarter percent over the bank's prime rate. The Company has utilized $850,000
of the revolving facility to provide a term loan due March 31, 1998, to repay a
like amount of preexisting Centercom long-term debt. On April 1, 1996, the
Company entered into an amended agreement with its bank which reduced the
interest rate on the term loans to the prime rate.
DESCRIPTION OF CENTERCOM'S BUSINESS
Centercom is a national video tape duplicator whose business, with the
exception of specific customer identity and geographic concentration, is
substantially similar to the video tape duplication business of the Company's
Vaughn Communications Division of which Centercom has become a part. Centercom
has video tape duplication facilities in Milwaukee, Wisconsin, Chicago, Illinois
and Tampa, Florida. The Company has merged its preexisting facilities in
Milwaukee, Chicago and Tampa into those of Centercom. Centercom, Inc. and
Centercom South, Inc. have been and will continue as wholly-owned subsidiaries
of the Company for the immediately foreseeable future.
For Centercom's fiscal years ended June 30, 1994 and 1993, it had annual
sales of $8,700,000 and $7,700,000, respectively. Net income for the same
periods was $645,000 and $412,000.
Centercom's operations involve the use of several hundred real time video
tape duplicating machines and three high-speed (150 times real time rates)
duplicating machines similar to those utilized by the Company.
At the time of the acquisition, Centercom had 73 employees, including six
in sales and marketing, 51 in operations and 16 in administration and support.
Substantially all of these persons are
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currently employees of Vaughn Communications Division. These employees are not
represented by a union. Centercom has not had a work stoppage during the past
five years and the Company considers Centercom's employee relations to be
satisfactory.
The Company believes that the Centercom acquisition has enabled the Company
to be a dominant competitor in the Milwaukee market, enhanced the Company's
already dominant position in the Tampa market and increased the Company's
presence in the Chicago market.
PURCHASE OF ADVANCED AUDIO/VIDEO PRODUCTIONS, INC.
Pursuant to a Purchase and Sale Agreement dated December 29, 1995, on
January 1, 1996 the Company acquired substantially all the assets and assumed
substantially all the liabilities of Advanced Audio/Video Productions, Inc.
("Advanced Video"), a Colorado corporation. The Company accounted for the
acquisition as a purchase.
The purchase price for the assets of Advanced Video in the amount of
approximately $282,000 included $182,000 of cash and $100,000 of long-term debt
to the seller. The note is payable in three annual installments of $33,333.33
starting January 5, 1997, plus interest at the prime rate adjusted on the
anniversary date.
Advanced Video is a regional video tape duplicator with its facility
located in Denver, Colorado. Its business is substantially similar to the video
tape duplication business of the Company's Vaughn Communications Division of
which Advanced Video has become a part.
For Advanced Video's fiscal year ended December 31, 1995, it had annual
sales of $1,204,000 and net income of $60,000.
PURCHASE OF INDIAN ARTS AND CRAFTS, INC.
Pursuant to a Purchase and Sale Agreement dated January 31, 1996 the
Company acquired substantially all the assets and assumed substantially all the
liabilities of Indian Arts and Crafts, Inc. ("IAAC"), a Washington corporation.
The Company accounted for the acquisition as a purchase.
The purchase price of approximately $2,332,000 was paid to the five
shareholders of IAAC (the "Sellers"). The Company paid approximately $82,000 in
cash, issued 145,138 shares of the Company's authorized and previously unissued
Common Stock valued at $8.6125 per share ($1,250,000 in the aggregate), equal to
the average closing sale price of the stock on NASDAQ for the 10 days prior to
January 31, 1996, and issued $1,000,000 of long-term debt to the Sellers. The
long-term debt consists of two promissory notes; one in the principal amount of
$250,000 payable in three equal annual installments beginning January 31, 1997,
and the other in the principal amount of $750,000 payable in seven equal annual
installments starting on January 31, 1997. The interest rate on both notes is
8.5% per annum.
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The Company also entered into a three-year employment agreement with Howard
Lowen, the president and largest shareholder of IAAC. In addition, the Company
entered into two leases with the Sellers. One lease is for a production
facility in Seattle totaling approximately 42,300 square feet at an aggregate
annual rent of $250,000. The term of this lease is 44 months starting February
1, 1996. The second lease is for a sales office in Anchorage ( 1,400 square
feet) at an annual rental of $14,400 and has a three-year term. Management of
the Company believes that the facilities leased from the Sellers are necessary
for the business of the Products Division and that the terms of the leases are
no less favorable to the Company than could be obtained from an unrelated third
party.
FINANCING FOR THE ACQUISITION
The Company used its revolving credit facility to fund the $82,000 cash
portion of the purchase price. To fund the anticipated increase in working
capital needs, the Company entered into an Amended and Restated Loan Agreement
with a bank on February 1, 1996 (the "Amended Agreement"). The Amended
Agreement increases the total credit facility from $13,000,000 to $17,000,000
and provides for long-term financing to finance acquisitions and equipment
purchases, and a revolving credit facility to finance working capital. The
interest rate on the long-term debt (approximately $5,085,000 at January 31,
1996) is 1/4% over the prime rate, while the interest rate on the revolving debt
is at the prime rate.
DESCRIPTION OF IAAC'S BUSINESS
IAAC's business consists primarily of the manufacture and sale of gift and
souvenir products. Its principal products are custom-designed soft goods,
including T-shirts, sweatshirts and hats sold primarily in Alaska and the
Pacific Northwest. The Company has an art department which develops custom
designs that are silk-screened on apparel and then sold to retailers by direct
salespeople or independent manufacturer's representatives. IAAC also resells
other gift and souvenir products through the same sales channels. IAAC will be
merged into Vaughn Products Division, and it is the intention of the Company to
move the operations of the entire Products Division to Seattle during fiscal
1997.
For IAAC's fiscal years ended December 31, 1995 and 1994, it had annual
sales of $7,543,000 and $7,593,000, respectively. Net income for the same
periods was $227,000 and $360,000, respectively.
At January 31, 1996, IAAC had 45 employees, including 17 in sales and
marketing, 22 in operations, and 6 in administration and support, all of whom
have become employees of the Vaughn Products Division. These employees are not
represented by a union, there have been no work stoppages, and the Company
believes IAAC employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company owns its executive and administrative offices and principal
manufacturing plant consisting of approximately 67,000 square feet located on a
4.1 acre site at 5050 West 78th Street, Minneapolis, Minnesota. Approximately
33,000 square feet is devoted to and equipped for the
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fabrication and warehousing of the Vaughn Products Division's products and raw
materials. Approximately 29,600 square feet is used for the Vaughn
Communications Division's separate administrative and sales offices, showrooms,
videotape duplication, shipping, warehouse and handling. The remaining space of
approximately 4,400 square feet houses the Company's executive and
administrative offices. These facilities include a separate adjacent building
of approximately 10,600 square feet. See the Notes to the audited financial
statements of the Company incorporated by reference for a description of the
mortgage term loan to the Company secured by these facilities.
The Company leases Vaughn Communications Division's facilities in
Milwaukee, Wisconsin; Phoenix, Arizona; Tampa, Florida; Portland, Oregon;
Atlanta, Georgia; Dallas, Texas; Houston, Texas; Raleigh, North Carolina;
Chicago, Illinois and Denver, Colorado for sales offices and videotape
reproduction, totaling approximately 187,000 square feet under leases expiring
from 1997 through 2006, at a current total annual rental of approximately
$900,000.
The Products Division's Seattle facilities leased from the IAAC Sellers are
described under "RECENT ACQUISITIONS - Purchase of Indian Arts and Crafts, Inc."
in Item 1 above.
The Company is presently utilizing approximately 75% of its manufacturing
plant capacity measured on a five-day week/three shift per day basis.
Production capacity, however, can be expanded by adding additional personnel or
acquiring additional manufacturing equipment. Management believes its
manufacturing facilities are generally sufficient for the Company's immediately
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company or
its properties which, in the opinion of management, will have a material adverse
effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended January 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter and has been included
in the National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") National Market System since March 26, 1994, under the symbol
VGHN. For the periods indicated through March 25, 1994, the table sets forth
the quarterly high and low closing sales prices as reported in the NASDAQ's
Small Cap Market. For the periods indicated after March 25, 1994, the
information presented is the quarterly high and low closing sale prices as
reported in the NASDAQ's National Market System. All prices are without retail
markups, markdowns or commissions.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Price
-----
Calendar Period High Low
--------------- ---- ---
<S> <C> <C>
1996: First Quarter $9.375 $8.375
1995: First Quarter $7.875 $6.25
Second Quarter 7.875 5.75
Third Quarter 9.375 7.125
Fourth Quarter 9.50 7.75
1994: First Quarter $5.875 $4.75
Second Quarter 5.625 4.625
Third Quarter 6.875 4.875
Fourth Quarter 7.75 5.50
</TABLE>
The last sales price for the Company's Common Stock as reported by the
NASDAQ National Market System on April 12, 1996 was $9.25 per share. As of
January 31, 1996, the Company had 325 shareholders of record. The Company has
never paid a cash dividend on its Common Stock. It intends to retain all
earnings to finance the development of its business. The Company's loan
agreement with its bank contains limitations on paying dividends. Accordingly,
no cash dividends are anticipated for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth in the sections entitled "SELECTED
FINANCIAL DATA from Continuing Operations (in Thousands, except per share
amounts)" to be included in the Company's 1996 Shareholder Report is
incorporated herein by reference in response to this Item 6. This section
should be read in conjunction with the Notes to Consolidated Financial
Statements which also appear in the 1996 Shareholder Report and are incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion under the Section entitled "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in the
1996 Shareholder Report is incorporated herein by reference in response to this
Item 7.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the years
in the three-year period ended January 31, 1996, together with the report
thereon of Ernst & Young LLP, contained in the 1996 Shareholder Report, are
incorporated herein by reference in response to this Item 8.
- 11 -
<PAGE>
The supplementary financial information requirements of Item 302 of
Regulation S-K are not applicable to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The discussions under the sections captioned "COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and delivered
to the Registrant's shareholders pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of the
Shareholders to be held on June 19, 1996 (the "1996 Proxy Statement") are
incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The discussions under the sections captioned "COMPENSATION OF DIRECTORS"
and "EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION - Compensation Committee Report on
Executive Compensation" and "EXECUTIVE COMPENSATION - Comparative Stock
Performance" to be included in the 1996 Proxy Statement are incorporated herein
by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and "TRANSACTIONS
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the section captioned "TRANSACTIONS WITH MANAGEMENT"
to be included in the 1996 Proxy Statement is incorporated herein by reference
in response to this Item 13.
- 12 -
<PAGE>
PART IV
ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
The consolidated financial statements listed below of the Company for
each of the years in the three-year period ended January 31, 1996,
together with the report thereon of Ernst & Young LLP, contained in
the 1996 Shareholder Report (attached as Exhibit 13) are incorporated
herein by reference in response to this Item 14 (a) (1).
Independent Auditor's Report of Ernst & Young LLP
Consolidated Balance Sheets as of January 31, 1996 and 1995
Consolidated Statements of Income for the years ended January 31,
1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity for the years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended January 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, and the
information specified in Parts II and III, the 1996 Shareholder Report
is not to be deemed filed as part of this Report.
2. FINANCIAL STATEMENT SCHEDULE OF THE COMPANY
Schedule No. Page
------------ ----
II Valuation and Qualifying Accounts S-1
All other schedules are omitted, because they are not applicable, or
not required, or because the information is included in the Company's
consolidated financial statements or notes thereto.
b. REPORTS ON FORM 8-K
No current Reports on Form 8-K were filed by the Company during the quarter
ended January 31, 1996.
(c) EXHIBITS
Exhibit No. Description of Exhibits
----------- -----------------------
(2)(a) Stock Purchase Agreement dated April 4, 1995, providing for
the Company's purchase of all of the capital stock of
Centercom, Inc., a Wisconsin corporation, and Centercom
South, Inc. a Florida
- 13 -
<PAGE>
corporation, from Jeffrey Johnson and Robert Harmon
(incorporated herein by reference to Exhibit 2(a)-1 to the
Company's Current Report on Form 8-K with a Date of Report
of April 14, 1995).
(2)(b) Escrow Agreement dated April 14, 1995 among the Company,
Jeffrey Johnson, Robert Harmon and Firstar Trust Company
(incorporated herein by reference to Exhibit (2)(a)-2 to the
Company's Current Report on Form 8-K with a Date of Report
of April 14, 1995).
(2)(c) Purchase and Sale Agreement dated January 31, 1996 between
the Company and the Shareholders of Indian Arts and Crafts,
Inc. (without Exhibits, Schedules or Attachments).
(3)(i)(a) Restated Articles of Incorporation of the Company, and all
amendments filed with the Minnesota Secretary of State
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(a) to the Company's Registration Statement on Form
S-1 No. 33-10918 hereinafter referred to as the "Company's
S-1 Registration Statement").
(3)(i)(b) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of
State on July 16, 1987 (incorporated herein by reference to
Exhibit 19 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1987).
(3)(i)(c) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of
State on June 24, 1993 (incorporated herein by reference to
Exhibit 3(a) to the Company's Annual Report on Form 10-K for
the year ended January 31, 1994, (hereinafter referred to as
the "1994 Form 10-K")).
(3)(ii)(a) Restated By-Laws of the Company and all amendments thereto
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(b) to the Company's S-1 Registration Statement).
(3)(ii)(b) Third Amendment to the Company's Restated By-Laws adopted
April 19, 1994 (incorporated herein by reference to Exhibit
3(b) to the 1994 Form 10-K.
(10)(a) [Intentionally left blank.]
- 14 -
<PAGE>
(10)(b) Purchase and Sale Agreement Restated February 17, 1994,
dated as of February 28, 1994, providing for the Company's
sale of its flag, banner and parade and float products,
assets and business to Chromatic Concepts Co. (incorporated
herein by reference to Exhibit (10)(b) to the 1994
Form 10-K).
(10)(c) Purchase Agreement dated as of May 25, 1993, providing for
the Company's purchase from Cranberry Novelty Manufacturing
Company of the "Cranberry Lake" novelty product line
(incorporated herein by reference to Exhibit (10)(c) to the
1994 Form 10-K).
(10)(d) Adoption Agreement dated November 5, 1992 for Vaughn
Communications, Inc. Retirement Savings Plan (the "Plan")
adopting Fidelity Management & Research Co. standard
prototype Profit Sharing/401(K) Plan basic plan document No.
7 and copy of Retirement Service Agreement dated November 4,
1992 with Fidelity Management Trust Company, providing for
the trust and administration of the Plan, first effective as
of the Plan year beginning February 1, 1993 (incorporated
herein by reference to Exhibit (10)(d) to the 1994
Form 10-K).
(10)(e) Amended and Restated Loan Agreement dated as of March 31,
1995 between the Company and American Bank, N.A., restating
and replacing all prior loan agreements and providing the
Company a revolving credit and term loan facility of up to
$13,000,000 through May 31, 1996, secured by the Company's
non-real estate assets (incorporated herein by reference to
Exhibit (10)(e) to the Company's Annual Report on Form 10-K
for the year ended January 31, 1995 (hereinafter referred to
as the "1995 Form 10-K")).
(10)(f) 1990 Company-Wide Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and forms of 1990 Incentive Stock Option and 1990 Non-
statutory Stock Option Agreements (incorporated herein by
reference to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the year ended January 31, 1991), and copy of
amendment to such Plan adopted by the Board June 24, 1992
(incorporated herein by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1993, (hereinafter referred to as the "1993 Form
10-K")).
- 15 -
<PAGE>
(10)(g) 1988 Stock Option Plan adopted by the Company's Board of
Directors on December 20, 1988, and forms of 1988 Incentive
Stock Option and 1988 Nonstatutory Stock Option Agreements
(incorporated herein by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1989), and copies of amendments to such Plan
adopted by the Board June 24, 1992 (incorporated herein by
reference to Exhibit 10(g) to the 1993 Form 10-K).
(10)(h) Amended and Restated Stock Put Redemption Agreement dated
August 27, 1986, between the Company and E. David Willette
(incorporated herein by reference to Exhibit 10(h) to the
1993 Form 10-K).
(10)(i) 1983 Incentive Stock Option Plan and form of 1983 Incentive
Stock Option Agreement (incorporated by reference to Exhibit
10(l) to the Company's S-1 Registration Statement), and copy
of amendment to such Plan adopted by the Board June 24, 1992
(incorporated herein by reference to Exhibit 10(i) to the
1993 Form 10-K).
(10)(j) 1985 Stock Option Plan (incorporated by reference to Exhibit
10(m) to the Company's S-1 Registration Statement), copy of
Amendment to the 1985 Stock Option Plan adopted by the
Company's Board of Directors on December 10, 1987, and
corresponding revised forms of 1985 Incentive Stock Option
Agreement and 1985 Nonstatutory Option Agreement
(incorporated by reference to Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the year ended January 31,
1988), and copy of amendment to such Plan adopted by the
Board June 24, 1992 (incorporated herein by reference to
Exhibit 10(j) to the 1993 Form 10-K).
(10)(k) 1990 Non-Employee Directors Stock Option Plan adopted by the
Company's Board of Directors June 26, 1990, as amended
December 17, 1990, and form of 1990 Non-Employee Directors
Stock Option Agreement (non-statutory) (incorporated herein
by reference to Exhibit 10(k) to the 1993 Form 10-K).
(10)(l) Mortgage and Security Agreement and Fixture Financing
Statement and Promissory Note, dated February 26, 1988,
between the Company (as mortgagor and borrower) and The
Canada Life Assurance Company (as mortgagee and lender),
providing for a three year $1,600,000 mortgage loan to
the Company with three
- 16 -
<PAGE>
year renewal options secured by the Company's Minneapolis,
Minnesota headquarters and adjacent plant and office
facilities (incorporated by reference to Exhibit 10(l) to
the Company's Annual Report on Form 10-K for the year ended
January 31, 1988).
(10)(m) 1990 Discounted Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and form of 1990 Discounted Stock Option Agreement
(nonstatutory) (incorporated herein by reference to Exhibit
10(m) to the Company's Annual Report on Form 10-K for the
year ended January 31, 1991), and copy of amendment to such
Plan adopted by the Board June 24, 1992 (incorporated herein
by reference to Exhibit 10(m) to the 1993 Form 10-K.
(10)(n) Leases each dated April 4, 1995, between Centercom, Inc.,
the Company's wholly-owned subsidiary, as Lessee, and
Centercom Partnership, a partnership owned by Jeffrey
Johnson and Robert Harmon, the former owners of all of the
capital stock of Centercom, Inc., as Lessor, and Specialty
Services, Inc., a real estate holding corporation owned by
Messrs. Johnson and Harmon, as Lessor, respectively
providing for the lease and rental from and after April 4,
1995, of the real estate and buildings located at 5737 West
Hemlock Street and 5621 West Hemlock Street, Milwaukee,
Wisconsin, from which the Company's wholly-owned subsidiary,
Centercom, Inc., conducts its Milwaukee, Wisconsin based
videotape duplication operations (incorporated herein by
reference to Exhibit (10)(n) to the 1995 Form 10-K).
(10)(o) Consulting and Non-Competition Agreements, each dated April
4, 1995, among the Company, its wholly-owned subsidiary,
Centercom, Inc. and each of Jeffrey Johnson and Robert
Harmon, the prior shareholders of Centercom, Inc., from whom
the Company acquired the capital stock of Centercom, Inc.,
providing for certain covenants of Jeffrey Johnson and
Robert Harmon against competition with the Company and
Centercom, Inc. and for performance of certain consulting
services by said prior shareholders (incorporated herein by
reference to Exhibit (10)(o) to the 1995 Form 10-K).
(10)(p) Shareholder Voting Agreement dated April 4, 1995, among the
Company, E. David Willette and Jeffrey Johnson and Robert
Harmon, providing that E. David Willette will vote his own
shares of the Company's Common Stock for the election of
Jeffrey
- 17 -
<PAGE>
Johnson and Robert Harmon as members of the Company's Board
of Directors (incorporated herein by reference to Exhibit
(10)(p) to the 1995 Form 10-K).
(10)(q) Amended and Restated Loan Agreement dated February 1, 1996,
between the Company and American Bank N.A.
(11) Statement Regarding Computation of Earnings Per Share.
(13) 1996 Annual Report to Shareholders.
(23) Consent of Independent Auditors
(24) Power of Attorney (see the Signature Page of this Report)
(27) Financial Data Schedules
(d) Financial Statements required by Regulation S-X which are excluded from the
Annual Report to Shareholders.
None.
- 18 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VAUGHN COMMUNICATIONS, INC.
By /s/ E. David Willette
---------------------------------
E. David Willette
Chairman, Chief Executive Officer
and Treasurer
(Principal Executive and Financial Officer)
By /s/ M. Charles Reinhart
---------------------------------
M. Charles Reinhart
Controller
(Principal Accounting Officer)
Dated: April 29, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above or below, constitutes and appoints E. David Willette and M. Charles
Reinhart, or either of them, his true and lawful attorneys-in-fact, and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
- 19 -
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in their respective capacities as directors of the Company.
E. David Willette Director April 29, 1996
-------------------------
E. David Willette
Roger F. Heegaard Director April 29, 1996
--------------------------
Roger F. Heegaard
Harold G. Whalquist Director April 29, 1996
--------------------------
Harold G. Wahlquist
William D. Smith Director April 29, 1996
--------------------------
William D. Smith
Laurence F. LeJeune Director April 29, 1996
--------------------------
Laurence F. LeJeune
Michael R. Sill Director April 29, 1996
--------------------------
Michael R. Sill
Rodney P. Burwell Director April 29, 1996
--------------------------
Rodney P. Burwell
Jeffrey Johnson Director April 29, 1996
--------------------------
Jeffrey Johnson
Robert Harmon Director April 29, 1996
--------------------------
Robert Harmon
Donald J. Drapeau Director April 29, 1996
--------------------------
Donald J. Drapeau
- 20 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Additions
---------
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- Deductions End of
Description of Period Expenses Describe Describe Period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended
1/31/96:
Deducted from
asset account:
Allowance for
doubtful accounts $500,000 $352,860 $297,260(1) $555,600
-------- -------- -------- --------
-------- -------- -------- --------
Year ended
1/31/95:
Deducted from
asset account:
Allowance for
doubtful accounts $470,000 $253,796 $223,796(1) $500,000
-------- -------- -------- --------
-------- -------- -------- --------
Year ended
1/31/94:
Deducted from
asset account:
Allowance for
doubtful accounts $383,000 $256,273 $169,273(1) $470,000
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries
- 21 - S-1
<PAGE>
VAUGHN COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
--------------- ----------------------
(2)(c) Purchase and Sale Agreement dated January
31, 1996 between the Company and the
Shareholders of Indian Arts and Crafts, Inc.
(without exhibits, schedules and attachments)
(10)(q) Amended and Restated Loan Agreement dated
February 1, 1996, between the Company and
American Bank N.A.
(11) Statement Regarding Computation of Earnings
Per Share
(13) 1996 Annual Report to Shareholders
(23) Consent of Independent Auditors
(24) Power of Attorney (see Signature Page of
Report)
(27) Financial Data Schedules
- 22 -
<PAGE>
EXHIBIT 2C
PURCHASE AND SALE AGREEMENT
This Agreement is made and entered into as of the 31st day of January,
1996, by and between Vaughn Communications, Inc. a Minnesota corporation with
its principal offices in Minneapolis, Minnesota ("Buyer"), and Indian Arts and
Crafts, Inc., a Washington corporation with its principal offices in Seattle,
Washington ("Seller") or ("Company"), and Howard Lowen, Jeanette Lowen, Janice
Lowen, Howard Lowen (trustee for David Lowen), and Howard Lowen (trustee for
Daniel Lowen). ("Shareholders").
WHEREAS, Seller is engaged in the sale and distribution of gift products.
WHEREAS, the Buyer wishes to purchase and the Seller wishes to sell
certain of the assets of the Seller on the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants of Seller and Buyer set forth herein, Buyer and Seller hereby agree as
follows:
1. Purchase and Sale
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, the Seller hereby agrees to sell, assign and transfer to Buyer its
Assets and Liabilities as is set forth on Exhibits A, B, C, D, E, F, G, H and I
to this Agreement, and Buyer hereby agrees to purchase and acquire such assets
and liabilities.
2. Definitions
2.1 As used throughout this Agreement the following words and phrases
shall have the following meanings:
(A) AGREEMENT means this Purchase and Sale Agreement by and
between Seller and Buyer along with all schedules and exhibits and
amendments thereto.
(B) ASSETS means all those assets purchased hereunder including
all Fixed Assets, Intangibles, Inventory, Accounts Receivable, Notes
Receivable, and Other Assets and including, without limitation, all
assets of every type and nature, used in Seller's Business or owned by
the Company, unless specifically excluded herein below, all of which
shall be free and clear of all liens, except Permitted Liens.
(C) LIABILITIES means only those liabilities which are
identified in writing in this Agreement including Current Liabilities,
Notes and Contracts payable, and Other Liabilities so identified.
1
<PAGE>
(D) BUSINESS means the sale and distribution of gift products as
is presently conducted by Seller.
(E) CLOSING or CLOSING DATE means effective as of January 1,
1996, or such later date as the parties mutually agree to, the date on
which the transaction contemplated by the Agreement shall be completed.
Buyer and Seller recognize the need to perform the obligations, obtain
the rights and complete the transactions contemplated by the Agreement
within the time periods herein specified.
(G) ACCOUNTS AND NOTES RECEIVABLE means all accounts and notes
owed to the Seller identified in Exhibit B attached hereto.
(H) INVENTORY means all finished goods, raw materials, work in
process, supplies and inventory of Seller identified in Exhibit C
attached hereto.
(I) OTHER ASSETS means those assets identified in Exhibit D
attached hereto including all Personal Property owned by the Company,
prepaids, insurance policies, letters of credit, claims, receivables and
tax refunds and all other assets used in the business.
(J) INTANGIBLES means all items necessary to the operation of
the business which are not tangible including: noncompete agreements,
licenses, contracts to which the Company is a party, any life insurance
policies, warranties on equipment, software programs, business and
financial records relating to the business, computer records and tapes,
copyrights, copyright applications, corporate names, customer lists and
records, goodwill, patents, patent applications, proprietary information,
trademarks, trademark applications, trade names, trade secrets, and any
and all of Seller's rights to any in the foregoing as are identified in
Exhibit E attached hereto.
(K) FIXED ASSETS means all equipment, accessories, machinery and
fixtures used in the business identified in Exhibit F attached hereto.
(L) CURRENT ASSETS means all Accounts and Notes Receivable, net
of reserve for bad debt, Inventory and other current Assets identified on
Exhibits A through E.
(M) CURRENT LIABILITIES means accounts payable, current portion
of long term debt, and accrued taxes and other accruals identified in
Exhibit G attached hereto. Taxes or other liabilities not yet payable at
the Closing Date for which no reserve or appropriate accrual has been
made will not be assumed by Buyer and shall be retained by Seller and
paid as and when due.
(N) NOTES AND CONTRACTS PAYABLE means all debt owed or contracts
to pay by the Seller identified in Exhibit H attached hereto.
(O) OTHER LIABILITIES means those liabilities identified in
Exhibit I attached hereto.
(P) PERMITTED LIENS means those liens, encumbrances, security
interests or other charges shown on Exhibit J attached hereto to which
the Assets will be subject after the Close.
2
<PAGE>
(Q) CLOSING DATE SHAREHOLDERS' EQUITY means the amount shown on
the January 31, 1996 Audited Financial Statement of the Company as
Shareholders' Equity, which is then adjusted to the Closing Date to
reflect changes occurring in the ordinary course of business between
January 31, 1996 and Closing.
(R) MARKET VALUE means the average of the closing prices quoted
by the NASDAQ National Market System on the Buyers Common Stock for the
10-day period ending 7 days prior to the Closing Date.
3. Purchase Price
3.1 Amount: Subject to any adjustments to which the Buyer or Seller
may be entitled in accordance with other Sections of this Agreement, the total
purchase price to be paid by Buyer shall be the sum of the Total Closing Date
Shareholders' Equity of the Company (which contemplates the assumption of
certain of Sellers' liabilities by Buyer, as provided herein) plus $500,000
Dollars, payable as follows:
(A) At the Closing, the Buyer shall deliver certificates of the
Buyers Common Stock issued in the name of the Seller or Shareholders, as
the Seller may direct, representing market value of $1,250,000.
(B) The sum of Seven Hundred Fifty Thousand Dollars ($750,000) at
Closing by delivery of a Promissory Note ("Note II") in the form attached
hereto as Exhibit K issued by Buyer to Seller, secured pursuant to a
Security Agreement in the form attached hereto as Exhibit L; and
(C) The sum of Two Hundred Fifty Thousand Dollars ($250,000) at
Closing by Delivery of a Promissory Note ("Note I") in the form attached
hereto as Exhibit M issued by Buyer to Seller, secured pursuant to a
Security Agreement in the form attached hereto as Exhibit L; and
(D) The sum of ______________________ Dollars ($__________)
shall be paid at Closing to the Seller in cash, certified check or wire
transfer to accounts designated in writing by the Sellers. This cash
consideration will be determined, in advance of Closing, to be the amount
remaining after the Total Closing Date Shareholders' Equity increased by
$500,000 is reduced by the $1,250,000 Stock and $1,000,000 Note
obligations. In the event that the January 31, 1996 Financial Statements
are not available on the Closing Date, the parties may agree to a cash
payment at Closing which is 80% of the audit firm's best estimate of the
cash consideration payable, to be followed by an additional cash payment
of the remaining Purchase Price promptly when the Financial Statement is
available to the parties and the Total Closing Date Shareholders' Equity
can be determined.
(E) Furthermore, notwithstanding anything to the contrary in this
Agreement and in addition to the above (A) through (D), Buyer shall also
assume all liabilities of Seller with respect to required continued
health coverage under the provisions of COBRA and shall indemnify and
hold Seller harmless from said liabilities. Seller shall terminate its
health insurance plan prior to Closing.
3
<PAGE>
3.2 Allocation: It is agreed that the purchase price to be paid
Seller by Buyer under the terms of this Agreement shall be allocated among the
Assets to be purchased as will be set forth in Exhibit O prepared by Buyer and
Seller prior to Closing. The parties agree to report or cause the reporting of
this transaction for state and federal income tax purposes on a basis consistent
with and reflecting the allocation of purchase price set forth in Exhibit O as
of the Date of Closing. State sales tax payment due at Closing will be the
obligation of the Buyer. Buyer will allocate the purchase price to the assets
purchased at the same value shown on IAAC's final Balance Sheet and the
remaining purchase price to goodwill.
3.3 Shareholder Consent: The Shareholders of the Company hereby
consent to the terms of this Agreement. The parties expressly acknowledge that
the Shareholders shall be liable for certain obligations of Seller pursuant to
Section 11.3(c) of this Agreement and are parties hereto for the purpose of
consenting to the terms hereof.
3.4 Stock Restriction: Seller and Shareholders acknowledge and agree
that the shares of common stock comprising the Stock Consideration have not been
and will not be registered with the SEC or any state securities regulatory
agency and as such may not be sold, pledged or otherwise transferred without
such registration or an exemption therefrom. Seller and Shareholders also
acknowledge and agree that the shares comprising the Stock Consideration are
restricted securities pursuant to SEC Rule 144 and as such cannot be resold or
otherwise transferred for a period of two (2) years from the date of issuance,
and then only in accordance with the restrictions imposed by Rule 144, unless
such shares are earlier registered for resale with the SEC. Seller and
Shareholders agree to give Buyer at Closing an Investment Letter in the form of
Exhibit AA.
Seller and Shareholders agree to timely make all filings with the SEC
required under the Securities Exchange Act of 1934 with respect to their
ownership of the Stock Consideration (including, if required and without
limitation, Initial Statements of Beneficial Ownership on Form 3, Statements of
Changes of Beneficial Ownership on Form 4, and Annual Statements of Changes of
Beneficial Ownership on Form 5) for as long as they or their Affiliates (as
defined in the Securities Exchange Act of 1934) continue to own the Stock
Consideration; provided, however, that Buyer prepares all necessary documents
for execution by Seller and Shareholders with information timely provided by
Seller and Shareholders.
4. Conduct of the Business
4.1 The Seller covenants and agrees that, except as otherwise
expressly provided herein or upon the written consent of Buyer, between the date
hereof and the Closing Date, the Company will conduct its business and affairs
only in the ordinary course and consistent with its prior practices;
(A) maintain, keep and preserve the Company and Assets in the
same condition as the date hereof, ordinary wear and tear excepted;
(B) preserve intact the Company's business and organization;
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(C) preserve for the benefit of Buyer the goodwill of the
Company's suppliers and customers and others having business relations
with it and use its best efforts to retain the employees of the Company;
(D) pay and perform all of the Company's liabilities as and when
due;
(E) give Buyer prompt written notice of any material change in
the representations and warranties made in Section 5 hereof or the
Exhibits referred to herein which occurs prior to the Closing Date;
PROVIDED that such notification shall not relieve Sellers or the Company
of any of their obligations hereunder;
(F) not enter into any contract, agreement, commitment,
understanding or arrangement outside of the ordinary course of business
except payment of certain deferred rent, and it will not cancel, modify,
renew or amend any Contract or Lease other than in the ordinary course of
business;
(G) not perform, take any action or incur or, permit to exist
any change, event or condition which has a material and adverse effect on
the condition (financial or otherwise), properties, assets, liabilities,
or prospects of the Company, including but not limited to the contracting
for or incurring of any expense in connection with opening any additional
Company facility;
(H) not cancel any License or permit any of the Licenses to
expire or not be renewed;
(I) not sell or dispose of any of the Assets (except for the use
of inventory and replacement of damaged or defective equipment or
materials in the ordinary course of business, or as listed on Exhibit W
hereto), or permit the creation of any mortgage, pledge, lien or other
encumbrance, security interest, or imperfection of title thereon or with
respect thereto, except for liens for taxes not yet due and payable;
(J) not take any action or permit to exist any condition which
would cause any of the representations and warranties of Seller contained
in the Agreement to be untrue in any material respect as of the Closing
Date;
(K) maintain its books and records in accordance with prior
practices;
(L) not cancel, compromise, excuse, forgive, postpone or apply
any portion of a customer deposit to any Account Receivable;
(M) not offer or provide special incentives to induce customers
to purchase goods from the Company other than incentives offered or
provided in a manner consistent with the Company's reasonable past
business practices;
(N) not amend the Company's Articles of Incorporation or Bylaws;
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(O) not issue or commit to issue any additional shares of
capital stock or any other securities;
(P) not issue, sell or grant any option, warrant or right to
acquire or otherwise dispose of any of its authorized but unissued
capital stock or other securities (or commit to do any of the foregoing);
(Q) not repurchase or redeem any shares of its capital stock or
commit to do so or make any distributions in respect of its capital
stock, except for the customary distribution of 40% of pre-tax income to
the shareholders for tax payment purposes.
(R) not make any increase in the compensation payable to the
Company's employees, officers, directors, consultants or agents;
(S) not terminate any employee of the Company, and promptly
notify Buyer in writing of any employee of the Company voluntarily
terminating his or her employment;
(T) not make any Lease payments in excess of amounts
historically paid by the Company; or
(U) not discharge, remove, suspend or terminate any officer of
the Company, not hire any person as an officer or to serve in an
executive capacity on behalf of the Company.
4.2 The Seller covenants that it will not sell, assign, transfer,
encumber or grant any option, warrant or right to acquire any of the Shares or
rights therein, or otherwise dispose of any of the Shares or rights therein, nor
will it commit to do any of the foregoing.
4.3 Access to Books, Records and Premises: From the date of this
Agreement through the Closing Date, Seller shall cause the Company to grant
Buyer and its authorized representatives full access to the properties, books
and records, premises, employees, distributors, customers and auditors of the
Company during reasonable business hours for purposes of enabling Buyer to fully
investigate the business of the Company. Seller shall cause the Company to
deliver monthly financial statements to Buyer as described in Section 5.7 from
the date of this Agreement through the Closing Date, which statements shall be
prepared on a basis consistent with generally accepted accounting principles and
with the financial statements of October 31, 1995. Any information obtained by
Buyer in connection with such review shall be maintained by Buyer on a
confidential basis (subject only to review by Buyer's counsel and accountants),
and shall not be disclosed to any other person in the event that the
transactions contemplated by this Agreement are not consummated.
4.4 Risk of Loss: The risk of loss shall remain with Seller until the
Closing Date, and Seller shall continue in force any and all fire, casualty,
theft or other insurance policies relating to the Business and Assets of the
Company.
4.5 Additional Schedules: Within twenty (20) days after the date of
this Agreement, Seller shall cause the Company to prepare and to deliver to
Buyer each of the following schedules:
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Schedule 4A: This schedule sets forth a list of all equipment,
machinery, furniture, fixtures, furnishings, leasehold improvements and
other similar property that are owned by the Company and that are being
used by the Company in connection with the Business conducted by it.
Schedule 4B: This schedule lists each motor vehicle owned or
leased by the Company, together with vehicle identification numbers, any
outstanding loan against such vehicle, the person to whom the vehicle is
assigned and the location of the vehicle.
Schedule 4C: This schedule lists all Intangible personal property
used by the Company in the conduct of its trade or Business, including
without limitation, software, computer systems, all trademarks, trade
names, service names, service marks, copyrights, patents, patent
licenses, applications for any and all of the foregoing and registrations
thereof owned by the Company or used in its operations.
Schedule 4D: This schedule lists each policy of fire, liability
and other forms of insurance owned by the Company, the amount of premium
thereon and the expiration date thereof. Also listed are the policy
numbers and dates and insurers name and address for each policy owned in
prior years.
Schedule 4E: This schedule lists all permits, licenses and other
approvals and authorizations which are necessary to conduct the Business
of the Company and sets forth the title, issuing agency and expiration
thereof and indicates which of such permits, licenses and approvals are
not possessed or held by the Company.
Schedule 4F: This schedule lists all personal property owned by
any third parties (whether a customer, supplier or other person) in the
possession of the Company or for which the Company is responsible, other
than leased property set forth on schedule 4K or 4L.
Schedule 4G: This schedule lists each bank or other financial
institution in which the Company has an account or depository
arrangement, together with the names of all persons authorized to take
any actions with respect thereto.
Schedule 4H: This schedule lists each employee of the Company and
the position, title, remuneration (including any scheduled salary and
remuneration increases), the date of employment and accrued vacation pay
of each such employee and the date and amount of last salary review and
increase.
Schedule 4I: This schedule lists the amount of sales made during
fiscal years ending 1993, 1994, and year-to-date 1995, to the Company's
fifteen (15) largest accounts, the principal contact at each such account
and the Company's responsible sales employee for each such account.
Schedule 4J: This schedule contains a true and complete
description of all real properties owned by the Seller or Shareholders
which are used in the Business and will be leased by the Buyer, including
the legal description thereof. This schedule may be filled by reference
to the Lease (Exhibit T).
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Schedule 4K: This schedule lists and describes each lease for
real property, whether written or oral, to which the Company is a party,
together with the term, rental and other material provisions thereof, and
any other instrument under which the Company claims or holds an interest
in real property owned by another person. Include a description of any
underground storage tanks owned or leased. Furnish copies of all such
leases.
Schedule 4L: This schedule lists and describes each lease for, or
license for the use of equipment or personal property, whether written or
oral, to which the Company is a party, together with the term, rental,
security agreements, and other material provisions thereof (ref. Exhibit
H). Furnish copies of all such leases or licenses.
Schedule 4M: This schedule lists the Accounts Receivable aged as
of the most recent month-end (ref. Exhibit B).
Schedule 4N: This schedule lists the following agreements,
whether oral or written, to which the Company is a party, as of the date
of such schedule, to the extent such agreements are not set forth in
other schedules. Furnish copies of all such agreements.
a) Each contract, agreement or arrangement made in the ordinary
course of business by the Company, not terminable by the
Company on thirty (30) days notice or less and involving an
expenditure of more than $1,000.00 for purchase of any
services, materials, supplies or equipment.
b) Each contract, agreement or commitment for the same by the
Company for delivery of its products or services over a
period of more than thirty (30) days from the date of this
agreement and for an aggregate price of more than $5000.00.
c) Each contract or commitment for capital expenditures of any
amount.
d) Each contract continuing over a period of twelve (12) months
or more from its date, which cannot be terminated by Seller
upon thirty (30) days notice, or less.
e) Each agreement for the sale of any capital equipment or real
property.
f) Each employment contract or agreement relating
thereto between the Company and any officer,
consultant, director or employee, including any
bonus, incentive or deferred compensation plans, any
confidentiality or non-compete agreements, and any
arrangements which encourage or compensate Company's
employees to stay with Company following the Closing
Date.
g) Each plan or contract or arrangement of the Company,
providing for pensions, life insurance, medical
insurance, disability insurance, vacations and other
employees' benefits or compensation plans, whether
formal or informal.
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h) Each agreement, if any, with any union covering
employees in the bargaining unit represented by such
union.
i) Each agreement not made in the ordinary course of the
Company's business.
j) Each contract between the Company and any dealer,
distributor, broker, agent or sales representative.
k) Each contract or agreement relating to the property
listed in Section 4.5 Schedule 4C to be delivered to
Buyer by Seller.
l) Each agreement not otherwise listed on Section 4 to
which the Company is a party or which has, or may
have, a material effect on the Company or its future
business prospects.
True and correct copies of all documents listed in any schedule delivered
pursuant to this Section 4 have heretofore been delivered or made available to
Buyer or will be made available prior to closing and will upon request by Buyer
be signed by an officer of the Company for identification.
4.6 Updating of Schedules: Between the date of this Agreement and the
Closing Date, Seller shall deliver to Buyer updated Schedules to reflect any
material changes in the Schedules delivered to Buyer pursuant to Section 4.5 of
this Agreement. On the Closing Date, Seller shall deliver to Buyer an officer's
certificate confirming the accuracy, as of the Closing Date, of each of the
Schedules delivered to Buyer pursuant to this Agreement; provided, however, that
Buyer shall not be obligated to proceed with the closing of the transactions
contemplated by this Agreement if there are material adverse changes from the
Schedules initially delivered to Buyer.
4.7 Contractual Obligations: Buyer agrees to assume only the
obligations identified in Exhibits G, H and I. Buyer's agreement to assume the
obligations is limited to those obligations for which Seller has provided to
Buyer, prior to Closing, a true and complete copy of each and every writing
evidencing such obligation.
5. Representations and Warranties of Seller
Seller hereby represents and warrants to Buyer that:
5.1 General: The statements set forth in Sections 4 and 5 of this
Agreement are true, accurate, complete and not misleading in any respect on the
date of this Agreement and will remain so as of the Closing.
5.2 Standing: Seller is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Washington.
Seller has all the necessary corporate powers to own properties, and to carry on
the business as now owned and operated by it. Seller is qualified to do
business in each state or jurisdiction where its failure to so qualify would
materially adversely affect its ability to transfer the assets to Buyer as
required hereunder.
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5.3 Authority: Seller has the right, power, legal capacity and
authority to enter into and perform its obligations under this Agreement, and no
approval or consent of any person, authority or entity that has not been
obtained is necessary in connection herewith. The execution and delivery of
this Agreement by Seller has been duly authorized by its Board of Directors and
by all requisite shareholder action.
5.4 Material Change: Since October 31, 1995 the Company has not:
(A) sold, transferred, leased to others or otherwise disposed of
any assets, except as listed on Exhibit W, and except for (i) inventory
and/or services sold in the ordinary course of business, and (ii) assets
which are not material to the operation of the Company's business;
canceled or compromised any material debt or claim; or waived,
compromised or released any right, except for rights which are not
material to the operation of the Company's business;
(B) suffered any damage, destruction or loss (whether or not
covered by insurance) that has materially and adversely affected the
Assets, the Company or the Company's business or prospects;
(C) encountered any labor union organizing activity or had any
actual or threatened employee strike, work stoppage, slowdown or lockout;
(D) transferred or granted any right under, or entered into any
settlement regarding the breach or infringement of, any license, patent,
copyright, trademark, trade name, invention, franchise or similar rights,
or modified any existing right with respect thereto;
(E) instituted, been named as a party, settled or agreed to
settle any litigation, action or proceeding before any court or
governmental body;
(F) failed to replenish the Company's inventories and supplies
in a normal and customary manner consistent with the Company's prudent
business practices, nor made any purchase commitments in excess of the
normal, ordinary and usual requirements of the Company's business or at
any price materially in excess of the then current market price, or upon
terms and conditions more onerous in any material respect than those
usual and customary in the Company's business, nor made any material
changes in the Company's marketing, selling, pricing, advertising, or
personnel practices inconsistent with the Company's past practices;
(G) failed to pay its liabilities as and when due in the
ordinary course of the Company's business;
(H) suffered any change, event or condition which has materially
and adversely affected the Company's condition (financial or otherwise),
properties, assets, liabilities, business or prospects;
(I) failed to maintain its facilities and equipment in a
commercially prudent and reasonable manner;
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(J) entered into any transaction, contract or commitment other
than in the ordinary course of the Company's business, except for
transactions, contracts or commitments for which the Company's total
obligation does not exceed in the aggregate $10,000;
(K) incurred any obligation or liability, absolute, contingent
or otherwise, whether due or to become due, except liabilities for trade
or business obligations incurred in the ordinary course of the Company's
business, and except for obligations or liabilities for which the
Company's total obligation does not exceed in the aggregate $10,000;
(L) created or assumed any mortgage, pledge, lien or encumbrance
upon any of the Assets that will survive the Closing;
(M) made any material writedown of the value of any of the
Assets;
(N) made any increase in the compensation of the employees of
the Company, or any increase in compensation payable to any officer or
director of the Company, except as indicated on Exhibit X, or any
increase in compensation payable to any employee, consultant or agent of
the Company;
(O) canceled, compromised, excused, forgiven, postponed or
applied any portion of a customer deposit to any Account Receivable
except that in the ordinary course of business the Company may apply all
or a part of a customer deposit to a customer account which has been
terminated; or
(P) other events or conditions that have or might have a
material adverse affect on the business.
5.5 No Liens or Encumbrances: The Company has good and marketable
title to all of the personal property and assets, tangible and intangible,
employed in the operation of its business, free of any mortgages, liens, claims,
charges, leases, security interests, pledges, easements, encumbrances and title
retention agreements of any kind whatsoever except such property and assets as
may be leased by the Company pursuant to leases described on Schedules 4B, 4K,
4L, delivered pursuant to Section 4.5 or pledged to secure debts described on
Exhibit H (which pledge or security interest will be listed and described on
Exhibit H).
5.6 Liabilities: There are no liabilities, responsibilities, debts,
claims or obligations known or unknown, liquidated or contingent, fixed or
contingent related to the assets or the business which could become the
obligation or responsibility of Buyer other than those set out on Exhibits G, H
and I. All other liabilities shall be retained by Seller and are expressly not
assumed by Buyer.
5.7 Financial Statements: Financial statements of the Company
("Financial Statements") are attached to this Agreement as Exhibit P and will
have been furnished to Buyer as follows:
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(A) Unaudited balance sheets of the Company as of December 31,
1995, and reviewed statements of income and expenditures, retained
earnings and statement of change in financial position for the fiscal
years then ended will be furnished by March 31, 1996; and
(B) Unaudited balance sheets of the Company as of October 31,
1995, November 30, 1995, and all other months prior to closing, and the
unaudited statements of income for the fiscal periods then ended,
prepared by the Company, will be furnished within twenty (20) days of
month end.
In the opinion of Management, such Financial Statements present fairly and
accurately in all material respects the results of operations of the Company for
the periods covered by such statements, have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a basis consistent
with past practices, and include all adjustments (consisting only of normal
recurring accruals) that are necessary for a fair presentation of the financial
condition of the Company and the results of the Company's Business operations
for the periods covered by such statements.
5.8 No Defaults: Schedules 4D, 4K, 4L, and 4N accurately and
completely list all Contracts or Leases to which the Company is a party or by
which it is bound or affected. All Contracts required to be listed on these
Schedules are valid and binding, enforceable in accordance with their respective
terms, and in full force and effect. Except as noted on Exhibit V, there is not
under any Contract any default by the Company, or, to the knowledge of Seller,
any other party thereto, or event which, after notice or lapse of time, or both,
would result in a default which would enable any party thereto to terminate such
Contract. Except as expressly set forth in Exhibit V, neither the Sellers nor
the Company have knowledge of any intention by any party to any Contract to (1)
terminate or amend the terms thereof, (2) refuse to renew the same upon
expiration of its term, or (3) renew the same upon expiration only on terms and
conditions which are more onerous than those pertaining to the existing
Contract. True and complete copies of all Contracts (together with any and all
amendments thereto) and a copy of the Company's forms of invoices and purchase
orders have been delivered to Buyer. Except as reflected in Exhibit V, none of
the Contracts relating to Personal Property would be classified for accounting
purposes as capital or financing leases. Other than the Contracts, the Company
requires no contract, agreement, license, franchise or permit to enable it to
carry on its business substantially as presently conducted. None of the
Contracts would be breached by virtue of the consummation of the transactions
contemplated hereby, and the consummation of the transactions contemplated
hereby will not affect the validity, enforceability or continuation of any of
the Contracts. All such Contracts are assignable to Buyer and will be assigned
to Buyer at Closing along with the consent, if required, of the parties thereto.
5.9 Inventory: All inventories reflected in the Financial Statements
are stated at the average cost or such cost as complies with GAAP and, as so
stated, are in good condition and are currently usable or salable, in the
ordinary course of business of the Company, without discount.
5.10 Accounts and Notes Receivable: The accounts and notes receivable
of the Company as set forth in Exhibit B are valid, assignable and enforceable
obligations due to the Company and shall be collectible by the Company without
reduction or setoff in the ordinary course of business. The goods and services
sold and delivered by the Company that gave rise to such accounts and notes
receivable were sold and delivered in conformity with the applicable purchase
orders, agreements and specifications.
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Such accounts and notes receivable are subject to no valid defense or offsets
except routine customer complaints of an immaterial nature.
5.11 Taxes: The Company has filed all income, excise, corporate
franchise, property, payroll and other tax returns or reports required to be
filed by it, as of the date hereof and has paid all taxes and assessments
relating to the time periods covered by such returns or reports. The amounts
set up as provisions for taxes in the Financial Statements are sufficient for
the payment of all unpaid federal, state or local taxes of the Company accrued
for or applicable to all periods ended on or prior to the date of this
Agreement, or which may subsequently be determined to be owing by the Company
with respect to all periods ending on or prior to the Closing Date. There are
no present disputes as to taxes of any nature payable by the Company. The most
recent tax year for which the Company's federal income tax returns have been
audited by the Internal Revenue Service is its tax year ending
___________________.
5.12 Lawsuits, Proceedings, etc.: Except as described on Exhibit Q
there is no action or proceeding (whether or not purportedly on behalf of the
Company) pending or, to the best knowledge of Seller, threatened against the
Company, nor, to the best knowledge of Seller, does there exist any basis
therefor, which might result in any adverse change in the condition, financial
or otherwise, of the Company's Business or Assets. No order, writ or injunction
or decree has been issued by, or requested of, any court or governmental agency
which does or may result in any adverse change in the Company's Assets or
properties or in the financial condition of the Company or its Business. The
Company is not liable for damages to any employee or former employee as a result
of any violation of any state or federal laws directly or indirectly relating to
such employee or former employee.
5.13 Regulatory Violations:
(A) The Company is not currently being charged with nor, to the
best knowledge of Seller, is it operating its Business in violation of
the federal Occupational Safety and Health Act of 1970, or the
regulations promulgated thereunder, the Environmental Quality Improvement
Act of 1970, or the regulations promulgated thereunder, or any other
applicable law or regulation relating to the environment or occupational
health and safety.
(B) Except as disclosed in Exhibit R, (i) the Company has not
received written notice of any violation by the Company of any
Environmental Law, and, to the Seller's knowledge, no condition or event
has occurred which, with notice or passage of time or both, would
constitute a violation of any Environmental Law; (ii) no pollutants,
contaminants or hazardous or toxic wastes, substances or materials, as
defined by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, the Resource Conservation and Recovery
Act of 1976, as amended, the Toxic Substances Control Act, or any other
similar Federal, state or local statute, have been manufactured,
generated, stored, handled, disposed, buried, dumped or used on, at or in
connection with the Real Property, or to the Seller's knowledge, by any
other occupant of the Real Property; (iii) no asbestos, asbestos-
containing materials, polychlorinated biphenyls (PCBs), PCB compounds, or
other pollutants, contaminants, hazardous or toxic wastes, substances or
materials have been placed on the Real Property by the Seller, or to
Seller's knowledge, by any other occupant of the Real Property, nor have
they been used in the construction, repair, or alteration of any portion
of the Real Property by the Seller, or to the Seller's knowledge, by any
other occupant of the Real Property; and (iv) there are no above-ground
or underground storage tanks, wells, pools, settling ponds, traps, drains
or other similar above-
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ground or subsurface structures present on or under the Real Property.
5.14 Post Balance Sheet Changes: The Company has not (a) mortgaged,
pledged or subjected to lien, charge or other encumbrance any asset, tangible or
intangible, other than the lien of current or real property taxes not yet due
and payable; (b) suffered any damage, destruction or loss, whether or not
covered by insurance, materially adversely affecting its assets or its business;
(c) made or suffered any amendment or termination of any material business; (d)
received notice or had knowledge of any labor organizing efforts or labor
trouble other than routine grievance matters, none of which is material; (e)
revalued any of its assets; or (f) entered into any transactions not in the
ordinary course of business.
5.15 Compliance with Laws and Licenses: Schedule 4E is an accurate and
complete list of all of the Licenses issued to or held by the Company. Except
for such non-compliance which could not have a materially adverse effect upon
the Assets or the operation of the Company's business, the Company has complied
with the Licenses listed on Schedule 4E and all laws, rules, regulations and
ordinances of any government or governmental agency. Neither the ownership nor
use of the Company's properties nor the conduct of its business conflicts in any
material respect with the rights of any other person, firm or corporation.
Neither Seller nor the Company is in violation of, or in default under, any
terms or provisions of any lien, mortgage, lease, license, deed of trust,
agreement, instrument, order, judgment or decree, except for such violations or
defaults which could not have a materially adverse affect upon the Assets or the
operation of the Company's business. All of the Licenses listed on Schedule 4E
are valid and binding and in full force and effect without conditions. There is
not under any License listed on Schedule 4E any default by either Seller or the
Company or any event which, after notice or lapse of time, or both, would
constitute a default, which, in either case, could result in a revocation,
termination, non-renewal or impairment of such License. The Company has
delivered true and complete copies of all Licenses listed on Schedule 4E
(together with any and all amendments thereto) to Buyer. All reports of Sellers
and the Company to municipal authorities are true in all material respects and
have been duly filed. Other than the Licenses listed on Schedule 4E, the Seller
and the Company require no license, franchise or permit to carry on the
Company's business as now conducted. None of the Licenses listed on Schedule 4E
would be breached by virtue of the transactions contemplated hereby, provided
the Consents are obtained.
5.16 Condition of the Company's Assets: All of the Company's tangible
Assets are currently in good and usable condition and are fit for their intended
purposes, ordinary wear and tear excepted. There are no defects in such Assets
or other conditions which, in the aggregate, materially and adversely affect the
operation or value of such Assets. Such Assets and the other properties being
leased by the Company pursuant to the leases described on Schedule 4B, 4K, or 4L
delivered by Seller pursuant to Section 4.5 constitute all of the operating
Assets being utilized by the Company in the conduct of its Business.
5.17 Real Estate: The Company does not own any real property in fee
simple. Schedule 4K contains a complete list and description of all leases to
which the Company is a party or of which the Company is a beneficiary. Schedule
4K includes a full legal or location description of the Real Property which is
the subject of such leases. All of the leases required to be listed on Schedule
4K are valid, binding and enforceable in accordance with their respective terms,
except as noted on Schedule 4K.
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5.18 Employees:
(A) Seller has no information indicating that any
management or key employee of the Company intends to terminate his
employment with the Company. To the best of knowledge of the
management of the Seller, there is not pending or threatened any
labor dispute, strike or work stoppage against the Company. To
the best knowledge of the management of the Seller, neither the
Company nor any representative or employee of the Company has
committed any unfair labor practices in connection with the
operation of the Company's Business, and there is not pending or
threatened any charge or complaint against the Company by the
National Labor Relations Board or any comparable state agency. To
the best knowledge of the management of the Seller, the Company is
not, and will not become, liable for any retroactive workers'
compensation insurance premiums or retroactive unemployment
compensation experience ratings or charges in connection with the
operation of its Business relating to the period of time prior to
the date of this Agreement.
(B) Schedule 4H contains, as of the dates shown on such
Schedule, accurate and complete information as to names and rates
of compensation (whether in the form of salaries, bonuses,
commissions or other supplemental compensation now or hereafter
payable) and shows each such employee's compensation for the two
(2) years immediately prior to the date of this Agreement,
including amounts and dates of change in compensation, of all
employees of the Company (grouped by categories as indicated
thereon), together with information as to any employment contracts
or severance arrangements involving the indebtedness of such
employees to the Company and any arrangements involving the
indebtedness of the Company to such employees in any amount.
(C) The Company is not a party to any collective
bargaining agreement or any employment agreement with any employee
of the Company, other than oral employment agreements at the
sufferance of the Company. The Company has complied in all
material respects and shall comply in all material respects with
all laws and regulations relating to the employment of labor,
including those related to wages, hours, collective bargaining,
discrimination and the payment of Social Security or similar
taxes. There are no unfair labor practice charges or claims
pending against the Company, nor any pending or, to the best of
Seller's or the Company's knowledge, threatened charges against
the Company with respect to any wage and hour, employment
discrimination or other statutory violation by the Company. There
is no union campaign being conducted to solicit cards from
employees to authorize the union to request an NLRB certification
election with respect to any employees of the Company.
5.19 Changes in Suppliers and Customers: Seller is not aware of any
fact which indicates that any of the suppliers supplying products, components or
materials to the Company intends to cease selling such products to the Company
or to limit or reduce such sales of products to the Company nor is Seller aware
of any fact which indicates that any major customer of the Company intends to
terminate, limit or reduce its business relations with the Company.
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5.20 Intangible Property Rights: Schedules 4C and 4E are true and
complete lists of all Intangibles applied for, issued to or owned by the Company
or under which the Company is licensed or franchised. All of the Intangibles
required to be listed on Schedules 4C and 4E are valid and in good standing are
assignable and, to Seller's knowledge, uncontested, and the Company has
delivered to Buyer copies and required assignments of all documents establishing
those Intangibles. The Intangibles listed on Schedules 4C and 4E are all such
property necessary to operate the business of the Company as now operated. The
Company is not infringing upon or otherwise acting adversely to any Intangibles
owned by any other person or persons. No employee of the Company has any right
in or to the Company's proprietary information, including without limitation,
computer programs used in the Company's business.
5.21 No Brokers or Finders: No person, firm or corporation has any
right, interest or valid claim against Seller or the Company for any commission,
fee or other compensation as a finder or broker in connection with the
transactions contemplated by this Agreement.
5.22 ERISA:
(A) All "employee benefit plans," as defined in Section
3(3) of ERISA, sponsored, maintained or contributed to by the
Company are listed on Schedule 4N(g) hereto, and complete and
accurate copies of the plans (or related insurance policies) have
been furnished to Buyer. Except as disclosed in Schedule 4N(g),
the Company is not a party to, does not have in effect or to
become effective after the date of this Agreement any bonus, cash
or deferred compensation, severance, medical, health or
hospitalization, pension, profit sharing or thrift, retirement,
stock option, employee stock ownership, life or group insurance,
death benefit, welfare, salesmen incentive, vacation, sick leave,
disability, trust agreement, arrangement or other welfare or
pension benefit plan (as such terms are defined by ERISA).
(B) Each employee benefit plan required to be listed in
Schedule 4N(g) hereto has been administered in compliance with
applicable provisions of ERISA and the Code.
(C) All reporting and disclosure requirements under ERISA
and the Code for the plans listed in Schedule 4N(g) hereto have
been complied with, except for such non-compliance which could not
result in a termination or fine or have a materially adverse
affect upon such plans.
(D) All benefits provided under all employee benefit
plans listed in Schedule 4N(g) hereto are covered by insurance,
other than Company policies for profit sharing, sick leave,
personal leave and vacation.
(E) The Company does not contribute to and is not
required to contribute to any "multi-employer plan," as defined in
Section 414(f) of the Code and Section 3(37) of ERISA, and the
Company has not incurred or does not reasonably expect to incur
any "withdrawal liability" under Section 4201 ET SEQ. of ERISA.
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(F) Neither Buyer, nor any trade or business under common
control with Buyer (within the meaning of Sections 414(b) and
414(c) of the Code) or any officers, directors, employees or
affiliates of the same shall, from and after the Closing Date,
have any liability, obligation or responsibility with respect to
any employee benefit plan maintained or provided by the Company,
or any affiliate thereof, before the Closing Date (including but
not limited to liability for contributions to or the benefits
payable under any such employee benefit plan), except for the
continuation of insurance plans, the continuation of insurance
protection to employees as mandated by applicable law or such
benefits as Buyer, in its sole discretion, may determine to
provide to the Company's employees after the Closing Date.
5.23 Insurance: Schedule 4D is an accurate and complete list of all
fire, theft, casualty, liability and other insurance policies insuring the
Company, its business, or any of the Assets, specifying the type and amount of
coverage and expiration dates. All such policies are in full force and effect.
No insurance policy of the Company has been canceled and no application of the
Company for an insurance policy has been rejected during the past five years.
5.24 Full Disclosure: There has been and will be no material change in
the information set forth in the documents furnished or schedules or exhibits to
this Agreement between the date of such schedule or exhibit and the date of this
Agreement or the Closing Date. Seller has not knowingly withheld from Buyer any
material fact relating to the Assets, Business, Operations, Financial Condition
or Prospects of the Company. No representation or warranty in this Agreement or
other document furnished in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein to make the statements therein not
misleading. Without limiting the scope of the foregoing, Seller is not aware of
any change or occurrence that has taken place or is pending that could have a
material adverse effect on the value of the Assets or the Business of the
Company, or the ability of the Company to operate its Business subsequent to the
Closing Date in the manner in which it has been operated by the Company before
the Closing Date, or which could materially increase the costs incurred by the
Company in operating its business subsequent to the Closing Date, including any
pending or present change in any law or regulation, or other requirements,
concerning license or approvals.
5.25 The representations and warranties made by Seller in this
Agreement are made as of the date of this Agreement and as of the Closing Date.
Such representations and warranties shall survive the Closing date and shall
continue until their expiration in accordance with the terms of this Agreement.
6. Representations and Warranties of Buyer
The Buyer hereby represents and warrants to the Seller as follows:
6.1 Organization and Standing: Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Minnesota, and has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement.
6.2 Corporate Authorization: The execution, delivery and performance
of this Agreement by Buyer have been duly authorized by proper corporate action
of Buyer and are within its corporate
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powers. This Agreement constitutes the legal, valid and binding obligation of
Buyer and is enforceable against Buyer in accordance with its terms.
6.3 No Brokers or Finders: No person, firm or corporation has any
right, interest or valid claim against Buyer for any commission, fee or other
compensation as a finder or broker in connection with the transactions
contemplated by this Agreement.
6.4 Property Lease: On the Closing Date, Buyer shall enter into a
lease agreement or assignment for the property located at 1119 Mercer Street,
Seattle, Washington. Such lease agreement shall be in the form of Exhibit T to
this Agreement.
6.5 Personal Service Agreements: On the Closing Date, Buyer shall
offer to enter into non-compete agreements or employment agreements with Howard
Lowen and Sandy Roth; which employment agreements will include covenants not to
compete, the terms of which will be specified on Exhibit U, attached hereto.
6.6 No Defaults: The Buyer is not in default or breach under any
provisions of this Agreement or any other Agreement between the parties on the
date of this Agreement and will not be in default or breach as of the Closing.
6.7 Lawsuits, Proceedings, etc.: Except as disclosed to Seller in
writing there is no action or proceeding (whether or not purportedly on behalf
of the Buyer) pending or threatened against the Buyer, nor, to the best
knowledge of Buyer, does there exist any basis therefor, which might result in
any adverse change in the condition, financial or otherwise, of the Buyer's
Business or Assets. No order, writ, or injunction or decree has been issued by,
or requested of, any court or governmental agency which does or may result in
any adverse change in the Buyer's Assets or properties or in the financial
condition of the Buyer or its Business. The Buyer is not liable for damages to
any employee or former employee as a result of any violation of any state or
federal laws directly or indirectly relating to such employee or former
employee.
6.8 No Breaches: The Buyer is not in violation of, and the execution,
delivery and performance of this Agreement will not result in any breach or
acceleration of, any of the terms or conditions of its articles of incorporation
or bylaws or of any mortgage, bond, indenture, agreement, contract, license or
other instrument or obligation to which the Buyer is a party or by which its
Assets are bound, nor will they result in any violation of any statute,
regulation, judgment, writ, injunction or decree of any court, threatened or
entered in a proceeding or action in which the Buyer may be bound or to which
any of its Assets are subject.
6.9 The representations and warranties made by Buyer in this Agreement
are made as of the date of this Agreement and as of the Closing Date. Such
representations and warranties shall survive the Closing Date and shall continue
until their expiration in accordance with the terms of this Agreement.
7. Employees
7.1 Buyer will not subsequent to Closing, have any obligation to offer
employment to any individuals employed by Seller, except as indicated by
Section 6.5. Except as disclosed pursuant to
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Section 4.5, 4N (f) (g) (h), there are no other written or oral agreements or
commitments to employees which cannot be terminated at any time by Seller.
7.2 Whether or not Buyer after Closing offers employment to any
employee of Seller, Seller shall retain and remain solely liable for any and all
claims, including without limitation, retirement benefits, accrued vacation,
workman's compensation and medical claims which arise out of, are associated
with or are based upon conditions or events which occurred prior to Closing.
8. Closing
8.1 General Procedure: At the Closing each party shall deliver to the
other party, in form and substance satisfactory to the other party, such
documents, instruments and materials required to effectuate the provisions of
this Agreement.
8.2 Time and Place: The Closing shall take place on January 1, 1996
in Seattle, Washington, or such other later date as is mutually agreed to by the
parties. If the closing has not occurred on or before March 1, 1996, the
Closing Date shall be on a date selected by the Buyer upon not less than 10 days
prior written notice to the Seller, at a time and place mutually determined.
9. Conditions of Buyer's Obligation
9.1 The obligation of Buyer to complete the purchase of the assets on
the Closing Date in accordance with the terms set forth in this Agreement is, at
the option of the Buyer, subject to the satisfaction (or waiver by Buyer) of
each of the following conditions:
(A) Accuracy of Representations and Warranties: The
representations and warranties made by Seller in this Agreement shall be
correct in all material respects on and as of the Closing Date with the
same force and effect as though such representations and warranties had
been made on the Closing Date.
(B) Personal Service Agreements: Employees of Seller shall have
entered into non-compete and/or employment agreements described in
Section 6.5.
(C) Opinion of Counsel: Buyer shall have received the opinion of
Gary English of Casey and Pruzan, the Seller's legal counsel, dated the
Closing Date and in form and substance satisfactory to Buyer's legal
counsel, stating the substance of the representations and warranties set
forth in Sections 5.2, 5.3, 5.8, 5.12 and 5.15 of this Agreement.
Counsel shall be entitled to rely upon certificates of governmental
officials and, as to factual matters, upon certificates of the president
of the Company.
(D) Delivery of Closing Documents: Seller shall have delivered
to Buyer each of the items listed in Section 2.1 (Exhibits A through J),
Section 4.5 and 4.6 and 5.7 Exhibits J, Q, R, V, W, X and such items
shall be satisfactory in form to Buyer and include:
1) A Bill of Sale transferring the assets to Buyer duly
executed by Seller in the form attached as Exhibit Y.
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2) Assignments executed by Seller to the corporate name,
trademarks, trade names, copyrights and other intangibles listed on
Exhibit E in the form attached as Exhibit Z.
3) Assignments or required consents executed by Seller or third
parties for leases, licenses, contracts or other agreements listed in
Section 4.5 herein and Exhibit D and Exhibit E attached hereto.
4) Certified copy of corporate resolutions, and if required by
statute shareholder approval authorizing the execution of this Agreement
and the consummation by Seller of the transactions of the Agreement.
(5) A letter executed by a duly authorized representative of
Badger Martin, Ross and Smith authorizing Buyer to rely on its
Independent Auditor's Report for Indian Arts and Crafts, Inc. dated
December 31, 1995, and attached financial statements, and the consent of
Badger Martin, Ross and Smith to the inclusion of such Independent
Auditor's Report and attached financial statements in any SEC filings
regarding the Company and the acquisition of the Company by Buyer as
Buyer and its counsel deem necessary and appropriate; provided, however,
that Bader, Martin, Ross & Smith shall be provided with a draft of the
SEC filings prior to granting consent.
(6) The results of UCC, tax, bankruptcy and judgment lien
searches, obtained at Seller's expense and dated within seven (7) days
prior to the Closing Date, in the name of the Seller, the Company and any
trade name used by the Company in the Secretary of State's records of the
States of Washington and Alaska, and in all appropriate local filing
offices.
(7) Appropriate payoff letters from the Company's creditors with
respect to all Long-Term Debt and other indebtedness of the Company, and,
if such debt is to be repaid pursuant to the terms of this Agreement,
releases in form reasonably satisfactory to counsel for Buyer from all
persons holding liens or other interests in any of the Assets (other than
liens for current taxes not yet due and payable).
(8) A Certificate of Good Standing for the Company from the
State of Washington and the Articles of Incorporation of the Company
certified by an appropriate government official as of the Closing Date,
delivered within two weeks of the closing.
(9) The Investment Letters executed by each of the Shareholders
to whom the Buyer's Common Stock is to be issued pursuant to Section 3.1A
herein, in the form of Exhibit AA.
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(10) The executed Property Lease which indemnifies the Buyer
against regulatory claims with respect to all periods on or prior to the
Closing Date.
(11) All other documents, certificates, instruments and writings
required hereunder to be delivered by the Company and/or Seller, or that
may reasonably be requested by Buyer at or prior to the Closing Date.
(12) Seller shall have conducted at its expense a Phase I
environmental assessment of the site at which the Business is being
conducted, the findings of which, in form and substance are acceptable to
Buyer.
(E) Covenants and Conditions: Seller shall have performed or
caused the company to perform in all material respects all of his
obligations and agreements and complied or caused the Company to comply
in all material respects with all covenants and conditions contained in
this Agreement to be performed or complied with on or before the Closing
Date.
(F) Adverse Change: Between the date of this Agreement and the
Closing Date, in Buyer's sole judgment, using a standard of reasonable
business judgment, there shall have been no material adverse change in
the Company or its condition (financial or otherwise), operations,
business or prospects, and the Company shall not have suffered any
material loss by fire, flood, act of God, natural disaster, blizzard,
windstorm, or other casualty which has not been fully restored or
replaced.
(G) Legal Proceedings: There shall not be pending or threatened
any lawsuit, claim, legal action, administrative proceeding or
investigation involving either Seller, the Company, the Assets or the
Shares which would materially adversely affect the Company, the Assets,
the Shares of the transactions contemplated by this Agreement.
(H) Licenses in Effect: All of the Licenses shall be in full
force and effect on the Closing Date without conditions.
(I) Encumbrances: Except for Permitted Liens (Exhibit J) there
shall be no security interest, mortgage, pledge, conditional sales
agreements, or other lien or encumbrance, affecting any of the Assets
(other than liens for current taxes not yet due and payable).
(J) Facility Leases: The Shareholders shall have executed and
delivered to Buyer the Property Leases.
10. Conditions to Obligations of Seller
10.1 The obligation of Seller hereunder to complete the sale of the
assets on the Closing Date on the terms set forth in this Agreement is subject
to the satisfaction (or waiver by the Seller) of each of the following
conditions:
(A) Accuracy of Representations and Warranties: The
representations and warranties of Buyer in this Agreement shall be
correct in all material respects as of the Closing Date.
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(B) Personal Service Agreements: The Buyer shall have entered
into the agreements described in Section 6.5.
(C) Opinion of Counsel: Seller shall have received the opinion
of Rider, Bennett, Egan & Arundel, the Buyer's legal counsel, dated the
Closing Date and in form and substance satisfactory to Seller's legal
counsel, stating the substance of the representations and warranties set
forth in Sections 6.1 and 6.2.
(D) Property Lease: Buyer shall have entered into or assumed
the assignment of the lease agreements described in Sections 4.5 (4K) and
6.4.
(E) Payment: Buyer shall have delivered the purchase price
payment according to the terms of Section 3.1 (A), (B), (C), (D), and (E)
of this Agreement.
(F) Copies of the resolutions of Buyer's Board of Directors,
authorizing and approving the execution of this Agreement and the
consummation of the transactions contemplated hereby, certified as true
and correct on the Closing Date by its Secretary or any Assistant
Secretary.
(G) A Certificate of Good Standing for Buyer from the State of
Minnesota and Articles of Incorporation of Buyer certified by an
appropriate government official as of the Closing Date.
(H) Covenants and Conditions: Buyer shall have performed in all
material respects all of its respective obligations and agreements and
complied in all material respects with all covenants and conditions
contained in this Agreement to be performed or complied with by it on or
before the Closing Date.
(I) Legal Proceedings: There shall not be pending any
injunction or legal restriction which, in the opinion of counsel to
Sellers, makes unlawful or impossible the closing of the transactions
contemplated hereby.
11. Indemnification
11.1 General: The covenants, representations and warranties contained
in this Agreement shall survive the Closing.
11.2 Indemnification of Seller:
(A) Seller shall indemnify and hold Buyer harmless against and
from any losses, claims, costs, demands, damages, suits or liabilities,
including without limitation in each case the cost, expenses and
attorney's fees reasonably incurred by Buyer resulting from, arising out
of, incident to or based upon: (i) Seller's ownership of the Assets and
activities associated with the conduct of the Business prior to Closing;
(ii) any breach of any of the representations, covenants or warranties
provided in this Agreement, or any misrepresentation in any certificate
or document delivered to Buyer hereunder; or (iii) any claims by third
parties alleging strict liability in tort,
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express or implied warranty or contract seeking compensation for property
damage, bodily injury and or death related to or arising out of, incident
to or associated with the design, manufacture, sale, installation,
operation, use, service and/or maintenance of any product associated with
the Business prior to Closing. Seller agrees to keep, pay and perform
all such liabilities and obligations not expressly assumed hereunder by
Buyer in accordance with their respective terms and conditions and shall
indemnify, defend and hold harmless Buyer in respect thereto and any
costs, expenses (including reasonable attorneys' fees), or other
liabilities incurred by Buyer with respect to such liabilities and
obligations of Seller.
(B) Notwithstanding the foregoing, the liability of Sellers
under this Section 11 shall be limited as follows:
(1) The Sellers' aggregate liability for any and all
claims under this Section 11 shall be limited to a sum equal to
the Purchase Price (which appears in Section 3.1).
(2) With respect to claims by third parties (including
without limitation any federal, state or local governmental
authority charged with enforcing environmental laws, tax
authorities, customers, current and former employees and
competitors) against the Company constituting a breach or breaches
of the Sellers' representations and warranties contained in
Section 5 hereof ("Third Party Claims"), Sellers shall have no
indemnification obligations or liabilities with respect to Third
Party Claims after the seventh anniversary of the date hereof or
after the expiration of the applicable statute of limitations
hereunder or with respect thereto.
11.3 Setoff and Reconciliation of Values:
(A) The exact value as of the Closing Date of Assets purchased
and obligations being assumed by Buyer shall be reconciled and verified
by Buyer subsequent to Closing.
Should the verification determine at any time that:
(1) liabilities undisclosed on Exhibit G, H, or I which
Buyer, in its sole discretion, elects to pay in order to preserve
the business operations and reputation of the Business, including
interest and attorneys' fees, to discharge such undisclosed
liabilities will be set off as described below. This provision
notwithstanding, the parties agree and acknowledge that Buyer is
not assuming and shall not be required to pay any liabilities not
disclosed on Exhibits G, H or I, attached hereto.
(2) any matter described in Section 11.2 above has
arisen, the cost to Buyer of such breach will be set off as
described below.
(3) there is a shortfall in the aggregate value of
Current Assets, including:
i) Accounts or Notes Receivable listed on Exhibit B
which have been uncollectable for ninety (90) days past
their payment date, or, in the case of invoices dated for
extended payment in July, thirty (30) days past their July
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payment date, the amount of such uncollectables exceeding an
aggregate amount equal to the Accounts Receivable Reserve
for Bad Debt on the final IAAC Balance Sheet will, on August
31 after Closing be set off as described below. The Buyer
will cooperate with the Seller on the collection of all
Accounts Receivable. In the event that any Accounts
Receivable, which have been deemed uncollectable at August
31 and set off under the provision herein, are later
collected, then said collected amount shall accrue to the
benefit of Seller.
ii) inventory at closing is less than the amount
listed on Exhibit C, that shortfall exceeding $5,000 will be
set off as described below.
Any amounts to be set off in paragraphs 1 through 3 above will be
applied against any amounts then owed by Buyer to Seller beginning with
amounts owed for payment of principal or interest under the Notes.
Amounts setoff under this provision will be adjustments to the Note
portion of the purchase price as of the Closing Date. Buyer shall notify
Seller in writing of the nature, reason and amount of Buyer's claim for
setoff. Seller shall be entitled to contest any such claimed setoff by
written notice to Buyer within thirty (30) days after the postmark date
of Buyer's notice thereof. If Seller does not so contest, Buyer shall
effect the setoff by reducing payments due under the Notes in the order
of their maturity. If Seller does so contest, and within sixty (60) days
of Buyer's original notice any dispute as to claimed setoff cannot be
settled by the parties without arbitration, the dispute shall be resolved
according to the provisions of Section (B) below.
(B) Disputes which arise under the provisions of this Section
11.3 or under the provisions of any other section of this Agreement shall
be resolved in Seattle, Washington through arbitration in accordance with
rules and procedures of the American Arbitration Association for
commercial transactions of such nature.
(C) Shareholders Guaranty: The parties acknowledge and agree
that Seller may make distribution of its assets to the Shareholders after
consummation of the transactions contemplated by this Agreement. Because
such distributions may leave Seller without significant assets, the
Shareholders hereby jointly and severally guaranty the indemnity
obligations of Seller, but only to the extent of distributions actually
received from Seller. In the event of the existence of an
indemnification liability hereunder, Buyer agrees to look first to the
assets of Seller in accordance with the terms of this Agreement before
looking to the Shareholders in accordance with this Section. To the
extent that Buyer looks to the Shareholders for satisfaction of any
indemnification liability, such liability shall be satisfied as follows:
(i) First, by setoff against any amounts then owed by
Buyer to the Seller or the Shareholders for payment of principal
or interest pursuant to the Notes.
(ii) Second, by surrender of Buyer's common stock held by
the Shareholders at its then current market value pursuant to the
Pledge Agreement attached hereto as Exhibit __.
(iii) Third, by collection of any remaining amount of
indemnification liability from the Shareholders, up to but not
exceeding the amount of any distributions made by Seller to the
Shareholders after the Closing Date.
It is understood by the parties that claims made under this
Section 11 may be, upon recovery by the Buyer, subsequently paid
to third parties or may be retained by the Buyer, depending upon
the nature of the claim. In the event an Indemnification Claim is
determined to be payable to the Buyer and no claim must be
subsequently paid by the Buyer to third parties, and such claim
restores to the Buyer all of the Purchase Price (as defined in
Section 3), then upon payment of such claim to the Buyer, Buyer
agrees to deliver back to the indemnifying party those Assets
which were purchased pursuant to this Agreement and which remain
in the possession of Buyer. Such return of Assets shall be
limited solely to those identifiable Assets (not including cash or
Assets which have been reduced to cash and not including assets
which have been purchased to replace the Purchased Assets) which
remain in the possession of Buyer.
11.4 Indemnification of Buyer: Buyer shall indemnify and hold Seller
harmless against and from any losses, claims, costs, demands, damages, suits or
liabilities, including, without limitation, in each case the costs, expenses and
attorney's fees reasonably incurred by Seller resulting from, arising out of or
based upon: (i) any breach of any of the representations, covenants, warranties
provided in this Agreement, or any misrepresentation in any certificate or
document delivered to Seller hereunder; or (ii) Buyer's operation of the
Business subsequent to Closing.
11.5 Indemnification Claims - Interest: Interest on any claim for
indemnification pursuant to this Section 11 shall accrue at a rate equal to the
reference rate as publicly announced from time to time by Norwest Bank National
Association, Minneapolis, Minnesota, from the date the claim arose until the
claim is satisfied by payment.
11.6 Legal Proceedings: In the event Buyer or Seller become involved
in any legal, governmental or administrative proceeding which may result in
damage to such party, or if any such proceeding is threatened or asserted which
will damage the business or reputation of the Company, such party shall promptly
notify the indemnifying party in writing and in full detail of the filing, or
the threat or assertion of such filing, and of the nature of any such
proceeding. If the Indemnifying Party does not elect to assume control or
otherwise participate in the defense of any third party claim, it shall be
bound by the results obtained by the Indemnified Party with respect to such
claim.
11.7 Bulk Sales Compliance: Seller has agreed to indemnify and hold
Buyer harmless from all liabilities arising from its operation of business that
have not been assumed by Purchaser as set forth above. In reliance upon said
indemnification, Buyer waives and releases Seller from its obligation to execute
and deliver an Affidavit listing creditors as required by Washington's Bulk
Transfer Law.
12. Remedies.
A. Seller's Remedies: If the transaction contemplated by this
Agreement is not consummated because of a default by Buyer of its
obligations hereunder and provided Seller is not in default, Seller shall
be entitled (but not required), to seek any other remedies which may be
available, including money damages. In the event of a default by Buyer
and the filing of a lawsuit
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which results in a final judgment (not subject to further appeal) in
favor of Seller for damages or other remedy, Seller shall be entitled to
reimbursement by Buyer of the reasonable legal fees and expenses incurred
by Seller.
B. Buyer's Remedies: The parties recognize that if Seller
refuses to perform under the provisions of this Agreement, monetary
damages alone will not be adequate. Buyer shall therefore be entitled,
to seek any other remedies which may be available, including money
damages. In the event of any action to enforce this Agreement, Seller
shall waive the defense that there is an adequate remedy at law. In the
event of a default by Seller and the filing of a lawsuit which results in
a final judgment (not subject to further appeal) in favor of Buyer for
damages or other remedy, Buyer shall be entitled to reimbursement by
Seller of the reasonable legal fees and expenses incurred by Buyer.
12.1 Buyer shall not acquire any title to or right in the assets until
Closing, and accordingly, all risk of loss with respect to the assets shall be
borne by Seller.
12.2 At Closing, the assets shall be in substantially the same
condition as of the date of this Agreement except for normal transactions of the
business, and ordinary wear thereof, provided, however, that if at Closing the
assets shall have suffered loss or damage to an extent which substantially
affects the value of such property, Buyer shall have the right, at its election,
to either: (i) complete the acquisition with a reduction in the purchase price
equal to the loss or damage, said reduction to be from the cash amount to be
paid by Buyer to Seller as set forth in Section 3.1 (D); or (ii) to terminate
this Agreement, in accordance with Section 13 hereof.
13. Termination
13.1 Mutual Termination: This Agreement may be terminated by mutual
agreement of Buyer and Seller at any time.
13.2 Default: This Agreement may be terminated by either Buyer or
Sellers, if the terminating party is not then in material default, upon written
notice to the other party, upon the occurrence of the following: prior to the
Closing Date, Sellers or Buyer shall be come aware of any material breach of any
representation, warranty, obligation or agreement by the other party (the
"Breaching party"), they shall give prompt written notice to the Breaching Party
of the nature of such breach. The Breaching Party shall use its best efforts to
cure the breach prior to the Closing Date. If the Breaching Party has not cured
the breach on or before the Closing Date, the parties shall negotiate in good
faith a mutually acceptable compromise taking into account the economic effect
of the breach on the Buyer or Sellers, as the case may be, and shall consummate
the transactions contemplated hereby. If the parties are unable to reach
agreement and consummate the transactions contemplated by this Agreement, the
Closing shall be postponed and the Breaching Party shall use its best efforts to
cure the breach as soon as practicable. The exact date and time of the
postponed Closing Date shall be agreed upon by Buyer and Sellers, provided that
in no event shall the postponed Closing Date occur after March 31, 1996. If the
Breaching Party has not cured the breach before that date, then if Buyer is the
nondefaulting party, it shall have all rights and remedies provided in this
Agreement and at law or equity, including without limitation, that the Sellers
shall be liable to Buyer for any damages incurred or suffered by Buyer.
26
<PAGE>
14. Miscellaneous
14.1 Binding Effect: This Agreement shall be binding upon and inure to
the benefit of and be enforceable against the parties hereto and their
respective successors and assigns.
14.2 Governing Law: This Agreement shall in respects of substantive
issues be governed by, and enforced and interpreted in accordance with, the laws
of the State of Washington.
14.3 Notices: All notices or other communications provided for herein
shall be in writing and shall be deemed validly given, when delivered personally
or sent by registered or express mail, postage prepaid, and, pending the
designation of another address, addressed as follows:
If to Seller: Howard Lowen
4560 NE 89th
Seattle, WA 98115
(B) 206-622-2855
(H) 206-524-5660
Fax: 206-622-4285 (advance notice
Please)
With a copy to: Attn: Alvin Martin
Bader Martin Ross
1000 2nd Ave. 34th floor
Seattle, WA 98104
(B) 206-667-0308 (direct)
(H) 206-824-1528
Fax: 206-682-1874
Gary English
Casey and Pruzan
18th floor, Pacific Bldg.
720 3rd Ave.
Seattle, WA 98104
(B) 206-623-3577
(H) 206-641-7909
Fax: 206-623-3649
If to Buyer: E. D. Willette
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
With a copy to: Rider, Bennett, Egan & Arundel
Attn: Barry Clegg
2000 Lincoln Center
333 South Seventh Street
Minneapolis, Minnesota 55402
27
<PAGE>
M. Charles Reinhart
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
14.4 Entire Agreement and Counterparts: This Agreement, the exhibits
attached hereto, and schedules delivered pursuant to the provisions hereof, set
forth the entire agreement between Seller and Buyer relating to the transaction
contemplated herein, superseding any prior oral or written agreement or
understanding between them. This Agreement shall be amended or modified only by
written instrument signed by both parties.
14.5 Assignment: Seller hereby agrees that Buyer may assign its
rights, and delegate its responsibilities, under this Agreement, including to a
wholly-owned subsidiary corporation, in which case the Buyer shall remain fully
obligated to on all responsibilities and duties hereunder in all events and
shall use its best efforts cause such subsidiary corporation to complete the
purchase of the assets in the manner contemplated by this Agreement. The
provisions of this Section notwithstanding, this Agreement is not intended to
and shall not create any rights or third parties not signatories to this
Agreement with respect to Buyer or its assets.
14.6 Expenses, Taxes: Each party shall pay for its own legal,
accounting and other similar expenses incurred in connection with the
transactions contemplated by this Agreement; provided, however, that in the
event a full certified Audited Financial Statement is required by the Buyer, the
audit fee for the audit agreed to under this Agreement shall be split equally
between Seller and Buyer.
14.7 Publicity: All notices to third parties and other publicity
relating to the matters contemplated by this Agreement shall be jointly planned
and coordinated between Seller and Buyer, and neither party shall unilaterally
release such notices or publicity without the prior written approval of the
other party.
14.8 Negotiation: Unless this Agreement is terminated, Seller will not
enter into negotiations with any other party for the sale of the Company's
assets or the Shares.
14.9 Exhibits: The Exhibits and Schedules shall be deemed to be
incorporated by reference in this Agreement as if fully set forth herein.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of
the date set forth in the first paragraph.
INDIAN ARTS AND CRAFTS, INC. VAUGHN COMMUNICATIONS, INC.
By _______________________ By___________________________
Howard Lowen E. David Willette
Its ______________________ Chairman
Title
28
<PAGE>
SHAREHOLDERS
- ------------------------------
Howard Lowen
- ------------------------------
Jeanette Lowen
- ------------------------------
Janice Lowen
- ------------------------------
Howard Lowen
Trustee for David Lowen
- ------------------------------
Howard Lowen
Trustee for Daniel Lowen
29
<PAGE>
EXHIBIT 10Q
SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT ("Amendment") is made as of February 1, 1996, by and between
American Bank N.A. ("Bank"), Vaughn Communications, Inc. a Minnesota corporation
("Borrower"), and certain subsidiaries of Borrower, Centercom Inc., a Wisconsin
corporation and Centercom-South Inc., a Florida corporation (collectively the
"Subsidiaries").
WHEREAS, the parties desire to revise certain terms and provisions
contained in that certain Amended and Restated Loan Agreement dated March 31,
1995, as amended by that certain First Amendment to Amended and Restated Loan
Agreement dated August 10, 1995, by and between the Borrower and the Bank
(collectively the "Agreement"), as provided for herein.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
A. Capitalized terms used herein and not defined shall have the
definitions ascribed to them as in the Agreement.
B. The Agreement is amended as follows:
1. Section 1(a) is hereby deleted in its entirety and the following
shall be inserted in place thereof:
"a. COMMITTED REVOLVING CREDIT. Subject to the terms and
conditions of this Agreement, up to the sum of Seventeen
Million Dollars ($17,000,000.00) (the "Committed Revolving
Credit") on a revolving basis, repayable in accordance with
the terms of Borrower's promissory note (the "Revolving
Note"), with interest on all advances made thereunder at a
rate equal to the Bank's Prime Rate (as hereinafter defined)
which interest rate shall change when and if such Prime Rate
changes. All borrowing hereunder shall be used by Borrower
for working capital purposes only and for no other purpose."
2. Section 1(a)(ii)A is hereby deleted in its entirety and the
following shall be inserted in place thereof:
<PAGE>
"A. Seventeen Million Dollars ($17,000,000.00) less
the sum of the outstanding principal amounts on
any Term Loans (as defined in Section 1(g) hereof)
and any letters of credit provided by the Bank for
the benefit of the Borrower ("Letter(s) of
Credit"); or"
3. Section 1(a)(iv) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"iv) The entire principal balance of the Committed Revolving
Credit, and all accrued interest thereon shall be payable
in full by Borrower on May 31, 1997, as specified in the
Revolving Note. Borrower agrees to pay the Bank a fee at
the per annum rate of one-quarter of one percent (0.25%)
of the average daily unused amount of the Committed
Revolving Credit for each quarter for which such fee is to
be determined ("Commitment Fee"). Term Notes and Letters
of Credit provided by the Bank for Borrower's benefit
shall be included as reducing the unused portion of the
Committed Revolving Credit for purposes of determining the
Commitment Fee. The Bank shall automatically charge
Borrower's account number 109-6312 for such Commitment
Fee."
4. Section 1(a)(v) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"v) The Committed Revolving Credit may include up to
$1,000,000.00 of Letters of Credit issued by the Bank for
the benefit of the Borrower in support of obligations of
the Borrower incurred in the ordinary course of its
business. All Letters of Credit shall be in a form
acceptable to the Bank, shall expire on or before April
31, 1998 and in connection with the issuance thereof, the
Borrower will simultaneously pay the Bank the following
fees: (i) for any financial standby Letter of Credit, a
fee equal to one and one-half of one percent (1.50%) per
annum on the original face amount of each Letter of
Credit; (ii) for any commercial Letter of Credit, a fee
equal to one-half of one percent (0.50%) per annum of the
original face amount of each Letter of Credit; and (iii)
any and all Bank's processing fees related to the issuance
of such Letter of Credit. The Borrower shall also pay the
Bank, on demand, all issuance, amendment, drawing and
other fees regularly charged by the Bank to its Letter of
Credit customers and all out of pocket
2
<PAGE>
expenses incurred by the Bank in connection with the
issuance, amendment, administration or payment of any
Letter of Credit."
5. Section 1(b)(iii) is hereby deleted in its entirety and the
following shall be inserted in placed thereof:
"iii) No new Equipment Term Loans will be made by the Bank to
Borrower after May 31, 1997. No Equipment Term Loans will be
made in an amount less than Two Hundred and Fifty Thousand
Dollars ($250,000.00). No new Equipment Term Loans will be made
if an Event of Default exists hereunder."
6. Section 1(b)(vi) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"vi) For purposes of this agreement, the Term Loans from Bank
to Borrower existing as of the date hereof shall be
considered Equipment Term Loans and include that certain
Amended and Restated Term Note in the amount of
$500,000.00 dated March 31, 1995 and that certain Amended
and Restated Term Note in the amount of $371,358.00, dated
March 31, 1995."
7. Section 1(e) is hereby deleted in its entirety and the following
shall be inserted in place thereof:
"PVS TERM LOAN. The Bank agrees to make a term loan to the
Borrower to enable the Borrower to replace existing term debt
financing of PVS, Inc., a Division of the Borrower ("PVS Term
Loan").
i) The amount of the PVS Term Loan to be made by the Bank to
the Borrower will be Four Hundred Thousand Dollars
($400,000.00), and shall be evidenced by a term note in a
form acceptable to and prepared by the Bank ("PVS Term
Note").
ii) Interest on the PVS Term Note shall be payable monthly on
the last day of each month commencing on _____ 1996 and
continuing through ______ 1999 at the floating rate of
one-quarter of one percent (0.25%) per annum in excess of
the Bank's Prime Rate.
3
<PAGE>
iii) Installments of principal on the PVS Term Note in the
amount of $11,111.11 shall be paid on the last day of each
month commencing on _________, 1996 and continuing through
_________, 1999.
iv) Accrued interest and principal on the PVS Term Note shall
be paid by an automatic charge to Borrower's account no.
109-6312.
v) The PVS Term Loan shall be secured by all the other
collateral provided by Borrower and Subsidiaries to Bank
pursuant to this Agreement, the Security Agreement, and
any other related loan documents.
vi) A default rate equal to one percent (1.0%) in excess of
the effective rate being charged by the Bank on the
outstanding principal of the PVS Term Loan for any period
during which an Event of Default exists hereunder. The
default rate shall remain in effect until the Bank
determines in its sole discretion that the Event of
Default no longer exists."
8. A new section 1(f) is hereby inserted and shall read as follows:
"IAAC TERM LOAN. The Bank agrees to make a term loan to the
Borrower to enable the Borrower to provide partial financing for
the acquisition of Indian Arts and Crafts, Inc. ("IAAC Term
Loan").
i) the amount of the IAAC Term Loan to be made by the Bank to
the Borrower will be Five Hundred Thousand Dollars
($500,000.00), and shall be evidenced by a term note in a
form acceptable to and prepared by the Bank ("IAAC Term
Note").
ii) Interest on the IAAC Term Note shall be payable monthly on
the last day of each month commencing on ________ 1996,
and continuing through ________, 2001 at the floating rate
of one-quarter of one percent (0.25%) per annum in excess
of the Bank's Prime Rate.
iii) Installments of principal on the IAAC Term Note in the
amount of $8,333.33 shall be paid on the last day of each
month commencing on ________, 1996 and continuing through
_________, 2001.
4
<PAGE>
iv) Accrued interest and principal on the IAAC Term Note shall
be paid by an automatic charge to Borrower's account no.
109-6312.
v) The IAAC Term Loan shall be secured by all the other
collateral provided by Borrower and Subsidiaries to Bank
pursuant to this Agreement, the Security Agreement, and
any other related loan documents.
vi) A default rate equal to one percent (1.0%) in excess of
the effective rate being charged by the Bank on the
outstanding principal of the IAAC Term Loan for any period
during which an Event of Default exists hereunder. The
default rate shall remain in effect until the Bank
determines in its sole discretion that the Event of
Default no longer exists."
9. A new section 1(g) is hereby inserted and shall read as follows:
"TERM LOANS AND TERM NOTES. For purposes of this
Agreement the Equipment Term Loans, the Acquisition Term Loan,
the Equipment Refinance Term Loan, the PVS Term Loan and the IAAC
Term Loan are herein collectively referred to as the "Term
Loans"; and, the Equipment Term Notes, the Acquisition Term Note,
the Equipment Refinance Term Note, the PVS Term Note and the IAAC
Term Note are herein collectively referred to as the "Term
Notes". Additionally, for purposes of this Agreement, the
Revolving Note and the Term Notes are herein collectively
referred to as the "Notes" while the Committed Revolving Credit
and the Term Loans are herein collectively referred to as the
"Loans"."
10. Section 7(e)(i) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"i) Tangible Net Worth of at least $6,000,000.00 at all times
through January 31, 1996, and of at least $7,000,000.00 at
all times thereafter. "Tangible Net Worth" shall mean:
(i) book net worth (assets less liabilities); (ii) plus
subordinated debt as identified by the Bank to be included
in this calculation; (iii) less intangible assets such as
goodwill and amounts attributable to non-competition
agreements, as identified by the Bank to be included in
this calculation; (iv) less any and all receivables from
affiliates, whether personal or business."
5
<PAGE>
11. Section 7(e)(ii) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"ii) Debt Service Coverage shall not be less than $2,700,000.00
for the Borrower's fiscal year ending January 31, 1996,
and shall not be less than $3,100,000.00 for the
Borrower's fiscal year ending January 31, 1997. "Debt
Service Coverage" shall mean net income plus depreciation
and amortization, less 33% of all capital expenditures
made by the Borrower and Subsidiaries during the fiscal
year, less any and all dividends paid by the Borrower and
Subsidiaries during the fiscal year."
12. Section 7(e)(iv) is hereby deleted in its entirety and the
following shall be inserted in place thereof:
"iv) A net after tax profit of not less than $1,900,000.00 for
the Borrower's fiscal year ending January 31, 1996, and
not less than $2,400,000.00 for the Borrower's fiscal year
ending January 31, 1997."
13. Section 7(e)(v) is hereby deleted in its entirety and the
following shall be inserted in placed thereof:
"v) A net after tax profit of at least $475,000.00 for each of
Borrower's fiscal quarters during the Borrower's fiscal
year ending January 31, 1996, except for Borrower's fiscal
quarter ending April 30, 1995, for which the net after tax
profit shall be at least $300,000.00, and a net after tax
profit of at least $600,000.00 for each of Borrower's
fiscal quarters during the fiscal year ending January 31,
1997, except for Borrower's fiscal quarter ending April
30, 1996, for which the net after tax profit shall be at
least $375,000.00."
14. Section 8(g) is hereby deleted in its entirety and the following
shall be inserted in place thereof:
"g. Make any capital expenditures (by purchase or
lease) for fixed assets, real property or plant
and equipment in an aggregate (adding together
Borrower's and Subsidiaries' capital expenditures)
amount exceeding Three Million Five Hundred
Thousand Dollars ($3,500,000.00) during any single
fiscal year of the Borrower."
6
<PAGE>
15. Exhibits B and C are hereby deleted in their entirety and the
Exhibits B and C attached hereto are inserted in place thereof.
C. The parties hereby acknowledge that the Agreement is in full force and
effect and, except as set forth in the Amendment, has not been amended or
modified in any respect.
D. In the event of any conflict between the provisions of the Agreement
and this Amendment, the terms of this Amendment shall be controlling.
IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement
to be executed and delivered on the date and year first above written.
VAUGHN COMMUNICATIONS, INC. CENTERCOM INC.
BY BY
------------------------------ ---------------------------------
ITS ITS
------------------------------ ---------------------------------
AMERICAN BANK N.A. CENTERCOM-SOUTH INC.
BY BY
------------------------------ ---------------------------------
ITS ITS
------------------------------ ---------------------------------
<PAGE>
VAUGHN COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended January 31
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY:
Average Shares Outstanding 3,078,548 2,797,798 2,583,418
Net effect of dilutive stock options 395,168 424,081 485,119
based on the treasury stock method ------- ------- -------
using average market price
TOTAL 3,473,716 3,221,879 3,068,537
--------- --------- ---------
--------- --------- ---------
Income from continuing operations $2,144,759 $1,551,307 $1,124,375
Income from discontinued
operations (net of tax benefit) - 492,351 73,289
---------- ------- ------
Net Income $2,144,759 $2,043,658 $1,197,664
---------- ---------- ----------
---------- ---------- ----------
PER SHARE AMOUNTS:
Income from continuing operations $.62 $.48 $.37
Income from discontinued operations - .15 .02
---- ---- ----
$.62 $.63 $.39
---- ---- ----
---- ---- ----
FULLY DILUTED:
Average shares outstanding 3,078,548 2,797,798 2,583,418
Net effect of dilutive stock options
based on the treasury stock method
using the quarter-end market price
if higher than average market price 433,648 455,481 599,737
------- ------- -------
TOTAL 3,512,196 3,253,279 3,183,155
--------- --------- ---------
--------- --------- ---------
Income from continuing operations $2,144,759 $1,551,307 $1,124,375
Income from discontinued
operations (net of tax benefit) - 492,351 73,289
------- ------- ------
Net Income $2,144,759 $2,043,658 $1,197,664
---------- ---------- ----------
---------- ---------- ----------
PER SHARE AMOUNTS:
Income from continuing operations $.61 $.48 $.36
Income from discontinued operations - .15 .02
---- ---- ----
$.61 $.63 $.38
---- ---- ----
---- ---- ----
</TABLE>
EXHIBIT 11
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT TO SHAREHOLDERS
THE COMPANY
Vaughn Communications, Inc. is the second largest provider in the United
States of high-volume videotape duplication services to corporations,
publishers, and educational companies. The Company operates videotape
duplication centers in areas selected because of their proximity to large
corporate bases. Facilities are now located in Minneapolis, Chicago,
Atlanta, Dallas, Milwaukee, Tampa, Phoenix, Denver, Portland, Raleigh and
Houston. Sales offices are located in New York, Los Angeles, Seattle, Ft.
Lauderdale, Orlando and St. Louis.
In addition to video services, the Company receives thirteen percent of its
total revenue from the VAUGHN PRODUCTS DIVISION which manufactures and
sells gift products and collectibles to retailers in growing niche markets.
1
<PAGE>
LETTER TO SHAREHOLDERS
To Our Shareholders,
Record sales and earnings bring us to six consecutive years of growth with
a compound growth rate of 23% in sales and 83% in net income from continuing
operations. Results these past two years have established our Company as the
leader in our industries in growth and profit. We will continue to build market
share by acquiring other successful companies in markets we share and by
focusing on delivering value and quality to our customers.
This year we completed several key acquisitions that better position our
Company for competition and future growth in both segments of our business. In
April, 1995, our Company acquired a videotape duplicator (Centercom, Inc.) with
facilities in Milwaukee, Chicago and Tampa. In January, 1996, we acquired a
videotape duplicator (Advanced Audio/Video Productions, Inc.) with operations in
Denver. Also in January, 1996, we acquired a gift products company (Indian Arts
and Crafts, Inc.) based in Seattle. These acquisitions are the result of the
Company's continuing strategy to capture market share and to serve customers
through strategically placed regional offices.
For the fiscal year ended January 31, 1996, sales increased 33% to
$55,500,000 from $41,600,000 in fiscal 1995. Operating income (before interest
and taxes) increased approximately 50% to $4,900,000 from $3,200,000.
COMMUNICATIONS DIVISION: Sales increased by 40% to $48,300,000 and operating
income increased 53% to $4,690,000, reflecting the Company's efforts to grow
sales while improving gross profit and controlling operating expenses. This
year we added MPEG-2 to our video compression services, which we believe is
necessary to deliver the high end needs of server-based video distribution
systems and new DVD home video systems scheduled for introduction in 1996.
MPEG-2 will open more markets for Vaughn's growing multimedia capabilities.
PRODUCTS DIVISION: The Products Division revenues of $7,203,000 were
approximately the same as last year, reflecting flat sales for the overall
retail gift business. Sales are expected to grow in fiscal 1997 by 100% as a
result of the January acquisition of Indian Arts and Crafts ("IAAC"). With the
acquisition of IAAC, our Products Division will be consolidated in Seattle
during the third quarter of fiscal 1997. This consolidation will improve our
efficiency and bring a broader range of products to all current customers
nationwide.
GOING FORWARD: We see increasing opportunities to grow revenue and earnings.
We continue to train and develop our people, guided by the principles of Deming
Total Quality Management. In September, 1995, our Directors elected Donald
Drapeau President, Chief Operating Officer and Director, expanding our
organization to manage significant future growth. Our team of experienced and
trained leaders at all levels of the Company is looking forward to these growth
opportunities.
E. David Willette Donald J. Drapeau
Chairman and Chief Executive Officer President and Chief Operating Officer
March 31, 1996
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Vaughn Communications, Inc. (the "Company") operates in two business
segments--the Communications Division serves the corporate videotape duplication
market, and the Products Division manufactures and sells gift products.
COMPARISON OF FISCAL 1996 AND FISCAL 1995 OPERATING RESULTS
In fiscal 1996 (year ended January 31, 1996), the Company completed several key
acquisitions that better position the Company for competition and future growth
in both segments of its business. In April, 1995, the Company acquired
Centercom, Inc. ("Centercom"), a videotape duplicator with facilities in
Milwaukee, Chicago and Tampa. The acquisition allowed the Company to
consolidate its existing facilities in Milwaukee and Tampa and add a new
facility in the Chicago market. In January, 1996, Advanced Audio/Visual
Productions, Inc., a videotape duplicator with operations in Denver, was
acquired. The acquisition increased the Company's presence in Denver from a
sales office to a full service duplication facility. Also acquired in January
was Indian Arts and Crafts, Inc., a gift products company based in Seattle.
Indian Arts and Crafts' products include a line of custom-designed soft goods
including T-shirts and sweatshirts sold primarily in Alaska and the Pacific
Northwest. Management believes that these products and territories are
complimentary to the Company's existing gift business. Management further
believes that consolidation of the operations of the two businesses in Seattle
will result in greater operation efficiencies. These acquisitions were treated
as purchases and included in the results of operations as of their respective
acquisition dates.
The Company's net sales increased 33% over fiscal 1995, from approximately
$41,603,000 to approximately $55,513,000, while the gross profit margin
increased to 31.8% in fiscal 1996 from 31.5% in fiscal 1995. Selling, general
and administrative expenses for fiscal 1996 were up 30% over the previous year
and represented 23% of net sales, down .6 percentage points from last year.
Operating profit increased 50% to approximately $4,900,000 over fiscal 1995,
while interest expense increased to approximately $1,300,000 in fiscal 1996, up
approximately $617,000 from fiscal 1995, due primarily to increased debt
associated with the acquisitions. The Company's effective income tax rate for
fiscal 1996 was 41.2%, an increase of 2.9 percentage points from the comparable
rate in fiscal 1995. This increase was due to the nondeductibility of goodwill
amortization pertaining to the acquisition of Centercom. Net income from
continuing operations increased 38% from $1,551,000 in fiscal 1995 to $2,145,000
in fiscal 1996.
The net contribution each division made to these results is discussed below.
3
<PAGE>
COMMUNICATIONS DIVISION:
The Communications Division sales were up 40% from $34,400,000 in fiscal 1995 to
$48,300,000 in fiscal 1996. The acquisition of Centercom, and a 16% increase in
the sales from pre-existing facilities, contributed to this sales growth. The
Company believes that factors which contributed to this growth--an overall
increase in the videotape duplication market, improved selling efforts, and
increased production capacity--will continue in the next year and that the
growth in sales will continue, although there can be no assurance that such
growth will be experienced at or near the levels experienced in fiscal 1996.
The gross profit margin increased to 32.5% in fiscal 1996 from 31.8% in the
prior year, primarily due to a decrease in the cost of materials used in the
duplication process. The decrease was due in part to the Company's importing of
materials directly from overseas sources. Although the price of videotape
duplication continues to decline, the Company expects to maintain its profit
margins by improving efficiencies, leveraging fixed costs with increased volume,
and continuing to utilize low cost providers of raw materials.
Selling, general and administrative expenses in fiscal 1996 were up 38% over
fiscal 1995, and represented 23% of net sales in fiscal 1996, which is
approximately the same as the prior year. The increase in selling, general and
administrative expenses reflects additional expenses associated with the
acquisitions previously discussed, including goodwill amortization and
noncompete payments. Excluding these expenses, selling, general and
administrative expense represented 22.3% of net sales.
Operating profit of approximately $4,693,000 increased 53% from the prior year
and reflects the Company's efforts to grow sales while improving gross profit
and controlling operating expenses.
Interest expense increased to approximately $1,185,000 for fiscal 1996, up
approximately $679,000 from fiscal 1995, due primarily to increased borrowings
resulting from the acquisitions. Pre-tax profit for the Communications Division
was $3,565,000 in fiscal 1996, a 40% increase from the prior year.
Excluding the acquisitions, the Company spent approximately $2,200,000 on
equipment and facilities to expand its production capacity. The investment was
funded by long-term financing and internally generated funds. The
Communications Division expects to spend approximately $1,600,000 for equipment
in fiscal 1997.
PRODUCTS DIVISION:
The Products Division sales of $7,203,000 were approximately the same as the
previous year. The Company's primary customers are gift shops, and management
believes the flat sales reflect the overall market conditions for retail sales
and not a loss of market share. Excluding the additional sales attributed to
the acquisition, the Company expects modest sales growth in fiscal 1997.
4
<PAGE>
The gross profit margin in fiscal 1996 decreased to 27% from 30% in fiscal 1995
due to increases in raw material costs, consisting primarily of increases in the
price of leather which is the main component of the Company's manufactured
product line. By the end of the year prices for leather returned to prior year
levels, and management expects the gross profit margin to improve in fiscal
1997.
Selling, general and administrative expenses for fiscal 1996 were down 13% from
the previous year and represented 24.5% of sales in fiscal 1996 versus 28% last
year. The decrease in expenses reflects the Company's continued emphasis on
cost containment and carefully managed marketing spending.
As a result of the decrease in selling, general and administrative expenses in
fiscal 1996, operating profit of $172,000 remained approximately the same as the
previous year. Non-operating expenses, consisting primarily of interest
expense, were approximately $92,000 in fiscal 1996, compared to approximately
$101,000 in fiscal 1995. Pretax profit increased 11% to $80,000 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The financial condition of the Company improved during fiscal 1996. Operations
provided a strong, positive cash flow which resulted in net cash provided from
operations of $3,794,000 principally due to higher net earnings and improved
working capital management. The improved cash flow, combined with maintaining
credit facilities, provides adequate liquidity to meet the Company's operational
needs for at least the next twelve months. The Company maintained a $13,000,000
credit facility with American Bank of St. Paul, Minnesota. At January 31, 1996,
the Company had approximately $4,800,000 of the facility available. Subsequent
to year end, the Company entered into an amended credit facility with the bank
which increased the amount of the line of credit to $17,000,000. This new
agreement was entered into in anticipation of increased working capital needs
associated with the acquisition of Indian Arts and Crafts.
Net cash used in investing activities for fiscal 1996 was primarily related to
acquisition and capital spending. Capital expenditures increased from
$2,186,000 in fiscal 1995 to $2,402,000 in fiscal 1996. Over the past several
years, investment has been focused on expanding production capacity to take
advantage of the growth in the videotape duplication market. The expansion has
included the acquisition of competitors and investment in new capital equipment.
Management plans to continue this expansion strategy and anticipates that fiscal
1997 capital expenditures will be approximately $2,000,000 while continuing to
look for acquisition candidates. No definitive agreements have been reached
regarding any such acquisitions.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF FISCAL 1995 AND 1994 OPERATING RESULTS
During fiscal year ended January 31, 1995 Vaughn Communications, Inc. (the
"Company") continued the implementation of its strategy which includes continued
growth of its videotape duplication business, a commitment to a quality program
to improve efficiencies in recognition of the realities of the business
environment of the 1990's and beyond, and the continued assessment of the
Company's operating units to assure they conform to the Company's long-term
focus. In March 1994 the Company sold the display products business which no
longer met the Company's long-term strategic direction. The sale of this
business unit has been treated as a discontinued operation, and prior years'
financial information has been restated to reflect this treatment. As a result,
Vaughn's fiscal 1995 earnings totaled $2,044,000 or $.63 per common share. This
was 191% greater than 1994 earnings of $1,198,000 or $.38 per share. On a
continuing operations basis, fiscal 1995 earnings were $1,551,000 or 38% greater
than the previous year.
Revenues from continuing operations increased from $32,275,000 in fiscal 1994 to
$41,603,000 in fiscal 1995, a 29% increase, while gross margins remained at
31.5%. Operating expenses as a percent of sales decreased from 24.5% in fiscal
1994 to 23.6% in fiscal 1995. Other expenses (primarily interest) increased by
$230,000 from the previous year and are attributable to the increases in the
prime lending rate and increased borrowings.
COMMUNICATIONS DIVISION:
The Communications Division's net revenues of $34,402,000 in fiscal 1995 were a
30% increase from the previous year's $26,406,000. The Company believes that
important factors affecting revenue growth have been an overall increase in the
videotape duplication market, the Company's increased production capacity, and
improved selling efforts. For these reasons the Company expects the revenue
growth to continue in fiscal 1996.
Gross margins as a percentage of sales decreased slightly from 32.9% in fiscal
1994 to 31.8% in fiscal 1995. Gross profit increased 26% on the higher volume
to $10,937,000 for fiscal 1995, up from $8,685,000 in fiscal 1994. The decrease
in percentage margins is due to declining video unit prices, partially offset by
reduced material costs.
Operating expenses as a percentage of net sales declined in fiscal 1995 to 23%
from 24.5% in fiscal 1994. However, operating expenses increased 23% to
$7,955,000 in fiscal 1995 as compared to $6,478,000 the previous year. This
increase was the result of (i) increased sales, customer service and
administrative labor to support higher sales volume ($600,000); (ii) increased
rent ($230,000) associated with expanded operations; and increases in other
categories associated with the record sales volume.
6
<PAGE>
Income from operations increased 35% to $2,982,000 in fiscal 1995. The factors
which contributed to the improvement included the increase in sales volume, and
the continued improvements in the leveraging of fixed operating expenses.
Offsetting these factors was the decrease in the gross margin percentage.
The Division had non-operating expenses of $506,000 in fiscal 1995 compared to
$302,000 in the previous year due primarily to additional debt to fund the
growth and increases in the prime lending rate. For fiscal 1995, the
Communications Division had pre-tax income of $2,476,000 compared to $1,905,000
last year.
The additional sales volume required additional investment in production
equipment. For the year, the Communications Division invested approximately
$2,000,000 in new equipment and facilities which was funded by long-term
financing and internally generated funds. The Division plans to spend
$1,800,000 for equipment in fiscal 1996.
PRODUCTS DIVISION:
Sales from continuing operations in the Products Division increased 23% from
$5,869,000 in fiscal 1994 to $7,201,000 in fiscal 1995. The increase was
attributable to an increase in the product offerings and improved sales efforts.
Gross margins as a percentage of sales improved from 25.8% in the prior year to
30% in fiscal 1995. Gross profit increased 40% on the higher volume to
$2,167,000, up from $1,516,000 in fiscal 1994. The improvement was due
primarily to improved operating efficiencies which reduced labor costs, and a
shift in product mix to higher margin products.
Operating expenses for fiscal 1995 increased 48% to $2,021,000 from $1,367,000
in 1994. As a percentage of net sales, operating expenses increased from 23% in
fiscal 1994 to 28% in fiscal 1995. The major factor in the $654,000 increase
was approximately $435,000 of operating expenses such as rent, insurance,
executive salaries and data processing costs which were allocated on an ongoing
basis to the remaining operations of the Products Division after the sale of the
display business (see following discussion). Excluding these costs, operating
expenses increased 16%, and was attributable to the higher costs needed to
support the increased sales volume.
Income from operations decreased slightly to $136,000 in 1995 from $148,000 in
1994. Excluding the reallocated operating costs, operating income would have
increased 292% to $432,000. This performance was due to the increased volume
and the improvement in gross margins.
Non-operating expenses, consisting primarily of interest expense were $64,000 in
fiscal 1995, compared to $8,000 in fiscal 1994. The increase was due to higher
interest rates, increased borrowings, and the inclusion of an $11,000 gain on
the sale of equipment in fiscal 1994. Pre-tax income decreased from $140,000 in
fiscal 1994 to $72,000 in fiscal 1995.
7
<PAGE>
DISCONTINUED OPERATIONS:
The discontinued operations are the result of the Company's sale of the assets
and operations of the operating unit involved in the manufacture and sale of
flag, float and display products. The sale was completed March 1, 1994. The
net gain on the sale of the assets was approximately $554,000. The tax
liability on this gain is expected to be fully offset by capital loss
carryforwards the Company has available.
8
<PAGE>
SELECTED FINANCIAL DATA FROM CONTINUING OPERATIONS (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended January 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . $55,513 $41,603 $32,275 $24,589 $19,978
Cost of goods sold . . . . 37,887 28,528 22,074 16,730 13,252
------- ------- ------- ------- -------
Gross profit . . . . . . . 17,626 13,075 10,201 7,859 6,726
Operating expenses . . . . 12,761 9,828 7,905 6,351 5,489
------- ------- ------- ------- -------
Operating income . . . . . 4,865 3,247 2,296 1,508 1,237
Interest expense . . . . . (1,286) (669) (529) (410) (562)
Other income (expense) . . 66 (67) 24 69 98
------- ------- ------- ------- -------
Income from continuing
operations before
income taxes . . . . . . 3,645 2,511 1,791 1,167 773
Income taxes . . . . . . . 1,500 960 667 366 297
------- ------- ------- ------- -------
Income from continuing
operations . . . . . . . 2,145 1,551 1,124 801 476
Income from
discontinued operations . - 493 74 175 279
------- ------- ------- ------- -------
Net income . . . . . . . . $ 2,145 $ 2,044 $ 1,198 $ 976 $ 755
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per common share:
Continuing operations. . $ .61 $ .48 $ .36 $ .27 $ .16
Discontinued operations. - .15 .02 .06 .10
------- ------- ------- ------- -------
$ .61 $ .63 $ .38 $ .33 $ .26
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average common
and common equivalent
shares outstanding . . . 3,512 3,253 3,183 2,970 2,898
January 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital. . . . . . $ 7,648 $ 4,008 $ 2,455 $ 2,949 $ 2,721
Total assets . . . . . . . 31,475 21,256 18,968 12,474 10,234
Long-term obligations
(excluding current
portion) . . . . . . . . 7,527 3,283 3,580 3,103 2,865
Total liabilities. . . . . 18,145 12,836 12,793 7,583 6,362
Total stockholders' equity 13,330 8,420 6,175 4,891 3,872
</TABLE>
9
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 31
1996 1995
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, less allowance of $556,000
and $500,000, respectively $ 9,411,016 $ 7,287,924
Other receivables 182,325 123,557
Inventories 7,693,007 5,762,279
Deferred income taxes 113,191 229,523
Prepaid expenses and other current assets 741,458 120,265
Income taxes receivable 98,799 16,073
-----------------------------
Total current assets 18,239,796 13,539,621
Property, plant and equipment:
Land 48,424 48,424
Buildings and improvements 2,452,467 2,226,648
Machinery and equipment 18,018,564 13,842,391
-----------------------------
20,519,455 16,117,463
Less accumulated depreciation (12,251,552) (9,650,652)
-----------------------------
8,267,903 6,466,811
Intangible assets, net of accumulated amortization
of $312,000 and $121,000, respectively 3,827,559 98,144
Long-term receivable 691,558 850,466
Other 447,719 301,329
-----------------------------
$31,474,535 $21,256,371
-----------------------------
-----------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31
1996 1995
-----------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank under credit facility $ 3,632,907 $ 4,691,699
Accounts payable 2,572,849 2,440,566
Salaries, wages and payroll taxes 512,906 302,123
Income taxes payable 197,026 -
Other 897,842 736,084
Current portion of long-term debt and capital
lease obligations 2,778,552 1,361,486
-----------------------------
Total current liabilities 10,592,082 9,531,958
Long-term debt, net of current maturities 6,233,482 2,173,662
Capital lease obligations, net of current portion 1,293,545 1,109,130
Deferred income taxes 25,326 21,178
SHAREHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares--20,000,000
Issued and outstanding shares--3,297,466 and
2,832,298, respectively 329,747 283,230
Additional paid-in capital 6,294,401 3,576,020
Retained earnings 6,705,952 4,561,193
-----------------------------
Total shareholders' equity 13,330,100 8,420,443
-----------------------------
$31,474,535 $21,256,371
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Net sales $55,512,872 $41,603,183 $32,274,895
Cost of goods sold 37,887,127 28,528,380 22,074,183
-----------------------------------------
Gross profit 17,625,745 13,074,803 10,200,712
Selling, general and administrative
expenses 12,760,921 9,828,058 7,904,539
-----------------------------------------
Income from operations 4,864,824 3,246,745 2,296,173
Other income (expense):
Interest income 36,384 31,646 4,594
Interest expense (1,286,449) (669,027) (529,008)
Other 30,000 (98,056) 19,116
-----------------------------------------
Income from continuing operations
before income taxes 3,644,759 2,511,308 1,790,875
Income taxes 1,500,000 960,000 666,500
-----------------------------------------
Net income from continuing
operations 2,144,759 1,551,308 1,124,375
Income (loss) from discontinued
operations net of taxes - (61,915) 73,289
Gain on sale of display operations - 554,266 -
-----------------------------------------
Net income $ 2,144,759 $ 2,043,659 $ 1,197,664
-----------------------------------------
-----------------------------------------
Net income per common share:
Primary:
Continuing operations $.62 $.48 $.37
Discontinued operations - .15 .02
-----------------------------------------
$.62 $.63 $.39
-----------------------------------------
-----------------------------------------
Fully diluted:
Continuing operations $.61 $.48 $.36
Discontinued operations - .15 .02
-----------------------------------------
$.61 $.63 $.38
-----------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993 2,537,864 $253,786 $3,317,395 $1,319,870 $ 4,891,051
Stock options exercised 232,702 23,270 163,905 - 187,175
Common Stock received as
partial consideration of
stock options exercised (21,158) (2,115) (98,385) - (100,500)
Net income - - - 1,197,664 1,197,664
---------------------------------------------------------------
Balance at January 31, 1994 2,749,408 274,941 3,382,915 2,517,534 6,175,390
Stock options exercised 82,890 8,289 91,042 - 99,331
Tax benefit on stock options
exercised - - 102,063 - 102,063
Net income - - - 2,043,659 2,043,659
---------------------------------------------------------------
Balance at January 31, 1995 2,832,298 283,230 3,576,020 4,561,193 8,420,443
Common Stock issued 325,138 32,514 2,387,486 - 2,420,000
Stock options exercised 148,965 14,897 175,041 - 189,938
Common Stock received as
partial consideration of
stock options exercised (8,935) (894) (62,520) - (63,414)
Tax benefit on stock options
exercised - - 218,374 - 218,374
Net income - - - 2,144,759 2,144,759
---------------------------------------------------------------
Balance at January 31, 1996 3,297,466 $329,747 $6,294,401 $6,705,952 $13,330,100
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $2,144,759 $2,043,659 $1,197,664
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Less gain on sale of display business - (554,266) -
Amortization 190,767 5,478 20,656
Depreciation 2,759,491 2,134,679 1,677,855
Deferred income taxes 168,639 99,479 (183,000)
Changes in operating assets and liabilities:
Receivables (470,498) (1,407,187) (2,001,098)
Inventories 118,170 (1,331,234) (2,209,340)
Income taxes 399,436 (461,777) 130,556
Prepaid expenses and other current assets (98,262) 31,552 (61,547)
Accounts payable (1,160,755) (716,195) 1,223,010
Salaries, wages and payroll taxes (111,753) 71,437 (95,548)
Other liabilities (146,108) (471,043) 338,404
------------------------------------------
Net cash provided by (used in) operating activities 3,793,886 (555,418) 37,612
INVESTING ACTIVITIES
Purchases of businesses, less cash acquired (4,355,010) - -
Additions to property, plant and equipment (2,238,441) (1,983,862) (2,688,469)
Long-term receivables 158,908 75,956 (15,630)
Net carrying amount of property disposals 5,938 119,235 1,935
Cash proceeds from sale of display business - 800,000 -
Other 18,992 (48,921) (154,714)
------------------------------------------
Net cash used in investing activities (6,409,613) (1,037,592) (2,856,878)
FINANCING ACTIVITIES
Increase in long-term debt 5,000,000 135,000 661,000
Proceeds from sale of Common Stock under
option plans 126,524 99,331 86,675
Repayments of long-term debt and capital leases (2,640,702) (1,376,027) (1,071,087)
(Repayments) borrowings under revolver (1,058,792) 1,765,724 2,925,975
Lease financing of equipment 1,188,697 968,982 216,703
------------------------------------------
Net cash provided by financing activities 2,615,727 1,593,010 2,819,266
------------------------------------------
Change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
------------------------------------------
Cash and cash equivalents at end of year $ - $ - $ -
------------------------------------------
------------------------------------------
</TABLE>
14
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Capital lease of equipment $ 163,488 $ 202,528 $ 988,004
</TABLE>
SEE ACCOMPANYING NOTES.
15
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Vaughn Communications, Inc. is one of the largest providers in the United States
of high volume videotape duplication services to corporations, publishers and
educational companies located in the United States. The Company operates
videotape duplication centers throughout the country in areas selected because
of their proximity to large corporate bases. In addition to video services, the
Company receives approximately 13% of its total revenue from the manufacture and
sale of gift products to retailers in niche markets. Additional information on
the Company's operations by segment are included in Note 9 to the financial
statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements included the accounts of the Company and
all of its majority-owned subsidiaries after elimination of all significant
intercompany accounts, transactions and profits.
INVENTORIES
Inventories are valued at the lower of average cost (first-in, first-out method)
or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Assets are
depreciated using the straight-line and declining balance methods. The carrying
value of property, plant and equipment is assessed annually and/or when factors
indicating an impairment are present.
INTANGIBLE ASSETS
The excess of purchase price over the fair value of net assets of businesses
acquired is being amortized over periods of 10 to 40 years using the straight-
line method. The carrying value of intangible assets are assessed annually
and/or when factors indicating impairment are present.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. This statement requires the use of the asset and liability method
of accounting for income taxes. Deferred taxes are recognized for the estimated
taxes ultimately payable or recoverable based on enacted tax law. Changes in
enacted tax rates are reflected in the tax provision as they occur.
16
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of shares of
Common Stock outstanding during each year including the effect of dilutive
outstanding Common Stock equivalents.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, (APB 25) and related interpretations in accounting
for its employee stock options. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the current
year's presentation.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. INVENTORIES
The components of inventories were as follows at January 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Raw material $2,329,560 $1,378,811
Finished goods 5,363,447 4,383,468
-------------------------
$7,693,007 $5,762,279
-------------------------
-------------------------
</TABLE>
17
<PAGE>
3. NOTE PAYABLE TO BANK
Borrowings under the note payable to bank in fiscal 1995 were due on demand with
interest payable monthly at .25% over prime (8.75% at January 31, 1995).
Advances under this note are at the sole discretion of the bank and are limited
to the lesser of $6,500,000 less the sum of the outstanding principal amounts on
any term notes payable to the bank, or the collateral value of receivables and
inventory. All the Company's assets except real estate and fixtures thereon have
been pledged to secure this indebtedness.
Effective March 31, 1995, the Company entered into a $13,000,000 revolving
credit facility, which amends the previous credit facility. Advances under the
credit facility are limited to the lesser of $13,000,000 less the sum of the
outstanding principal amounts on any term notes payable to the bank, or the
collateral value of receivables and inventory. The revolving credit facility
accrues interest at a rate equal to the prime rate. Interest on the credit
facility is payable monthly. All of the Company's assets except real estate and
fixtures have been pledged to secure this indebtedness. This facility expires on
May 31, 1996.
Pursuant to the loan agreement, the Company is required, among other things, to
maintain minimum levels of net worth, pretax profit, ratio of current assets to
current liabilities and ratio of debt to net worth. The Company is required to
receive approval from the bank prior to incurring or assuming any indebtedness
not in the ordinary course of business, paying any dividends or redeeming its
capital stock, entering into any transactions of merger, consolidation or
liquidation, or making loans or investments in another business.
On February 1, 1996, the Company entered into a new $17,000,000 credit facility
with its bank, which amends the previous credit facility. The agreement provides
term financing to fund acquisitions (including the Centercom acquisition) and
equipment purchases, and a revolving credit facility to be used to finance
working capital. The interest rate on the term debt is .25% over the prime rate,
while the interest rate on the revolving debt is at the prime rate.
18
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following at January 31:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Term note payable to bank under credit facility in
20 quarterly installments of $250,000, secured by all
the Company's assets except real estate and fixtures
thereon. Interest is payable monthly at 1/4% over
prime (8.75% on January 31, 1996). $4,250,000 $ -
First mortgage loan on land and building secured by
properties having a net book value of $697,185 at
January 31, 1996. 1,406,759 1,446,298
Term note payable to bank in 36 monthly installments of
$23,611, secured by all the Company's assets except
real estate and fixtures thereon. Interest is payable
at 1/2% over prime (9% on January 31, 1996).
613,889 -
1996 1995
------------------------
Notes payable to Indian Arts and Crafts, Inc. Interest
on both notes is payable annually on the first
anniversary date at 8.5%. Notes are secured by assets
having a net book value of $1,607,800 at January 31, 1996.
Note I is payable in 3 annual installments of $83,333
plus accrued interest beginning January 31, 1997.
Note II is payable in seven annual installments of $ 250,000 $ -
$107,143 plus accrued interest beginning
January 31, 1997.
750,000 -
Term note payable to bank in 48 monthly installments of
$10,125. Interest is payable at 1/2% over prime (9%
at January 31, 1996). Secured by assets having a net
book value of $135,000 at January 31, 1996. 212,625 344,250
Note payable to Central Life Assurance Company
payable in annual installments of $40,000, with the
remaining balance due February 1, 1997. Interest is
payable monthly at 9.5%. 200,000 240,000
19
<PAGE>
4. LONG-TERM DEBT (CONTINUED)
Note payable to Cranberry Novelty Manufacturing Inc.
payable in 10 annual installments of $17,500. Interest
is payable annually at the prime rate (8.5% at
January 31, 1996). 122,500 140,000
Note payable to shareholders of Teknifilm, Inc. payable
in annual installments of $54,077, with the remaining
balance due January 1, 1997. Interest is payable
quarterly at 9.0%. Note is secured by equipment
having a net book value of $275,650 at January 31,
1996. 108,153 162,229
1996 1995
------------------------
Note payable to Advanced Audio/Video Productions,
Inc., payable in 3 annual installments of $33,333
plus accrued interest commencing January 5, 1997.
Interest is payable annually at the prime rate on
the anniversary date (8.5% on January 5, 1996).
Secured by certain assets. $ 100,000 $ -
Note payable to I. Michael Kasser for building
improvements in 24 monthly installments of
$6,106. Interest is payable at 8%. 40,700 113,968
Term note payable to bank in 48 monthly installments
of $8,605. Interest is payable monthly at 1/2% over
prime (9% at January 31, 1996). Secured by assets
having a net book value of $10,300 at January 31,
1996. 8,565 111,825
Term note payable to bank in 36 monthly installments
of $12,806. Interest is payable monthly
at 1/2% over prime. - 153,656
------------------------
8,063,191 2,712,226
Current portion (1,829,709) (538,564)
------------------------
$6,233,482 $2,173,662
------------------------
------------------------
</TABLE>
Pursuant to the terms of the mortgage agreement, the Company in 1994 renewed the
mortgage for three years at an interest rate of 8.125%. It is payable in monthly
installments with the balance payable in full on March 1, 1997. The mortgage may
be prepaid in whole at any time subject to a prepayment premium. The interest
rate is subject to a 4% increase in certain events of default.
20
<PAGE>
4. LONG-TERM DEBT (CONTINUED)
Required annual principal payments on long-term debt are as follows for years
ending January 31: 1997--$1,829,709; 1998--$3,196,377; 1999--$1,288,533;
2000--$1,124,644; 2001--$374,643; thereafter--$249,285.
Interest paid approximated interest expense for 1994, 1995 and 1996.
5. LEASES
The Company leases various types of equipment under long-term lease agreements
classified as capital leases. Property, plant and equipment includes the
following leased property:
<TABLE>
<CAPTION>
JANUARY 31
1996 1995
---------------------------
<S> <C> <C>
Equipment $4,454,000 $3,102,000
Less accumulated amortization (2,020,000) (1,099,000)
---------------------------
$2,434,000 $2,003,000
---------------------------
---------------------------
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
The Company leases certain facilities, equipment and autos under noncancelable
operating lease agreements with initial lease terms in excess of one year. Rent
expense from these operating leases was $977,306, $723,766 and $542,411 in 1996,
1995 and 1994, respectively.
5. LEASES (CONTINUED)
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at January 31,
1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------------------
<S> <C> <C>
Year ending January 31:
1997 $1,101,300 $1,197,917
1998 925,589 1,151,113
1999 421,284 1,080,785
2000 99,132 695,301
2001 - 218,954
Thereafter - 830,100
---------------------------
Total minimum lease payments 2,547,305 $5,174,170
------------
------------
Amount representing interest (304,917)
------------
Present value of net minimum lease payments 2,242,388
Current portion (948,843)
------------
Long-term capital lease obligations $1,293,545
------------
------------
</TABLE>
21
<PAGE>
6. STOCK OPTIONS
Under the terms of the Company's stock option plans, 249,897 shares of Common
Stock were reserved at January 31, 1996 for issuance or grant to officers,
directors and employees at prices ranging from 85% to 110% of fair market value
at the date of grant. The options granted are determined by the Compensation
Committee. Options granted are usually exercisable at any time after grant,
except for those granted under the Company-wide stock option plan, which vest
over a four-year period. The options generally expire after five years.
A summary of outstanding options and shares reserved under the plans is as
follows:
<TABLE>
<CAPTION>
SHARES
RESERVED OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
----------------------------------------------
<S> <C> <C> <C>
Balance January 31, 1994 208,486 806,233 $ .50 to $4.13
Options exercised - (82,888) .50 to 5.38
Options granted (71,058) 71,058 5.38 to 6.25
Terminated/expired 36,181 (36,181) .50 to 5.63
--------------------------
Balance January 31, 1995 173,609 758,222 .50 to 6.25
Adoption of new plan 200,000 -
Options exercised - (148,869) .50 TO 6.88
Options granted (125,206) 125,206 5.84 TO 8.38
Terminated/expired 1,494 (1,494) .50 TO 6.88
--------------------------
Balance January 31, 1996 249,897 733,065 $.50 TO $8.38
--------------------------
--------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS PRICE PER
OUTSTANDING SHARE
-------------------------------
<S> <C> <C>
Exercisable at January 31:
1996 614,372 $.50 to $8.38
1995 657,230 $.50 to $5.63
</TABLE>
7. INCOME TAXES
The provision for federal and state income tax expense from continuing
operations was as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,109,300 $ 875,000 $717,300
State 222,000 163,000 132,200
------------------------------------------
1,331,300 1,038,000 849,500
Capital loss carryforward - (213,000) -
Deferred 168,700 135,000 (183,000)
------------------------------------------
$1,500,000 $ 960,000 $666,500
------------------------------------------
------------------------------------------
</TABLE>
22
<PAGE>
7. INCOME TAXES (CONTINUED)
Discontinued operations in fiscal 1995 resulted in $35,000 of tax benefit. The
tax benefit arose from a $36,000 reduction in deferred taxes and $1,000 of
current federal tax expense.
The components of the deferred tax assets and liabilities at year-end were:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995
-------------------------
<S> <C> <C>
Deferred tax assets:
Net capital loss carryforwards $ - $118,900
Inventory reserves 318,800 231,800
Bad debt expense 212,100 198,200
Additional tax cost of inventory 75,200 81,300
Non-deductible reserves 8,200 78,200
-------------------------
614,300 708,400
Deferred tax liabilities:
Rental equipment depreciation (501,100) (360,000)
Accumulated depreciation (25,300) (21,200)
-------------------------
(526,400) (381,200)
-------------------------
Net deferred tax assets 87,900 327,200
Valuation allowance - (118,900)
-------------------------
$ 87,900 $208,300
-------------------------
-------------------------
</TABLE>
The difference between total income tax expense and the amount computed by
applying the statutory federal income tax rate to income before income taxes was
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Taxes at statutory rate of 34% $1,239,200 $1,009,300 $648,600
State income taxes, net of federal tax benefit 162,400 116,100 78,600
Intangible amortization 64,600 5,500 5,500
Realization of capital loss carryforward - (213,000) -
Impact of adopting Statement No. 109 - - (50,000)
Other 33,800 7,100 27,300
------------------------------------------
1,500,000 925,000 710,000
Benefit (expense) allocated to discontinued
operations - 35,000 (43,500)
------------------------------------------
$1,500,000 $ 960,000 $666,500
------------------------------------------
------------------------------------------
</TABLE>
The Company paid income taxes of $938,000 $1,288,000 and $779,000 in 1996, 1995
and 1994, respectively.
The Company had capital loss carryforwards of approximately $300,000 at
January 31, 1995 which expired at January 31, 1996.
23
<PAGE>
8. RELATED PARTY TRANSACTION
Pursuant to a Stock Put Redemption Agreement between the Company and its Chief
Executive Officer ("CEO") dated August 27, 1986, as amended June 24, 1992, the
Company has agreed to redeem shares of Common Stock having a value of up to
$1,500,000 from the CEO's estate, following his death or, unless the Board
determines that such redemption is not in the best interest of the Company, from
the CEO upon any entity acquiring beneficial ownership of in excess of 20% of
the Company without Board approval. The put options to require or request
redemption by the Company can be exercised any time up to one year after the
date of the event giving rise to the option. The per share redemption price, in
the event of death, will be the greater of the fair market value or book value
of the Common Stock. The per share redemption price in event of change in
control will be the greater of fair market value, the highest price paid by the
new controlling shareholder, or a multiple of ten times net pretax earnings per
share. Any redemption from the CEO's estate will be paid out of the proceeds of
$1,500,000 of term life insurance which the Company carries on the CEO's life.
24
<PAGE>
9. INDUSTRY SEGMENTS
The Company operates within two industry segments. Vaughn Communications
Division is engaged in video tape duplication and rental of video equipment. The
Vaughn Products Division is engaged in the manufacture and/or sale of souvenirs,
gifts and leather products.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Net sales from continuing operations:
Communications Division $48,309,408 $34,402,174 $26,406,260
Products Division 7,203,464 7,201,009 5,868,635
-------------------------------------------
Total sales $55,512,872 $41,603,183 $32,274,895
-------------------------------------------
-------------------------------------------
Operating profit from continuing
operations:
Communications Division $ 4,693,052 $ 3,073,591 $ 2,304,460
Products Division 171,772 173,154 (8,287)
-------------------------------------------
Total operating profit 4,864,824 3,246,745 2,296,173
Interest expense, net of interest income (1,250,065) (637,381) (524,414)
Other income (expense) 30,000 (98,056) 19,116
-------------------------------------------
Income from continuing operations
before income taxes $ 3,644,759 $ 2,511,308 $ 1,790,875
-------------------------------------------
-------------------------------------------
Identifiable assets:
Communications Division $25,035,622 $17,395,929 $13,523,705
Products Division 6,438,913 3,860,442 5,444,665
-------------------------------------------
Total assets $31,474,535 $21,256,371 $18,968,370
-------------------------------------------
-------------------------------------------
Depreciation and amortization:
Communications Division $ 2,876,081 $ 2,038,903 $ 1,494,073
Products Division 74,177 101,254 204,438
-------------------------------------------
Total $ 2,950,258 $ 2,140,157 $ 1,698,511
-------------------------------------------
-------------------------------------------
Capital expenditures:
Communications Division $ 2,351,440 $ 2,132,042 $ 3,098,759
Products Division 50,489 54,347 577,714
-------------------------------------------
Total $ 2,401,929 $ 2,186,389 $ 3,676,473
-------------------------------------------
-------------------------------------------
</TABLE>
25
<PAGE>
10. ACQUISITIONS
On April 4, 1995, the Company completed the acquisition of all the capital stock
of Centercom, Inc. and Centercom South, Inc. (collectively "Centercom"), a
videotape duplicator with facilities in Milwaukee, Wisconsin; Chicago, Illinois;
and Tampa, Florida. The effective date of acquisition was April 1, 1995, and was
accounted for by the purchase method of the accounting and, accordingly, results
from operations have been included in the consolidated financial statements from
April 1, 1995.
The purchase price was $6,420,000 including $5,250,000 of cash and 180,000
shares of Vaughn Communications, Inc. common stock valued at $1,170,000. In
addition, the selling shareholders of Centercom collectively will be paid
$200,000 a year for seven years under non-compete and consulting agreements.
Goodwill recorded in this transaction will be amortized over 15 years using the
straight-line method.
On January 1, 1996, the Company completed the acquisition of substantially all
of the assets of Advanced Audio/Video Productions, Inc., a video tape duplicator
located in Denver, Colorado. The acquisition has been accounted for by the
purchase method of accounting, and the consolidated statement of income for the
year ended January 31, 1996 includes the results of Advanced Audio/Video from
January 1, 1996.
The purchase price was approximately $282,000 including a cash payment by the
Company of approximately $182,000 and long-term debt to the seller of $100,000.
(See Note 4 for description of long-term debt.) Goodwill recorded in this
transaction will be amortized over 15 years using the straight-line method.
On January 31, 1996, the Company acquired the assets and assumed certain
liabilities of Indian Arts and Crafts, Inc., a gift products business located in
Seattle, Washington. The acquisition has been accounted for by the purchase
method of accounting, and the consolidated financial statements for the year
ended January 31, 1996 reflect the purchase of the business, but do not include
any results from operations since the transaction was completed on the last day
of the fiscal year.
The purchase price was approximately $2,332,000 including approximately $82,000
of cash, 145,138 shares of Vaughn Communications, Inc. common stock valued at
$1,250,000, and long-term debt to the seller of $1,000,000. (See Note 4 for
description of long-term debt.) Goodwill recorded in this transaction will be
amortized over 10 years using the straight-line method.
26
<PAGE>
10. ACQUISITIONS (CONTINUED)
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1995
--------------------------
<S> <C> <C>
Sales $66,070,000 $60,285,000
Income from continuing operations 2,424,000 2,140,000
Net income 2,424,000 2,632,000
Income per common share:
Continuing operations $.66 $.60
Discontinued operations - .14
--------------------------
$.66 $.74
</TABLE>
11. DISCONTINUED OPERATIONS
On March 1, 1994, the Company sold the assets and operations of the operating
unit of the Company involved in the manufacture and sale of flags, float and
display products. The non-contingent selling price of $1,500,000 included cash
of $800,000 and a note receivable of $700,000. The gain on the sale was
approximately $550,000 and added $.15 to the fiscal 1995 earnings per share.
Prior years have been restated to include the Company s former display business
as discontinued operations.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments as of January 31,
1996 approximated their fair value.
27
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Vaughn Communications, Inc.
We have audited the accompanying consolidated balance sheets of Vaughn
Communications, Inc. and subsidiaries as of January 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended January 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vaughn
Communications, Inc. and subsidiaries at January 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
March 20, 1996
28
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
E. DAVID WILLETTE, Chairman and Chief Executive Officer. Age 60
WILLIAM D. SMITH, JR., Chief Operating/Financial Officer, Viromed
Laboratories, Inc. (laboratory testing and products). Age: 45
R. F. HEEGAARD, Chairman, Homestyles Publishing and Marketing,
(magazine publishing), Minneapolis, Minnesota. Age: 69
LAURENCE F. LEJEUNE, President, LeJeune Investment Co.
(diversified investments) Minneapolis, Minnesota. Age: 59
HAROLD G. WAHLQUIST, President and Chief Executive Officer, First
Community Bank Group, Inc. (a bank holding company), Minneapolis,
Minnesota. Age: 57
MICHAEL R. SILL, Chief Executive Officer, Road Machinery & Supplies Co.
(distribution of construction equipment and services), Savage,
Minnesota. Age: 64
RODNEY P. BURWELL, Chairman of the Board, Xerxes Corporation
(manufacturer of fiberglass underground fuel storage tanks),
Minneapolis, Minnesota. Age: 57
ROBERT HARMON, Retired Former President, Centercom, Inc.,
Milwaukee, Wisconsin. Age: 49
JEFFREY JOHNSON, Retired Former Vice-President and Secretary,
Centercom, Inc., Milwaukee, Wisconsin. Age 50
DONALD J. DRAPEAU, President and Chief Operating Officer. Age: 42
OFFICERS
E. DAVID WILLETTE, Chairman, Chief Executive Officer, Treasurer
DONALD J. DRAPEAU, President and Chief Operating Officer
WILLIAM D. DORNBUSCH, Vice President, General Manager, Vaughn
Products Division
M. CHARLES REINHART, Secretary and Controller
29
<PAGE>
COMMON STOCK INFORMATION
The Company's Common Stock is traded over-the-counter and has been included
in the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") National Market System since March 26, 1994,
under the symbol VGHN. For the periods indicated through March 25, 1994,
the table sets for the quarterly high and low closing sales prices as
reported in the NASDAQ's Small Cap Market. For the periods indicated after
March 25, 1994, the information presented is the quarterly high and low
closing sales prices as reported in the NASDAQ's National Market System.
All prices are without retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
CALENDAR PERIOD SALE PRICE
------------------------------------------------ ---------------------
HIGH LOW
<S> <C> <C>
1994: First Quarter. . . . . . . . . . . . . $ 5.875 $ 4.75
Second Quarter . . . . . . . . . . . . 5.625 4.625
Third Quarter. . . . . . . . . . . . . 6.875 4.875
Fourth Quarter . . . . . . . . . . . . 7.75 5.50
1995: First Quarter. . . . . . . . . . . . . $ 7.875 $ 6.25
Second Quarter . . . . . . . . . . . . 7.875 5.75
Third Quarter. . . . . . . . . . . . . 9.375 7.125
Fourth Quarter . . . . . . . . . . . . 9.50 7.75
1996: First Quarter. . . . . . . . . . . . . $ 9.375 $ 8.375
</TABLE>
As of January 31, 1996, the Company had 325 shareholders of record.
------------------------------------------------------------------------
30
<PAGE>
CORPORATE HEADQUARTERS
Vaughn Communications, Inc.,
5050 West 78th Street
Minneapolis, MN 55435
(612) 832-3200
PUBLICLY-TRADED SECURITIES
Vaughn Communications, Inc. Common Stock is listed on the
NASDAQ National Market System under the Symbol: VGHN.
TRANSFER AGENT
Chemical Mellon
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07660
INDEPENDENT AUDITORS
Ernst & Young LLP, Minneapolis, Minnesota
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 4:00 p.m.
on Wednesday, June 19, 1996 at The Marquette Hotel,
7th & Marquette, Minneapolis, Minnesota.
FORM 10-K REPORT
The Company's 1996 Annual Report on Form 10-K is available
without charge on written request to M. Charles Reinhart,
Corporate Secretary.
COUNSEL
Jacobson Harwood Bennett & Erickson, P.A.
Minneapolis, Minnesota
31
<PAGE>
VAUGHN COMMUNICATIONS, INC.
5050 WEST 78TH STREET
MINNEAPOLIS, MN 55438
Atlanta, Georgia
Chicago, Illinois
Dallas, Texas
Denver, Colorado
Ft. Lauderdale, Florida
Houston, Texas
Los Angeles, California
Milwaukee, Wisconsin
Minneapolis, Minnesota
New York, New York
Orlando, Florida
Phoenix, Arizona
Portland, Oregon
Raleigh/Durham, North Carolina
Seattle, Washington
St. Louis, Missouri
Tampa, Florida
32
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Vaughn Communications, Inc. of our report dated March 20, 1996 included in
the 1996 Annual Report to Shareholders of Vaughn Communications, Inc.
Our audits also included the financial statement schedule of Vaughn
Communications, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material aspects the information set forth
therein.
We also consent to the incorporation by reference in the Registration Statements
(forms S-8 No. 33-41882, 33-41883, 33-41884 and 33-41885) pertaining to certain
stock option plans of the Company of our report dated March 20, 1996, with
respect to the financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of Vaughn
Communications, Inc.
Minneapolis, Minnesota
April 25, 1996
EXHIBIT 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,967,016
<ALLOWANCES> 556,000
<INVENTORY> 7,693,007
<CURRENT-ASSETS> 18,239,796
<PP&E> 20,519,455
<DEPRECIATION> 12,251,552
<TOTAL-ASSETS> 31,474,535
<CURRENT-LIABILITIES> 10,592,082
<BONDS> 7,527,027
0
0
<COMMON> 329,747
<OTHER-SE> 13,000,353
<TOTAL-LIABILITY-AND-EQUITY> 31,474,535
<SALES> 55,512,872
<TOTAL-REVENUES> 55,512,872
<CGS> 37,887,127
<TOTAL-COSTS> 37,887,257
<OTHER-EXPENSES> 12,760,921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,286,449
<INCOME-PRETAX> 3,644,759
<INCOME-TAX> 1,500,000
<INCOME-CONTINUING> 2,144,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,144,759
<EPS-PRIMARY> .62
<EPS-DILUTED> .61
</TABLE>
