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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
For the fiscal year ended: January 31, 1997
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. [X]
Exhibit Index appears on Page 22. Page 1 of 27 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 11, 1997) was approximately $21,895,996. As
of April 11, 1997, 3,726,978 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, Except Per
Share Amounts)" to be included in the Registrant's Annual Report to
Shareholders for the Year Ended January 31, 1997 (the "1997 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 1997 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
1997 Shareholder Report are incorporated herein by reference in response to
Item 8 of Part II hereof.
4. The discussions under the sections captioned "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE", "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 17, 1997
(the "1997 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 1997 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 1997
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 1997 Proxy Statement is incorporated herein
by reference in response to Item 13 of Part III hereof.
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VAUGHN COMMUNICATIONS, INC.
1997 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..............................................12
Item 8. Consolidated Financial Statements and Supplementary Data...........12
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
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Item 12. Security Ownership of Certain Beneficial Owners and Management.....12
Item 13. Certain Relationships and Related Transactions.....................13
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. The Vaughn Communications Division is a high volume
video tape duplicator for the corporate, educational and institutional user,
accounting for approximately 80% of the Company's sales in fiscal 1997. The
Vaughn Products Division is a manufacturer and distributor of gift, leather
products, and custom designed soft goods sold by gift shops and western stores,
accounting for approximately 20% of the Company's sales in fiscal 1997.
During the fiscal years ended January 31, 1997, 1996 and 1995, the
percentage of sales of the Communications Division and the Products Division as
compared to total sales of the Company were as follows:
Year Ended January 31,
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Division 1997 1996 1995
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Communications Division 80% 87% 83%
Products Division 20% 13% 17%
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, 1997, 1996 and 1995 included in the notes to the Registrant's audited
consolidated financial statements to be included in the 1997 Shareholder Report
are incorporated herein by reference.
VAUGHN COMMUNICATIONS DIVISION
The Company's operations in the communication industry are conducted
through its Communications Division. The Communications Division currently has
video tape duplication facilities in Minneapolis, Milwaukee, Phoenix, Tampa,
Portland, Atlanta, Dallas, Houston, Raleigh, Chicago, Denver and Seattle and has
additional sales offices in St. Louis, New York City, Los Angeles, Nashville,
Washington, D.C. 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 1997.
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, 1997 ("fiscal 1997") the Communications Division acquired all
of the common stock of Satastar Corporate Services, Inc. which is located in
Chicago (see also "RECENT ACQUISITIONS - Merger of Satastar Corporate Services
Inc.") and expanded its operations in Seattle from a sales office to a full
service duplication facility. Expansion has been financed by cash flow generated
from operations, equipment leasing and bank financing.
The Company expended approximately $2,740,000 during fiscal 1997 for
additional video tape duplication equipment. It expects to spend an additional
$1,400,000 in fiscal 1998 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 $550,000 in fiscal 1997 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 16% 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 62 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 Communications 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
The Products Division is engaged in the manufacture and sale of a line of
soft goods, including custom-designed, silk-screened T-shirts and sweatshirts,
souvenir leather products, 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 billfolds, purses, and
personal accessory items, and in Seattle, Washington, where it designs and
produces its soft goods products. The Products Division corporate headquarters
are also located in Seattle. The gift products are sold at wholesale prices for
resale, primarily by gift shops,and are marketed under the "Bloom Brothers" and
"Indian Arts and Crafts" names. 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 in-house sales people and independent manufacturer's
representatives. The Products Division employs two sales manager and four sales
people, 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 net sales.
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.
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SEASONAL OPERATIONS
The operations of the Company's 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 Communications and Products Divisions (see "Item 2.
Properties" below).
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.
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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, 1997, the Company had 695 employees, including 81 in sales
and marketing, 493 in manufacturing and 121 in executive, finance and
administrative positions. Eighty of the Company's manufacturing and clerical
employees are part-time employees. 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
MERGER OF SATASTAR CORPORATE SERVICES, INC.
Pursuant to a Plan and Agreement of Merger dated June 7, 1996, on June
28, 1996 Satastar Corporate Services, Inc. (DBA PVS Corporate Services), an
Illinois corporation, was merged into the Company. The Company accounted
for the transaction as a pooling of interests. The merger was effected by
the issuance of 165,357 shares of the Company's common stock valued at $13.75
per share or approximately $2,274,000 in the aggregate, in exchange for all
the common stock of Satastar.
The Company also entered into employment and noncompete agreements with
the former owners of Satastar. The agreements are for terms ranging from two
to three years and call for compensation of $130,000 to $162,000 per year.
DESCRIPTION OF SATASTAR'S BUSINESS
Satastar is a regional video tape duplicator whose business, with the
exception of specific customer identity, is substantially similar to the
video tape duplication business of the Company's Communications Division of
which Satastar has become part. Satastar has a videotape duplication
facility in Chicago, Illinois, and the Company merged its pre-existing
facility in Chicago into that of Satastar.
For Satastar's years ended December 31, 1996 and 1995, it had annual
sales of $4,056,000 and $3,868,000, respectively. Net income for the same
periods was $102,000 and $342,000.
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At the time of the merger, Satastar had 39 employees, including 3 in
sales, 10 in administration and support, and 26 in operations. A majority of
these persons are currently employees of Vaughn Communications Division.
These employees are not represented by a union, and the Company considers
Satastar's employee relations to be satisfactory and there have been no work
stoppages.
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 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.
The Sellers receive $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 a 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
provided a revolving credit facility of up to $8,000,000. On February 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,
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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.
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 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
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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.
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 $4,015,000
at January 31, 1997) and 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 has been merged into Vaughn Products Division, and the
Company moved the majority of the operations of the 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.
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 5,000 square feet is devoted to and equipped for the
fabrication and warehousing of the Vaughn Products Division's products and
raw materials.
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Approximately 57,600 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 and Orlando, Florida; Portland,
Oregon; Atlanta, Georgia; Dallas, Texas; Houston, Texas; Raleigh, North
Carolina; Chicago, Illinois; Seattle, Washington; and Denver, Colorado for
sales offices and videotape reproduction, totaling approximately 293,000
square feet under leases expiring from 1998 through 2002, at a current total
annual rental of approximately $1,155,000.
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. In addition, the Products Division leases
approximately 24,000 square feet of warehousing and office space in an
adjacent building. The lease expires in 1999 and has a current annual rental
of $126,000.
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, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
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. 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>
Price
---------------------
Calendar Period High Low
--------------- ------- -------
1997: First Quarter $ 8.00 $ 6.00
1996: First Quarter $ 9.375 $ 8.375
Second Quarter 19.00 9.00
Third Quarter 15.00 9.50
Fourth Quarter 10.50 7.00
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
The last sales price for the Company's Common Stock as reported by the
NASDAQ National Market System on April 11, 1997 was $5.875 per share. As of
January 31, 1997, the Company had 336 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.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended January 31, 1997, the Company sold
unregistered securities in the amounts, at the times, and for the aggregate
amounts of consideration listed below:
a. On June 28, 1996, the Company issued 165,357 shares of its common
stock to Satastar Corporate Services, Inc. ("Satastar") in exchange for all
of the outstanding capital stock of Satastar. The business combination of
Satastar and the Company has been accounted for as a pooling of interest.
There were no underwriters involved in this transaction. The shares issued
to the shareholders of Satastar were issued in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Act"). With respect to the Company's reliance on Section 4(2)
of the Act, the shareholders of Satastar represented that they acquired the
shares for investment and the certificates representing the shares issued to
the shareholders of Satastar were legended with respect to restrictions on
transfer. See the discussion under "RECENT ACQUISITIONS - Purchase of
Satastar Corporate Services, Inc." included in "Item 1. Business."
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 1997 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 1997 Shareholder Report and are incorporated
herein by reference.
- 11 -
<PAGE>
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 1997 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, 1997, together with the report
thereon of Ernst & Young LLP, contained in the 1997 Shareholder Report, are
incorporated herein by reference in response to this Item 8.
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 "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE", "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 17, 1997 (the "1997
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 1997 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
- 12 -
<PAGE>
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1997 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 1997 Proxy Statement is incorporated herein by reference
in response to this Item 13.
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, 1997,
together with the report thereon of Ernst & Young LLP, contained in
the 1997 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, 1997 and 1996
Consolidated Statements of Income for the years ended January 31,
1997, 1996 and 1995
Consolidated Statement of Shareholders' Equity for the years ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended January 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, and the
information specified in Parts II and III, the 1997 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, 1997.
- 13 -
<PAGE>
(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 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) (incorporated
by reference to Exhibit (2)(c) to the Company's Annual Report
on Form 10-K for the year ended January 31, 1996 (hereinafter
referred to as the "1996 Form 10-K")).
(2)(d) Plan and Agreement of Merger dated June 7, 1996, between the
Company and Satastar Corporate Services, Inc., doing business
as PVS Corporate Services (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).
- 14 -
<PAGE>
(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.]
(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) [Intentionally left blank.]
- 15 -
<PAGE>
(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")).
(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(1) 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).
- 16 -
<PAGE>
(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 year renewal options
secured by the Company's Minneapolis, Minnesota headquarters and
adjacent plant and office facilities (incorporated by reference
to Exhibit 10(1) 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
- 17 -
<PAGE>
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 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. (incorporated by
reference to Exhibit (10)(q) to the 1996 Form 10-K.)
(10)(r) 1995 Non-Employee Director Stock Option Plan adopted by the
Board of Directors on June 20, 1995 and form of 1995
Non-Employee Director Nonstatutory Stock Option Agreement.
10)(s) Third Modification Agreement and Amendment to Mortgage dated
January 1, 1997 between the Company and the Canada Life
Assurance Company.
(11) Statement Regarding Computation of Earnings Per Share.
(13) 1997 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 and Chief Executive Officer
(Principal Executive Officer)
By \s\ M. Charles Reinhart
-------------------------------------
M. Charles Reinhart
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: April 30, 1997
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.
\s\ E. David Willette Director April 30, 1997
- ----------------------------------
E. David Willette
\s\ Roger F. Heegaard Director April 30, 1997
- ----------------------------------
Roger F. Heegaard
\s\ Harold G. Wahlquist Director April 30, 1997
- ----------------------------------
Harold G. Wahlquist
\s\ William D. Smith Director April 30, 1997
- ----------------------------------
William D. Smith
\s\ Laurence F. LeJeune Director April 30, 1997
- ----------------------------------
Laurence F. LeJeune
\s\ Michael R. Sill Director April 30, 1997
- ----------------------------------
Michael R. Sill
\s\ Rodney P. Burwell Director April 30, 1997
- ----------------------------------
Rodney P. Burwell
\s\ Jeffrey Johnson Director April 30, 1997
- ----------------------------------
Jeffrey Johnson
\s\ Robert Harmon Director April 30, 1997
- ----------------------------------
Robert Harmon
\s\ Donald J. Drapeau Director April 30, 1997
- ----------------------------------
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
1/31/97:
Deducted from
asset account:
Allowance for
doubtful accounts $625,600 $396,694 $372,294(1) $650,000
--------- -------- -------- --------
--------- -------- -------- --------
Year ended
1/31/96:
Deducted from
asset account:
Allowance for
doubtful accounts $536,700 $386,160 $297,260(1) $625,600
--------- -------- -------- --------
--------- -------- -------- --------
Year ended
1/31/95:
Deducted from
asset account:
Allowance for
doubtful accounts $470,000 $290,496 $223,796(1) $536,700
--------- -------- -------- --------
--------- -------- -------- --------
</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, 1997
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
(2)(d) Plan and Agreement of Merger dated June 7, 1996 between the
Company and Satastar Corporate Services, Inc., doing business
as PVS Corporate Services (without exhibits, schedules and
attachments).
(10)(r) 1995 Non-Employee Director Stock Option Plan adopted on
June 20, 1995 and Form of 1995 Non-Employee Director
Nonstatutory Stock Option Agreement.
(10)(s) Third Modification Agreement and Amendment to Mortgage dated
January 1, 1997, between the Company and Canada Life
Assurance.
(11) Statement Regarding Computation of Earnings Per Share
(13) 1997 Annual Report to Shareholders
(23) Consent of Independent Auditors
(24) Power of Attorney (see Signature Page of Report)
(27) Financial Data Schedules
- 22 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
COMPUTATI0N OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended January 31
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRIMARY:
Average Shares Outstanding 3,640,304 3,243,905 2,963,155
Net effect of dilutive stock options 283,960 395,168 424,081
based on the treasury stock method ---------- ---------- ----------
using average market price
TOTAL 3,924,264 3,639,073 3,387,236
---------- ---------- ----------
---------- ---------- ----------
Income from continuing operations $2,015,496 $2,247,176 $1,893,459
Income from discontinued
operations (net of tax benefit) - - 492,351
---------- ---------- ----------
Net Income $2,015,496 $2,247,176 $2,385,810
---------- ---------- ----------
---------- ---------- ----------
PER SHARE AMOUNTS:
Income from continuing operations $.51 $.62 $.56
Income from discontinued operations - - .14
------ ------ ------
$.51 $.62 $.70
------ ------ ------
------ ------ ------
FULLY DILUTED:
Average shares outstanding 3,640,304 3,243,905 2,963,155
Net effect of dilutive stock options
based on the treasury stock method
using the quarter-end market price
if higher than average market price 284,129 433,648 455,481
---------- ---------- ----------
TOTAL 3,924,433 3,677,553 3,418,636
---------- ---------- ----------
---------- ---------- ----------
Income from continuing operations $2,015,496 $2,247,176 $1,893,459
Income from discontinued
operations (net of tax benefit) - - 492,351
---------- ---------- ----------
Net Income $2,015,496 $2,247,176 $2,385,810
---------- ---------- ----------
---------- ---------- ----------
PER SHARE AMOUNTS:
Income from continuing operations $.51 $.61 $.56
Income from discontinued operations - - .14
------ ------ ------
$.51 $.61 $.70
------ ------ ------
------ ------ ------
</TABLE>
EXHIBIT 11
<PAGE>
EXHIBIT 2(d)
PLAN AND AGREEMENT OF MERGER
BETWEEN
VAUGHN COMMUNICATIONS, INC.
AND
SATASTAR CORPORATE SERVICES, INC.
doing business as
PVS CORPORATE SERVICES
June 7, 1996
<PAGE>
TABLE OF CONTENTS
Page #
ARTICLE 1
DEFINITIONS........................................................... 1
ARTICLE 2
MERGER................................................................ 4
2.1 MERGER....................................................... 4
2.3 GOVERNING LAW; RESTATED ARTICLES OF INCORPORATION............ 4
2.4 DIRECTORS AND OFFICERS....................................... 4
2.5 APPROVAL OF SHAREHOLDERS; FILING OF ARTICLES OF
ARTICLE 3
CONVERSION OF SHARES IN THE MERGER.................................... 4
3.1 VAUGHN'S COMMON STOCK........................................ 4
3.2 PVS'S COMMON STOCK........................................... 5
(a) CONVERSION............................................ 5
(b) STOCK CERTIFICATES.................................... 5
3.3 EFFECT OF THE MERGER......................................... 5
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
PVS AND ITS SHAREHOLDERS.............................................. 6
4.1 ORGANIZATION AND STANDING.................................... 6
4.2 AUTHORITY AND ENFORCEABILITY................................. 6
4.3 COMPLIANCE................................................... 7
4.4 CAPITALIZATION............................................... 7
4.5 FINANCIAL STATEMENTS......................................... 7
4.6 ASSETS....................................................... 8
(a) ACCOUNTS RECEIVABLE.................................. 8
(b) INVENTORY............................................ 8
(c) TANGIBLE PERSONAL PROPERTY EQUIPMENT AND
FIXTURES............................................. 8
(d) INTANGIBLES.......................................... 8
(e) REAL PROPERTY........................................ 9
4.7 UNDISCLOSED LIABILITIES...................................... 9
4.8 CONDUCT OF BUSINESS IN ORDINARY COURSE....................... 9
4.9 ENVIRONMENTAL MATTERS........................................ 11
4.10 EMPLOYEE BENEFIT PLANS; ERISA................................ 11
(a) EXISTENCE OF PLANS..................................... 11
(b) ADMINISTRATION......................................... 12
(c) REPORTING AND DISCLOSURE............................... 12
(d) INSURANCE.............................................. 12
(e) MULTI-EMPLOYER PLANS................................... 12
(f) LIABILITY.............................................. 12
4.11 EMPLOYEES; COLLECTIVE BARGAINING AGREEMENTS; LABOR
RELATIONS.................................................... 12
(a) EMPLOYEES.............................................. 12
<PAGE>
(b) EMPLOYMENT AGREEMENTS.................................. 13
4.12 TAXES........................................................ 13
4.13 CONTRACTS.................................................... 14
4.14 COMPLIANCE WITH LAWS; PERMITS AND LICENSES................... 14
4.15 INSURANCE.................................................... 15
4.16 CLAIMS; LEGAL ACTIONS........................................ 15
4.17 POWERS OF ATTORNEY; BANK ACCOUNTS AND SAFE DEPOSIT
BOXES........................................................ 16
4.18 BROKERS..................................................... 16
4.19 ACCOUNTING TREATMENT MATTERS................................ 16
(a) VAUGHN OWNERSHIP........................................ 16
(b) POST-CLOSING ACQUISITIONS............................... 16
(c) CERTAIN PVS TRANSACTIONS................................ 16
4.21 SURVIVABILITY................................................ 17
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF VAUGHN.............................. 17
5.1 ORGANIZATION AND STANDING.................................... 17
5.2 AUTHORITY AND ENFORCEABILITY................................. 17
5.3 COMPLIANCE................................................... 17
5.4 SEC FILINGS; FINANCIAL STATEMENTS............................ 18
5.5 CAPITALIZATION............................................... 18
5.6 CONDUCT OF VAUGHN'S BUSINESS IN ORDINARY COURSE.............. 19
5.7 CLAIMS; LEGAL ACTIONS........................................ 19
5.8 COMPLETE DISCLOSURE.......................................... 19
5.9 SURVIVABILITY................................................ 20
ARTICLE 6
OTHER AGREEMENTS...................................................... 20
6.1 RULE 144 REPORTING........................................... 20
6.2 STOCK PLEDGE AGREEMENT....................................... 20
6.3 RESTRICTIONS ON TRANSFER OF STOCK CONSIDERATION.............. 21
6.4 PUBLIC ANNOUNCEMENT.......................................... 21
6.5 EXHIBITS..................................................... 21
6.6 STALE ACCOUNTS RECEIVABLE.................................... 21
6.8 COSTS AND EXPENSES........................................... 21
ARTICLE 7
CONDITIONS PRECEDENT TO PVS'S OBLIGATIONS............................. 21
7.1 ACCURACY OF VAUGHN'S REPRESENTATIONS AND
WARRANTIES................................................... 22
7.2 PERFORMANCE BY VAUGHN........................................ 22
7.3 DELIVERIES AT CLOSING........................................ 22
7.4 CONSENTS..................................................... 22
7.5 OPINION OF COUNSEL........................................... 22
7.6 CHANGES IN BUSINESS.......................................... 22
7.7 BOARD OF DIRECTOR APPROVAL................................... 22
7.8 EMPLOYMENT AGREEMENTS........................................ 22
<PAGE>
ARTICLE 8
CONDITIONS PRECEDENT TO VAUGHN'S OBLIGATIONS.......................... 22
8.1 ACCURACY OF PVS'S REPRESENTATIONS AND WARRANTIES............. 22
8.2 PERFORMANCE BY PVS........................................... 23
8.3 DELIVERIES AT CLOSING........................................ 23
8.4 CONSENTS..................................................... 23
8.5 OPINION OF COUNSEL........................................... 23
8.6 CHANGES IN BUSINESS.......................................... 23
8.7 SHAREHOLDER APPROVAL; DISSENTING SHARES...................... 23
ARTICLE 9
TERMINATION........................................................... 23
9.1 TERMINATION.................................................. 23
9.2 EFFECT OF TERMINATION........................................ 24
ARTICLE 10
CLOSING............................................................... 24
10.1 CLOSING PLACE AND DATE....................................... 24
10.2 DELIVERIES BY PVS............................................ 24
10.3 DELIVERIES BY VAUGHN......................................... 25
ARTICLE 11
INDEMNIFICATION....................................................... 26
11.1 INDEMNIFICATION OF SURVIVING CORPORATION BY PVS
SHAREHOLDERS................................................. 26
11.2 INDEMNIFICATION OF THE PVS SHAREHOLDERS BY VAUGHN............ 27
11.3 CLAIMS PROCEDURE............................................. 27
(a) NOTICE OF CLAIM......................................... 27
(b) INVESTIGATION; PAYMENT.................................. 28
(c) ARBITRATION............................................. 28
(d) PARTICIPATION IN DEFENSE................................ 28
(e) COLLATERAL.............................................. 28
11.4 LIMITATION OF INDEMNIFICATION OBLIGATION..................... 29
11.5 SOLE REMEDY.................................................. 30
ARTICLE 12
POST-CLOSING AGREEMENTS............................................... 30
12.1 FURTHER ASSURANCES........................................... 30
ARTICLE 13
MISCELLANEOUS......................................................... 30
13.1 GOVERNING LAW................................................ 30
13.2 ENTIRE AGREEMENT............................................. 30
13.3 WAIVER AND AMENDMENT......................................... 30
13.4 NOTICES...................................................... 31
13.5 BINDING AGREEMENT............................................ 32
13.6 COUNTERPARTS................................................. 32
13.7 EXHIBITS..................................................... 32
<PAGE>
EXHIBIT INDEX
Exhibit 2.3 RESTATED ARTICLES OF INCORPORATION.................... 4
Exhibit 2.5 ARTICLES OF MERGER.................................... 1,4
Exhibit 4.4 PVS SHAREHOLDERS...................................... 3,7
Exhibit 4.5 COPIES OF PVS'S FINANCIAL STATEMENTS.................. 7,8
Exhibit 4.6(a) ACCOUNTS RECEIVABLE OF PVS......................... 8
Exhibit 4.6(c) ALL PERSONAL PROPERTY OWNED OR LEASED BY
PVS............................................... 8
Exhibit 4.6(d) LIST OF INTANGIBLES................................ 9
Exhibit 4.6(e) LIST OF REAL PROPERTY.............................. 9
Exhibit 4.7 UNDISCLOSED LIABILITIES............................... 9
Exhibit 4.8 CONDUCT OF BUSINESS IN ORDINARY COURSE................ 9
Exhibit 4.9 ENVIRONMENTAL MATTERS................................. 11
Exhibit 4.10(a) EXISTENCE OF PLANS................................ 12
Exhibit 4.11(a) EMPLOYEES......................................... 13
Exhibit 4.11(b) WRITTEN EMPLOYMENT AGREEMENTS..................... 13
Exhibit 4.12 AUDITS............................................... 14
Exhibit 4.13 CONTRACTS............................................ 14
Exhibit 4.14 LIST OF ALL PERMITS AND LICENSES..................... 15
Exhibit 4.15 LIST OF ALL INSURANCE................................ 15
Exhibit 4.16 CLAIMS; LEGAL ACTIONS................................ 15,16
Exhibit 4.17 POWERS OF ATTORNEY; BANK ACCOUNTS, ETC............... 16
Exhibit 5.5 CAPITALIZATION........................................ 18
Exhibit 5.6 CONDUCT OF VAUGHN'S BUSINESS IN ORDINARY
COURSE................................................ 18
Exhibit 5.7 CLAIMS; LEGAL ACTIONS................................. 18,19
Exhibit 6.1 STOCK PLEDGE AGREEMENT................................ 24
Exhibit 6.2 STOCK PLEDGE AGREEMENT................................3,21,29
Exhibit 6.3 INVESTMENT LETTER..................................... 2,21
Exhibit 7.5 OPINION OF COUNSEL.................................... 22
Exhibit 8.5 OPINION OF COUNSEL.................................... 23
<PAGE>
PLAN AND AGREEMENT OF MERGER
BETWEEN
VAUGHN COMMUNICATIONS, INC.
AND
SATASTAR CORPORATE SERVICES, INC.
doing business as
PVS CORPORATE SERVICES
June 7, 1996
THIS AGREEMENT is dated effective as of the 7th day of June, 1996 by and
between VAUGHN COMMUNICATIONS, INC., a Minnesota corporation ("Vaughn"),
SATASTAR CORPORATE SERVICES, INC., doing business as PVS CORPORATE SERVICES, an
Illinois corporation ("PVS") (both Vaughn and PVS may collectively be referred
to as the "Merging Corporations"), and the PVS SHAREHOLDERS as such term is
defined in Article I hereof.
RECITALS
Both of the Merging Corporations are engaged in the business of
videotape duplication. The Merging Corporations and their respective
shareholders desire to adopt and implement this Agreement providing
for the Merger of the Merging Corporations pursuant to the provisions
of Section 368(a)(1)(A) of the Code, and in accordance with the laws
of the States of Minnesota and Illinois, in accordance with the terms
of this Agreement.
ARTICLE 1
DEFINITIONS
Agreement means this agreement and all of the Exhibits attached hereto.
ARTICLES OF MERGER means the articles of merger described in Section 2.5
and attached as Exhibit 2.5.
BOOK VALUE means the book value of the PVS Shares, as defined in Section
3.2(a); provided, however, that accounts receivable in excess of ninety (90)
days old shall be valued at zero (0).
CLOSING DATE means June 28, 1996, or such other date as the parties may
mutually agree.
CLOSING means the closing of the transactions contemplated by this
Agreement.
CODE means the Internal Revenue Code of 1986, as amended from time to time.
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EFFECTIVE DATE means the date this Agreement is executed.
EMPLOYMENT AGREEMENTS mean the agreements described in Section 6.7 and
attached as Exhibit 6.7.
ENVIRONMENTAL LAW means any law, statute, regulation, rule, order,
consent, decree, settlement agreement or governmental requirement, which
imposes liability for or standards of conduct concerning discharges,
emissions, releases or threatened releases of noises, odors or any
pollutants, contaminants or hazardous or toxic wastes, substances or
materials into ambient air, water or land, or otherwise imposes liability for
or standards of conduct concerning the manufacture, processing, generation,
distribution, use, treatment, storage, disposal, cleanup, transport or
handling of pollutants, contaminants, or hazardous toxic wastes, substances,
materials or containers, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, the Resources
Conservation and Recovery Act of 1976, as amended, any other so-called
"Superfund" or "Superlien" law, the Toxic Substances Control Act, or any
other similar federal, state or local statutes, laws or ordinances.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
EXHIBITS means the exhibits referred to and attached to this Agreement.
INDEMNIFYING PARTY means the party indemnifying the Surviving Corporation
or the Surviving Corporation (as successor to Vaughn) with respect to
indemnification of the PVS Shareholders, all pursuant to Article 11 hereof.
INTANGIBLES means copyrights, trademarks, trade names, service marks,
licenses, patents, permits, jingles, privileges, franchises, computer software
and licenses, and other similar intangible property rights and interests.
INVESTMENT LETTER means the agreement described in Section 6.3 and attached
as Exhibit 6.3.
MATERIAL ADVERSE EFFECT means an event that has such an effect as described
in the context of the reference, either individually or in the aggregate, when
such individual events or circumstances are based upon, arise from or are
related to the same or substantially similar underlying facts, circumstances or
situations.
MERGER means the merger of PVS into Vaughn in accordance with the laws of
the States of Minnesota and Illinois and Section 368(a)(1)(A) of the Code, all
pursuant to the terms of this Agreement.
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MERGING CORPORATIONS means Vaughn and PVS.
PVS means Satastar Corporate Services, Inc. doing business as PVS Corporate
Services.
PVS SHAREHOLDERS means the individuals referred to in Exhibit 4.4.
PVS SHARES means the shares of common voting stock of PVS as issued and
outstanding on the Closing Date prior to the Closing.
PVS'S BUSINESS means the business assets, liabilities and operations of
PVS, as conducted prior to Closing.
PVS'S FINANCIAL STATEMENTS means the financial statements of PVS, including
the year end balance sheet, statement of operations and statement of financial
position, of PVS for the previous two fiscal years of PVS, as reviewed by Wolf &
Company, LLP, and the interim statements up to the Closing Date.
SEC means the Securities and Exchange Commission.
SEC FILINGS means complete copies of each report, schedule, registration
statement and definitive proxy statement (including copies of all amendments and
supplements and all exhibits set forth or incorporated by reference therein)
filed by Vaughn with the Securities and Exchange Commission since January 1,
1994.
STOCK CONSIDERATION means the shares of common voting stock of the
Surviving Corporation received by the PVS Shareholders pursuant to the terms of
the Merger.
STOCK PLEDGE AGREEMENT means the agreement described in Section 6.2 and
attached as Exhibit 6.2
SURVIVING CORPORATION means Vaughn, after the merger of PVS into Vaughn on
the Closing Date, pursuant to the terms of this Agreement.
VAUGHN means Vaughn Communications, Inc., a Minnesota corporation.
VAUGHN SHARES means the shares of common voting stock of Vaughn as issued
and outstanding on the Closing Date prior to the Closing.
VAUGHN'S BUSINESS means the business assets, liabilities and operations of
Vaughn, as conducted prior to Closing.
VAUGHN'S FINANCIAL STATEMENTS means the financial statements of Vaughn,
including the year end balance sheet, statement of income and statement of cash
flow, of Vaughn for the previous two
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fiscal years of Vaughn, as audited by Ernst & Young, LLP, and the interim
unaudited statements up to the Closing Date.
ARTICLE 2
MERGER
2.1 MERGER. In consideration of the representations, warranties and mutual
promises set forth in this Agreement, the parties agree, in accordance with the
applicable provisions of the laws of the States of Minnesota and Illinois, that
PVS shall be merged into Vaughn, which shall continue its corporate existence
and be the corporation surviving the Merger, all in accordance with Section
368(a)(1)(A) of the Code and subject to the terms of this Agreement.
2.2 NAME. The name of the Surviving Corporation shall be Vaughn
Communications, Inc.
2.3 GOVERNING LAW; RESTATED ARTICLES OF INCORPORATION. The laws of the
State of Minnesota shall govern the Surviving Corporation and the interpretation
and enforcement of this Agreement. The Restated Articles of Incorporation of
the Surviving Corporation shall be in the form attached as Exhibit 2.3.
2.4 DIRECTORS AND OFFICERS. As of the Closing Date, the directors of the
Surviving Corporation shall be the existing directors of Vaughn. The officers of
the Surviving Corporation shall be the existing officers of Vaughn.
2.5 APPROVAL OF SHAREHOLDERS; FILING OF ARTICLES OF MERGER. This Agreement,
together with the Articles of Merger, shall be submitted to the Board of
Directors of Vaughn and the shareholders of PVS as provided by law at a meeting
which shall be held on or before June 28, 1996, or at such later date as the
Boards of Directors of the Merging Corporations shall mutually approve. Upon
adoption and approval of this Agreement, and subject to the conditions contained
in this Agreement, the Articles of Merger, attached as Exhibit 2.5, shall be
executed, acknowledged and delivered to the Secretaries of State of the States
of Minnesota and Illinois for filing as provided by law.
ARTICLE 3
CONVERSION OF SHARES IN THE MERGER
The manner of carrying into effect the Merger, and the manner and basis of
converting the shares of PVS into shares of the Surviving Corporation are as
follows:
3.1 VAUGHN'S COMMON STOCK. No shares of common stock of Vaughn issued as
of the Effective Date shall be converted as a
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result of the Merger, but all of such shares shall remain issued shares of
common stock of the Surviving Corporation.
3.2 PVS'S COMMON STOCK.
(a) CONVERSION. On the Closing Date, each share of common stock of
PVS issued and outstanding shall be converted into the number of shares of
common stock of the Surviving Corporation as determined by the following
formula;
1 PVS share = [($2,500,000 + $BV) DIVIDED BY 1000 DIVIDED BY $MP] Vaughn shares
Total Vaughn shares issued = ($2,500,000 + $BY) DIVIDED BY $MP
where 1000 is the number of outstanding shares of PVS at the Closing
Date, "BY" represents the Book Value of PVS on the Closing Date and
"MP" represents the market price of one share of Vaughn's common stock
which for this purpose shall be the average of the closing NASDAQ
price published in the Wall Street Journal for the seven trading days
ending one week prior to the Closing Date.
Certificates representing fractional shares will not be issued. Each issued
share of common stock of PVS held in the PVS's treasury at the Effective Date
shall be canceled and shall not be converted. The preliminary Book Value of PVS
shall be determined at the Closing Date based on the books and records of PVS,
following review by Wolf & Company, LLP and such Book Value shall thereafter be
adjusted as necessary to conform to generally accepted accounting principles,
including any adjustments resulting from the special procedures (including
observation of inventory, review of receivables and liabilities and such other
procedures as may be requested by the Surviving Corporation) performed by
certified public accountants selected by the Surviving Corporation, all within
forty-five (45) days thereafter. Wolf & Company, LLP shall complete its review
of the Book Value of PVS within thirty (30) days after the Closing Date so that
the accountants selected by the Surviving Corporation will have an additional
fifteen (15) days to complete their procedures.
(b) STOCK CERTIFICATES. Within forty-five (45) days after the Closing
Date, after determination of Book Value in accordance with Section 3.2(a), the
PVS Shareholders shall surrender their certificates representing such shares for
cancellation and, subject to the Stock Pledge Agreement, shall receive
certificates representing the Stock Consideration.
3.3 EFFECT OF THE MERGER. At the Closing Date, the Surviving Corporation
shall succeed to, without other transfer, act or deed of any person, and shall
possess and enjoy all the rights, privileges, immunities, powers and franchises
both of a public and private nature, and be subject to all the restrictions,
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disabilities and duties of each of the Merging Corporations, and all property,
real, personal and mixed, including patents, trademarks, trade names, and all
debts due to any of the Merging Corporations shall be vested in the Surviving
Corporation; and all such property, rights, privileges, immunities, powers and
franchises, and all and every other interest shall be thereafter the property of
the Surviving Corporation, and the title of any real estate vested by deed or
otherwise in any of said Merging Corporations shall not revert or be in any way
impaired by reason of the Merger; provided, however, that all rights of
creditors and all liens upon any property of any of said Merging Corporations
shall be preserved unimpaired, and all debts, liabilities and duties of the
Merging Corporations, respectively, shall attach to the Surviving Corporation
and may be enforced against it to the same extent as if said debts, liabilities
and duties had been incurred or contracted by the Surviving Corporation.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
PVS AND ITS SHAREHOLDERS
PVS and its Shareholders jointly and separately make the following
representations and warranties to Vaughn with the intention that Vaughn may rely
upon the same and acknowledge that the same shall be true on the Effective Date
and as of the Closing Date and that such representations and warranties shall
survive the Closing of this transaction.
4.1 ORGANIZATION AND STANDING. PVS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Illinois and is
duly qualified to do business in all other states in which a failure to qualify
would have a Material Adverse Effect on PVS's Business. PVS has the requisite
corporate power and authority to own, lease and use its properties and assets
and is entitled to operate its business as and in the places where such
properties and assets are now owned, leased or operated as such business is now
conducted.
4.2 AUTHORITY AND ENFORCEABILITY. PVS has all requisite corporate power and
authority to enter into this Agreement and to perform all of its obligations
under this Agreement. The execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action on the part of PVS
and has been approved by the unanimous vote of PVS's Shareholders. This
Agreement constitutes the valid and binding agreement of PVS enforceable in
accordance with its terms except as may be limited by bankruptcy, moratorium and
insolvency laws and other laws affecting the rights of creditors generally and
except as may be limited by the availability of equitable remedies.
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4.3 COMPLIANCE. Except as shown in Exhibit 4.3, neither the execution,
delivery or performance of this Agreement by PVS or the PVS Shareholders nor
the consummation of the transactions contemplated hereby will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default or loss of rights (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation
of any lien, charge or encumbrance pursuant to any;
(i) provision of the Articles of Incorporation or Bylaws of PVS;
(ii) note, bond, indenture, mortgage, deed of trust, contract,
agreement, lease or other instrument or obligation to which
either PVS or the PVS Shareholders are a party or by which any of
them may be bound or affected which is material to PVS; or
(iii) law, order, judgment, ordinance or decree to which PVS or the PVS
Shareholders are a party or by which they may be bound or
affected.
4.4 CAPITALIZATION. The authorized capital stock of PVS is held as set
forth in Exhibit 4.4. All issued and outstanding shares of PVS are owned of
record and beneficially by the PVS Shareholders in amounts specified in
Exhibit 4.4. Other than the PVS Shares identified in Exhibit 4.4, there are
no other issued or outstanding capital stock or other equitable securities,
or options or warrants to acquire the same, of PVS. All of the PVS Shares are
validly issued, fully paid and non-assessable, free of preemptive rights or
rights of first refusal as of the Closing and have not been issued in
violation of federal or state securities laws. Except as described in Exhibit
4.4 and excepting agreements which will terminate on or before the Closing
Date, there are no subscriptions, options, warrants, calls, rights,
agreements or commitments relating to the sale, delivery or transfer by PVS
or the PVS Shareholders of any PVS Shares. Except as described in
Exhibit 4.4 and excepting agreements which will terminate on or before the
Closing Date, there are no voting agreements, voting trust agreements,
shareholder agreements or similar agreements relating to the voting of the
PVS Shares. Effective as of the Closing, each PVS Shareholder shall have
good and valid title to the PVS Shares owned by him and to be transferred
pursuant to this Agreement, free and clear of all pledges, security
interests, liens, charges, encumbrances, agreements, equities, claims and
options of whatever nature.
4.5 FINANCIAL STATEMENTS. Exhibit 4.5 contains copies of PVS's Financial
Statements, all of which have been prepared from the books and records of PVS
in accordance with generally accepted accounting principles, consistently
applied and maintained throughout the periods indicated. The Financial
Statements accurately reflect in all material respects the books, records and
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accounts of PVS, and fairly present the financial condition, assets,
liabilities and results of operation of PVS as of and at their respective
dates (except for the absence of footnotes and year-end adjustments in the
case of unaudited interim financial statements). Exhibit 4.5 also contains a
breakdown of PVS's sales by major customers for the three (3) fiscal years
DEG. ending prior to the date of this Agreement.
4.6 ASSETS.
(a) ACCOUNTS RECEIVABLE. Exhibit 4.6(a) lists all accounts receivable
of PVS as of April 3O, 1996. Except to the extent reserved against in PVS's
Financial Statements, all accounts receivable of PVS which are less than
ninety (90) days old as of the Closing Date are collectable at the aggregate
face amounts of such receivables recorded on PVS's books. All such accounts,
notes or other receivables are valid, legal and binding obligations owing to
PVS enforceable against the respective obligors.
(b) INVENTORY. All inventories of raw material, work in process and
finished goods included in PVS's Financial Statements are valued at the lower
of cost or market, first-in first-out basis. Except to the extent reserved
against in PVS's Financial Statements, PVS's inventory is and will be, as of
the Closing Date, good, merchantable and saleable at customary prices in the
ordinary course of business and is and will be, as of the Closing Date, of a
quality, quantity and mix consistent with PVS's past business practices and
the demands of its customers.
(c) TANGIBLE PERSONAL PROPERTY. EQUIPMENT AND FIXTURES.
Exhibit 4.6(c) accurately describes all personal property owned or leased by
PVS (including motor vehicles and property or equipment owned by third
parties) which is material to the operation or conduct of PVS's Business.
PVS owns and has good title to all such owned personal property and,
effective as of the Closing, will own and have good title to such owned
property and, except as shown on Exhibit 4.6(c) or the other Exhibits hereto,
none of such personal property is subject to any security interest, mortgage,
pledge, conditional sales agreement or other lien or encumbrances. PVS has
delivered to Vaughn true and complete copies of all leases and other
agreements affecting personal property, all of which are valid and
enforceable against the respective lessors in accordance with their
respective terms. PVS is not in default under any such leases and other
agreements affecting personal property. Except as shown on Exhibit 4.6(c),
each item of personal property is in good operating condition and repair in
all material respects as of the date hereof (ordinary wear and tear excepted)
and is available on the Effective Date and on the Closing Date for immediate
use in PVS's Business.
(d) INTANGIBLES. Exhibit 4.6(d) is a true and complete list of all
Intangibles applied for, issued to or owned by PVS or
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under which PVS is licensed or franchised. All of the Intangibles are valid
and in good standing with respect to PVS and uncontested. PVS has delivered
to Vaughn copies of all documents establishing those Intangibles with respect
to PVS. PVS is not infringing upon or otherwise acting adversely in any
material respect to any Intangibles owned by any other person or persons. No
employee of PVS has any ownership right in or to PVS's proprietary
information, including, without limitation, computer programs used in PVS's
Business.
(e) REAL PROPERTY. Exhibit 4.6(e) contains a complete list and
description of all real property leased by PVS. Each of the real property
leases reflected on Exhibit 4.6(e) is in full force and effect. Accurate and
complete copies of such leases have been delivered by PVS to Vaughn. PVS has
complied with all material commitments and material obligations on its part
to be performed or observed pursuant to the terms of such leases. No event or
condition has happened or presently exists which constitute a default or,
after notice or lapse of time or both, would constitute a default under any
such lease. All real property leased by PVS is in condition and repair
adequate for its current use, is suitable for the purposes for which it is
presently being used and is adequate to meet all present requirements of
PVS's Business as currently conducted.
4.7 UNDISCLOSED LIABILITIES. Except as disclosed in Exhibit 4.7, PVS has
no liabilities or obligations of any nature, either individually or in the
aggregate, matured or unmatured, fixed or contingent, except such liabilities
and obligations which are;
(i) accrued or reserved against in PVS's Financial Statements or the notes
thereto or in the Book Value as adjusted pursuant to Section 3.2(a);
or
(ii) expressly disclosed in this Agreement or Exhibit 4.7, attached.
4.8 CONDUCT OF BUSINESS IN ORDINARY COURSE. Since December 31, 1995,
except as either disclosed on Exhibit 4.8 or in the other Exhibits hereto,
PVS has conducted its business only in the ordinary course and has not;
(i) sold, transferred, leased to others or otherwise disposed of any
assets, except for inventory and/or services sold in the ordinary
course of business, or assets which are not material to the
operation of PVS's Business;
(ii) 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 PVS's Business;
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(iii) suffered any damage, destruction or loss (whether or not covered
by insurance) that has materially and adversely affected the
assets, PVS or PVS's Business or prospects;
(iv) encountered any labor union organizing activity or had any actual
or known threatened employee strike, work stoppage, slow down or
lockout;
(v) 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;
(vi) instituted, been named as a party, settled or agreed to settle
any litigation, action or proceeding before any court or
governmental body;
(vii) failed to replenish PVS's inventories and supplies in a normal
and customary manner consistent with PVS's ordinary business
practices, nor made any purchase commitments in excess of the
normal, ordinary and usual requirements of PVS'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 PVS's Business (given then
current industry conditions and circumstances), nor made any
material changes in PVS's marketing, selling, pricing,
advertising or personnel practices inconsistent with PVS's past
practices (other than price increases consistent with then
current industry conditions and circumstances);
(viii) failed to pay its liabilities as and when due in the ordinary
course of PVS's Business;
(ix) suffered any change, event or condition which has materially and
adversely affected PVS's condition (financial or otherwise),
properties, assets, liabilities or business;
(x) failed to maintain its facilities and equipment in a commercially
prudent and reasonable manner, other than any such failure which
would not materially and adversely affect PVS;
(xi) entered into any transaction, contract or commitment other than
in the ordinary course of PVS's Business;
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(xii) created or assumed any mortgage, pledge, lien or encumbrance upon
any of PVS's assets other than liens reflected in the Exhibits
attached to this Agreement;
(xiii) made any material write down of the value of any of its assets;
(xiv) made any increase in the compensation of the employees of PVS, or
any increase in compensation payable to any officer or director
of PVS; or
(xv) canceled, compromised, excused, forgiven, postponed or applied
any portion of a customer deposit to any account receivable,
except for adjustments or credit vouchers in the ordinary course.
4.9 ENVIRONMENTAL MATTERS. Except as disclosed in Exhibit 4.9, PVS has not
received notice of any violation by PVS of any Environmental Law, and no
condition or event has occurred in the conduct of PVS's Business which, with
notice or passage of time or both, would constitute a violation of any
Environmental Law. Except as disclosed in Exhibit 4.9, 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 applicable to PVS, have been manufactured,
generated, stored, handled, disposed, buried, dumped or used on, at or in
connection with any real property owned or leased by PVS during the use or
occupancy of said premises by PVS nor, to the knowledge of PVS, prior
thereto. Except as disclosed in Exhibit 4.9, no asbestos, asbestos containing
materials, polychlorinated biphenyls (PCBs), PCB compounds, or other
pollutants, contaminants, hazardous or toxic wastes, substances or materials,
to the knowledge of PVS, have been placed on any real property owned or
leased by PVS, nor have they been used, to the knowledge of PVS, in the
construction, repair or alteration of any portion of such real property by
PVS. Except as disclosed in Exhibit 4.9, there are no above-ground or
underground storage tanks, wells, pools, settling ponds, traps, drains or
other similar above-ground or subsurface structures present on or under the
real property owned or leased by PVS.
4.10 EMPLOYEE BENEFIT PLANS; ERISA.
(a) EXISTENCE OF PLANS. All "Employee Benefit Plans" as defined in
Section 3(3) of ERISA, sponsored, maintained or contributed to by PVS are
listed on Exhibit 4.10(a), and complete and accurate copies of the plans (or
related insurance policies) have been furnished to Vaughn. Except as
disclosed in Exhibit 4.10(a), PVS is not a party to, does not have in effect
or to become
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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) ADMINISTRATION. Each employee benefit plan required to be listed
in Exhibit 4.10(a) has been administered in all material respects in compliance
with applicable provisions of ERISA and the Code.
(c) REPORTING AND DISCLOSURE. All reporting and disclosure
requirements under ERISA and the Code for the plans listed in Exhibit 4.10(a)
hereto have been complied with.
(d) INSURANCE. All benefits provided under all employee benefit plans
listed in Exhibit 4.10(a) are covered by insurance, other than the plans for
profit sharing, sick leave, personal leave, incentive pay and vacation.
(e) MULTI-EMPLOYER PLANS. PVS 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 PVS has not
incurred or does not reasonably expect to incur any 'withdrawal liability"
under Section 4201, ET. SEQ. of ERISA.
(f) LIABILITY. Neither PVS, Vaughn, the Surviving Corporation, nor
any trade or business under common control with any of the foregoing (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 date
hereof, have any liability, obligation or responsibility with respect to any
Employee Benefit Plan maintained or provided by PVS, or any affiliate
thereof, before the date hereof as a result of PVS's noncompliance with
applicable law or plan provision with respect thereto prior to the Closing
Date.
4.11 EMPLOYEES; COLLECTIVE BARGAINING AGREEMENTS; LABOR RELATIONS.
(a) EMPLOYEES. Exhibit 4.11 (a) contains, as of the date shown on the
Exhibit, accurate and complete information as to the names of all employees
and rates of compensation currently and for the two calendar years prior
hereto including the date and amount of each change in such rate (whether in
the form of salaries, bonuses, commissions or other supplemental compensation
now or hereafter payable in group by categories as indicated on the Exhibit),
together with information as to any employment contracts or severance
arrangements involving the indebtedness of such employees to PVS and any
arrangements involving the indebtedness of PVS to
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such employees in any amount. Except as described on Exhibit 4.11 (a), there
has been no strike or labor disturbance by any such employees affecting PVS
or PVS's Business and PVS does not know of any planned or impending imminent
departure from employment expressed to them by any key employee of PVS. PVS
maintains a workforce adequate to carry on its business as presently
conducted.
(b) EMPLOYMENT AGREEMENTS. PVS is not a party to any collective
bargaining agreement or any employment agreement with any employee of PVS, other
than the written Agreements with the PVS Shareholders attached as Exhibit
4.11(b). PVS has complied 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 PVS nor any pending or threatened charges against PVS with respect to
any wage and hour, employment discrimination or other statutory violation by
PVS. 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 PVS.
4.12 TAXES. PVS has filed all federal, state and local income tax returns
due prior to the Closing Date, and all other federal, state and local tax
returns due prior to the date hereof which are required to be filed by it, or
has appropriate, effective and unexpired extensions therefor and has timely paid
all estimated taxes required to be paid prior to the date hereof in connection
with such extensions, and has timely paid or caused to be paid all taxes shown
on those returns or on any assessment therefor received by PVS to the extent
that such taxes have become due and has timely paid all required estimated
taxes, or has set aside on its books reserves (segregated to the extent required
by sound accounting practice) adequate with respect thereto. Such returns have
been prepared in accordance with the applicable provisions of the Code and the
rules and regulations thereunder and with the applicable provisions of the state
and local laws, rules and regulations concerning taxation. PVS has delivered
true and complete copies of all such tax returns and requests for extension for
the tax years ended December 31, 1995 to Vaughn. To the extent that any of PVS's
tax returns have been audited by any taxing authority, any matters raised during
such audits have been resolved to the satisfaction of such taxing authority.
Except as reflected on Exhibit 4.12, there have been no such audits since
January 1, 1985. No deficiencies that have been assessed against PVS by any
federal, state or local taxing authority are outstanding. PVS has not granted
any extension of the limitation period applicable to any claim for taxes or
assessments for any tax year. PVS has never filed, or otherwise made and as of
the Closing Date, shall have never filed, or otherwise made, a consent under
Section 341(f) of the Code or an election under Section 338 of the Code. PVS
files its federal, state, local and other tax returns on the basis of a fiscal
year ending December 31.
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4.13 CONTRACTS. Exhibit 4.13 lists all contracts to which PVS is a party or
by which it is bound, including contracts to supply products or service at
specified price or contracts to purchase or lease equipment, real property,
computers and systems, and which are material to PVS. The term "material," as
used in the previous sentence shall exclude contracts involving less than Five
Thousand Dollars ($5,000) in costs to PVS, except if such contracts excluded in
the aggregate exceed Ten Thousand Dollars ($10,000). All such contracts are
valid, binding and enforceable against the other contracting parties thereto in
accordance with their respective terms, and in full force and effect. Except as
noted on Exhibit 4.13, there is not under any such contract any default by PVS,
or to the knowledge of PVS, any other party thereto or, to the knowledge of PVS,
has any event occurred 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 set forth on Exhibit 4.13, PVS has not been advised of any
intention by any party to a customer or supply contract to;
(i) terminate or amend the terms thereof;
(ii) refuse to renew the same (if renewable) upon expiration of its
terms; or
(iii) renew the same (if renewable) upon expiration only on terms and
conditions which are more onerous than those in the existing
contract.
True and complete copies of all contracts listed on Exhibit 4.13 (together with
any and all amendments thereto) have been delivered to Vaughn. Except as
reflected in Exhibit 4.13, none of the contracts relating to personal property
would be classified for accounting purposes as capital or financing leases. None
of the listed 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 contractual validity or enforceability
of any of the contracts.
4.14 COMPLIANCE WITH LAWS; PERMITS AND LICENSES. Exhibit 4.14 is an
accurate and complete list of all permits and licenses currently issued to or
held by PVS as of the date hereof which are material to the operation of PVS's
Business. PVS has complied with all such permits and licenses and all laws,
rules, regulations and ordinances of any government or governmental agency
applicable to PVS or PVS's Business. Neither the ownership nor use of PVS's
properties nor the conduct of PVS's Business conflicts in any material respect
with the rights of any other person, firm or corporation. PVS is not in
violation of, or in default under, any terms or provisions of any lien,
mortgage, lease, license, permit, deed of trust, agreement, instrument, order,
judgment or decree. All of the licenses and permits listed on Exhibit 4.14 are
in full force and effect. PVS has delivered true and complete copies of all
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licenses and permits listed on Exhibit 4.14 (together with any and all
amendments thereto) to Vaughn. All reports of PVS to municipal authorities are
true in all material respects and have been duly filed when due. Other than the
licenses and permits listed on Exhibit 4.14, PVS requires no other license,
franchise or permit to carry on PVS's Business as now conducted. None of the
licenses or permits listed on Exhibit 4.14 will be breached by virtue of the
transactions contemplated by this Agreement.
4.15 INSURANCE. Exhibit 4.15 is an accurate and complete list of all fire,
theft, casualty, liability and other insurance policies insuring PVS and PVS's
Business, specifying the type and amount of coverage, the name of the insurance
carrier, policy number and expiration dates. All such policies are in full force
and effect. Except as set forth on Exhibit 4.15, no insurance policy of PVS has
been canceled and, no application of PVS for an insurance policy has been
rejected during the past five years. The policies listed on Exhibit 4.15 insure
PVS's tangible, real and personal property and assets, whether owned or leased,
against loss or damage by fire or other casualty amounts equal to or in excess
of 100% of the replacement value thereof. PVS has promptly and adequately
notified its insurance carriers of any and all claims known to PVS with respect
to the operations or products of PVS for which PVS is insured.
4.16 CLAIMS; LEGAL ACTIONS. Except as set forth on Exhibit 4.16, there is
no claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, nor any order,
decree or judgment in progress or pending, or to the knowledge of PVS,
threatened against or relating to PVS or PVS's Business, any employee benefit
plans described in any Exhibits to this Agreement, or to the transactions
contemplated by this Agreement, nor does PVS know of any basis for the same.
Except as set forth in Exhibit 4.16, there are no applications, complaints or
proceedings pending, or to the knowledge of PVS, threatened;
(i) before any federal or state agency involving charges of illegal
discrimination by PVS under any federal or state employment, civil
rights, disability discrimination or other similar laws or
regulations; or
(ii) before any federal, state or local agency involving environmental or
zoning issues relating to PVS under any federal, state or local
environmental or zoning law or regulation.
Except as set forth on Exhibit 4.16, no order, writ, injunction or decree is in
effect or, to the knowledge of PVS, is threatened with respect to PVS or the PVS
Shares. To the knowledge of PVS, there is no basis for any legal proceeding
against PVS that, if adversely
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determined, would have a Material Adverse Effect on PVS or the PVS Shares.
4.17 POWERS OF ATTORNEY; BANK ACCOUNTS AND SAFE DEPOSIT BOXES. Exhibit 4.17
lists all powers of attorney, all bank accounts and all safe deposit boxes of
PVS, and the names of all persons authorized to draw thereon or to have access
thereto.
4.18 BROKERS. Neither PVS nor the PVS Shareholders have incurred any
liability for any finders or brokerage fees or commissions in connection with
this Agreement.
4.19 ACCOUNTING TREATMENT MATTERS.
(a) VAUGHN OWNERSHIP. Except as shown in Exhibit 4.19(a), neither PVS
nor the PVS Shareholders own or are the beneficial owners of any Vaughn
securities or common stock as of the date hereof and continuing until the
Closing Date.
(b) POST-CLOSING ACQUISITIONS. For one year after the Closing Date,
no PVS Shareholder may acquire or commit to acquire any additional shares of the
Surviving Corporation from any other PVS Shareholder.
(c) CERTAIN PVS TRANSACTIONS. Except as disclosed on Exhibit 4.19(c),
for a period of two (2) years prior to the Closing Date;
(i) there shall have been no change in ownership, new issuances or
transfers of any PVS Shares;
(ii) there shall have been no PVS stock splits or stock dividends;
(iii) there shall have been no changes in PVS's cash dividend policy;
(iv) there shall have been no issuance of any PVS options, warrants or
other residual equity interests by PVS;
(v) PVS shall have not operated any employee stock award programs;
(vi) neither PVS nor the PVS Shareholders have been a party to any
so-called "standstill agreement" or "lock-up arrangements" with
respect to any PVS Shares; or
(vii) there shall not have been any acquisitions by PVS of treasury
shares or any sales of treasury shares by PVS.
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4.20 COMPLETE DISCLOSURE. No representation, warranty or statement made by
PVS or the PVS Shareholders in this Agreement, the Exhibits attached hereto, or
in any other material furnished or to be furnished by PVS to Vaughn or the
Surviving Corporation, pursuant to this Agreement or the transactions
contemplated hereby, contains or shall contain any untrue statement of a
material fact, or omits or shall omit to state a material fact required to be
stated or necessary to make such representations, warranties or statements, in
the light of the circumstances under which they were made, not misleading.
4.21 SURVIVABILITY. The representations, warranties and agreements of PVS
made in this Article and throughout this Agreement shall survive the Closing and
shall remain in full force and effect thereafter until expiration in accordance
with the applicable statutes of limitations pursuant to Minnesota and, if
applicable, federal law.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF VAUGHN
Vaughn makes the following representations and warranties to PVS with the
intention that PVS may rely upon the same and acknowledge that the same shall be
true on the Effective Date and as of the Closing Date and that such
representations and warranties shall survive the Closing of this transactIon.
5.1 ORGANIZATION AND STANDING. Vaughn is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota
and is duly qualified to do business in all other states in which a failure to
qualify would have a Material Adverse Effect on Vaughn's Business. Vaughn has
the requisite corporate power and authority to own, lease and use its properties
and assets and is entitled to operate its business as and in the places where
such properties and assets are now owned, leased or operated as such business is
now conducted.
5.2 AUTHORITY AND ENFORCEABILITY. Vaughn has all requisite corporate power
and authority to enter into this Agreement and to perform all of its obligations
under this Agreement. The execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action on the part of
Vaughn and has been approved by the Board of Directors of Vaughn. This Agreement
constitutes the valid and binding agreement of Vaughn enforceable in accordance
with its terms except as may be limited by bankruptcy, moratorium and insolvency
laws and other laws affecting the rights of creditors generally and except as
may be limited by the availability of equitable remedies.
5.3 COMPLIANCE. Neither the execution, delivery or performance of this
Agreement by Vaughn nor the consummation of the transactions
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contemplated hereby will, with or without the giving of notice or the passage
of time, or both, conflict with, result in a default or loss of rights (or
give rise to any right of termination, cancellation or acceleration) under,
or result in the creation of any lien, charge or encumbrance pursuant to any;
(i) provision of the Articles of Incorporation or Bylaws of Vaughn;
(ii) note, bond, indenture, mortgage, deed of trust, contract,
agreement, lease or other instrument or obligation to which
Vaughn is a party or by which it may be bound or affected which
is material to Vaughn; or
(iii) law, order, judgment, ordinance or decree to which Vaughn is a
party or by which it may be bound or affected.
5.4 SEC FILINGS; FINANCIAL STATEMENTS. Vaughn has made available to PVS the
SEC Filings which are all the documents that Vaughn was required to file with
the SEC since January 1, 1994. As of their respective dates, the SEC Filings
complied in all material respects with the applicable requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder applicable to such SEC Filings. The
financial statements of Vaughn included in the SEC Filings complied as to form
with the regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during such periods (except as may be indicated in the notes thereto or,
in the case of the unaudited statements, as permitted by Form 10-0), accurately
reflect in all material respects the books, records and accounts of Vaughn and
present fairly (subject, in the case of the unaudited statements, for year end
adjustments of a normal recurring nature) the financial condition, assets and
liabilities of Vaughn as of the dates thereof and the results of operations and
cash flows for the periods then ended.
5.5 CAPITALIZATION. The authorized capital stock of Vaughn and all
outstanding securities including all warrants, options or other right to acquire
securities of Vaughn are fully and accurately disclosed in the SEC filings or
other materials furnished by Vaughn to PVS. Exhibit 5.5 accurately summarizes
the number of shares of such capital stock of Vaughn and all warrants and
options for capital stock of Vaughn which are currently outstanding. All of the
Vaughn shares presently issued or to be issued pursuant to this Agreement are
and will be validly issued, fully paid and nonassessable, free of preemptive
rights and rights of first refusal as of the Closing and have not been and will
not be issued at Closing in violation of federal or state securities laws.
Effective as of Closing, the PVS Shareholders shall have good and valid title
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to the shares of the Surviving Corporation issued to them free and clear of
all pledges, security interests, liens, charges, encumbrances, agreements,
equities, claims and options of any nature.
5.6 CONDUCT OF VAUGHN'S BUSINESS IN ORDINARY COURSE. Except as disclosed
in Exhibit 5.6, Vaughn has conducted its business since January 31, 1996, in
the ordinary course of business and has not taken any action or suffered any
change, event or condition which has or could have any Material Adverse
Effect on the value of Vaughn, the Surviving Corporation, or their shares.
5.7 CLAIMS; LEGAL ACTIONS. Except as set forth on Exhibit 5.7, there is
no claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, nor any
order, decree or judgment in progress or pending, or to the knowledge of
Vaughn threatened, relating to Vaughn or Vaughn's Business, any employee
benefit plans of Vaughn, or to the transactions contemplated by this
Agreement, nor does Vaughn know of any basis for the same. Except as set
forth in Exhibit 5.7, there are no applications, complaints or proceedings
pending, or to the knowledge of Vaughn, threatened;
(i) before any federal or state agency involving charges of illegal
discrimination by Vaughn under any federal or state employment, civil
rights, disability discrimination or other similar laws or
regulations; or
(ii) before any federal, state or local agency involving environmental or
zoning issues relating to Vaughn under any federal, state or local
environmental or zoning law or regulation.
Except as set forth on Exhibit 5.7, no order, writ, injunction or decree is in
effect or, to the knowledge of Vaughn, is threatened with respect to Vaughn or
Vaughn's Business. To the knowledge of Vaughn, there is no basis for any legal
proceeding against Vaughn that, if adversely determined, would have a Material
Adverse Effect on Vaughn.
5.8 COMPLETE DISCLOSURE. No representation, warranty or statement made by
Vaughn in this Agreement, the Exhibits attached hereto, or in any other material
furnished or to be furnished by Vaughn to PVS or the Surviving Corporation,
pursuant to this Agreement or the transactions contemplated hereby, contains or
shall contain any untrue statement of a material fact, or omits or shall omit to
state a material fact required to be stated or necessary to make such
representations, warranties or statements, in the light of the circumstances
under which they were made, not misleading. Except as disclosed to PVS in the
Vaughn SEC filings and except as otherwise disclosed in this Agreement or the
Exhibits hereto, there are no conditions that exist as of the date of this
Agreement which
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would cause Vaughn to be in violation of any of its representations or
warranties contained herein.
5.9 SURVIVABILITY. The representations, warranties and agreements of
Vaughn made in this Article and throughout this Agreement shall survive the
Closing and shall remain in full force and effect thereafter until expiration
in accordance with the applicable statutes of limitations pursuant to
Minnesota and, if applicable, federal law.
ARTICLE 6
OTHER AGREEMENTS
6.1 RULE 144 REPORTING. With a view to make available the benefits of
certain rules and regulations of the Securities and Exchange Commission which
may permit the sale of restricted securities (as that term is used in the
Securities Act) to the public without registration, Vaughn or (after the
Closing) the Surviving Corporation shall;
(i) make its best efforts to make and keep available "adequate
current public information" as those terms are understood and
defined in Rule 144(c) under the Securities Act, at all times
from and after the Closing Date;
(ii) use its best efforts to file with the Securities and Exchange
Commission in a timely manner all reports and other documents
required of the Surviving Corporation under the Securities Act
and the Exchange Act; and
(iii) so long as a PVS Shareholder owns any restricted securities of
the Surviving corporation, furnish to such PVS Shareholder
forthwith upon request a written statement by the Surviving
Corporation as to its compliance with the reporting requirements
of Rule 144 and of the Securities Act and Exchange Act, a copy of
the most recent annual or quarterly report of the Surviving
Corporation, and such other reports and documents so filed as a
PVS Shareholder may reasonably request in order to avail himself
of any rule or regulation of the Securities and Exchange
Commission allowing a PVS Shareholder to sell any such restricted
securities without registration.
6.2 STOCK PLEDGE AGREEMENT. On or before the Closing Date, the PVS
Shareholders and the Surviving Corporation shall execute a Stock Pledge
Agreement in the form of Exhibit 6.2.
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6.3 RESTRICTIONS ON TRANSFER OF STOCK CONSIDERATION. PVS and the PVS
Shareholders acknowledge and agree that the Stock Consideration has 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 appropriate exemption therefrom. PVS and the PVS Shareholders
also acknowledge and agree that, except as provided in Section 6.3, Vaughn and
the Surviving Corporation shall have no obligation to register the shares of
common stock of Vaughn comprising the Stock Consideration. On or before the
Closing Date, PVS and the PVS Shareholders agree to execute an Investment Letter
in the form of Exhibit 6.3.
6.4 PUBLIC ANNOUNCEMENT. The parties shall cooperate in developing a public
announcement announcing the transactions contemplated by this Agreement. Neither
party shall make any public announcement without the advance consent of the
other party, which shall not be unreasonably withheld.
6.5 EXHIBITS. All Exhibits called for in this Agreement shall be provided
to the appropriate party at least twenty (20) days prior to Closing.
6.6 STALE ACCOUNTS RECEIVABLE. Accounts receivable in excess of ninety (90)
days old not reflected in the computation of Book Value shall remain assets of
the Surviving Corporation and the Surviving Corporation shall use its best
efforts to collect such accounts. To the extent the Surviving Corporation
collects such accounts, net proceeds collected (net of costs of collection)
shall be distributed pro-rata to the PVS Shareholders. The PVS Shareholders
shall receive accountings at least quarterly showing all collections and all
remaining receivables which are being collected for their benefit.
6.7 EMPLOYMENT AGREEMENTS. On or before the Closing Date, the PVS
Shareholders and the Surviving Corporation shall have executed the Employment
Agreements in the form attached as Exhibit 6.7 providing for the employment of
each of the PVS Shareholders as employees of the Surviving Corporation.
6.8 COSTS AND EXPENSES. Each party shall bear the costs of its own due
diligence, attorneys' fee and all other expenses incurred by such party in
connection with the negotiation and consummation of this Agreement.
ARTICLE 7
CONDITIONS PRECEDENT TO PVS'S OBLIGATIONS
The obligations of PVS are subject to the satisfaction, at or before the
Closing, of the conditions set forth below. The benefit
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of these conditions is for PVS only and may be waived by PVS in writing at
anytime in its sole discretion.
7.1 ACCURACY OF VAUGHN'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Vaughn in this Agreement are true and correct
in all material respects as of the date hereof and as of the Closing Date.
7.2 PERFORMANCE BY VAUGHN. Vaughn shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required to be performed by it.
7.3 DELIVERIES AT CLOSING. At the Closing, Vaughn shall have delivered
all instruments and agreements required to be delivered by it pursuant to the
terms of this Agreement.
7.4 CONSENTS. Vaughn shall have obtained and delivered to PVS all consents
required by any party in order to consummate the transactions contemplated by
this Agreement.
7.5 OPINION OF COUNSEL. PVS shall have received the favorable opinion,
dated the date of Closing, of Vaughn's counsel, in the form of Exhibit 7.5.
7.6 CHANGES IN BUSINESS. From and after the date hereof, there shall have
occurred or be threatened no event relative to Vaughn's Business not disclosed
in the Exhibits hereto which is reasonably likely to have a Material Adverse
Effect.
7.7 BOARD OF DIRECTOR APPROVAL. This Agreement and the transactions
contemplated hereby shall have been adopted and approved by the Board of
Directors of Vaughn.
7.8 EMPLOYMENT AGREEMENTS. The Employment Agreements in the form of
Exhibit 6.7 shall have been duly executed and delivered.
ARTICLE 8
CONDITIONS PRECEDENT TO VAUGHN'S OBLIGATIONS
The obligations of Vaughn are subject to the satisfaction, at or before the
Closing, of the conditions set forth below. The benefit of these conditions is
for Vaughn only and may be waived by Vaughn in writing at anytime in its sole
discretion.
8.1 ACCURACY OF PVS'S REPRESENTATIONS AND WARRANTIES. The representations
and warranties of PVS and the PVS Shareholders in this Agreement as supplemented
and modified through the Closing Date are true and correct in all material
respects as of the date hereof and as of the Closing Date.
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8.2 PERFORMANCE BY PVS. PVS shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
to be performed by it.
8.3 DELIVERIES AT CLOSING. At the Closing, PVS shall have delivered all
instruments and agreements required to be delivered by it pursuant to the terms
of this Agreement.
8.4 CONSENTS. PVS shall have obtained and delivered to Vaughn all consents
required by any party in order to consummate the transactions contemplated by
this Agreement.
8.5 OPINION OF COUNSEL. Vaughn shall have received the favorable opinion,
dated the date of Closing, of PVS's counsel, in the form of Exhibit 8.5.
8.6 CHANGES IN BUSINESS. From and after the date hereof, there shall have
occurred or be threatened no event relative to PVS's Business not disclosed in
the Exhibits hereto which is reasonably likely to have a Material Adverse
Effect.
8.7 SHAREHOLDER APPROVAL; DISSENTING SHARES. This Agreement and the
transactions contemplated hereby shall have been adopted and approved by the
holders of 100% of the PVS Shares. There shall be no dissenting PVS
Shareholders.
ARTICLE 9
TERMINATION
9.1 TERMINATION. This Agreement may be terminated and the Merger abandoned
at anytime on or before the Closing Date, whether before or after adoption by
the Shareholders of PVS or the Board of Directors of Vaughn;
(i) by mutual consent of PVS and Vaughn;
(ii) by PVS or Vaughn, if any governmental authority shall have
enacted, issued, promulgated, enforced or entered any law or
judgment which has the effect of prohibiting consummation of the
transactions contemplated by this Agreement;
(iii) by PVS or Vaughn, if any of the conditions precedent to their
respective obligations contained in Articles 7 and 8 of this
Agreement required to have been met have not been met as of the
Closing Date and such breach or failure has not been waived by
the non-breaching party or cured by the breaching party; or
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(iv) by PVS or Vaughn if, subsequent to delivery of the Exhibits
hereto, such Exhibits, individually or collectively, disclose
events or conditions which have or which are reasonably likely to
have a Material Adverse Effect.
9.2 EFFECT OF TERMINATION. Upon the termination of this Agreement for the
reasons set forth in Section 9.1, this Agreement shall become null and void and
the parties will have no remedies against, and will have no liability to, each
other or their respective officers, directors, shareholders, partners,
representatives or agents. The Confidentiality Agreement previously executed by
the parties shall continue in full force and effect without regard to
termination of this Agreement.
ARTICLE 10
CLOSING
10.1 CLOSING PLACE AND DATE. The Closing shall take place on June 28, 1996
at the offices of Rider, Bennett, Egan & Arundel, LLP, 2000 Metropolitan Centre,
333 South Seventh Street, Minneapolis, Minnesota 55402, or such other place and
time as the parties shall mutually agree.
10.2 DELIVERIES BY PVS. PVS shall deliver to Vaughn and the Surviving
Corporation the following, executed where appropriate by PVS and the PVS
Shareholders:
(i) certificates of Merger, certified by the Secretaries of State of
Illinois and Minnesota, with respect to the Merger of PVS into
Vaughn;
(ii) within forty-five (45) days, after the Closing Date, after
determination of Book Value, in accordance with Section 3.2(a),
stock certificates of PVS held by the PVS Shareholders
representing 100% of the issued and outstanding common stock of
PVS, duly endorsed for transfer;
(iii) resolutions adopted by the Board of Directors of PVS and the PVS
Shareholders authorizing and approving the Merger and the other
transactions contemplated by this Agreement;
(iv) certificates of the Chief Executive Officer and the PVS
Shareholders of PVS certifying as to the accuracy of the
representations and warranties of PVS set forth in Article 4
hereof;
(v) the consents described in Section 8.4 hereof;
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(vi) the Other Agreements contemplated by Article 6 hereof;
(vii) the stock books, stock ledgers, minute books, corporate seals and
all other corporate records of PVS;
(viii) PVS's Articles of Incorporation, certified by the Secretary of
State -of Illinois as of a date within three days of the Closing
Date, and PVS's Bylaws, certified by the Secretary of PVS as of
the Closing Date;
(ix) a letter executed by a duly authorized representative of Wolf &
Company, LLP authorizing Vaughn and the Surviving Corporation to
rely on its Independent Accountant's Review relating to the
Financial Statements of PVS as of December 31, 1996;
(x) the Opinion of Counsel described in Section 8.5; or
(xi) all other documents, certificates, instruments and writings
required to be delivered by PVS or that may be reasonably
requested by Vaughn a reasonable time prior to the Closing.
10.3 DELIVERIES BY VAUGHN. Vaughn shall deliver to PVS and the PVS
Shareholders the following, executed where appropriate by duly authorized
officers of Vaughn:
(i) certificate of Merger, certified by the Secretary of State of
Minnesota, with respect to the Merger of PVS into Vaughn;
(ii) within forty-five (45) days after the Closing Date, after
determination of Book Value in accordance with Section 3.2(a),
certificates representing the Stock Consideration to be issued
and delivered pro rata to the PVS Shareholders or, to the extent
provided in Section 11.4,, delivered to the Surviving Corporation
pursuant to the terms of the Stock Pledge Agreement;
(iii) resolutions adopted by the Board of Directors of Vaughn
authorizing and approving the Merger and the other transactions
contemplated by this Agreement;
(iv) certificates of the Chief Executive Officer and Chief Financial
Officer of Vaughn certifying as to the accuracy of the
representations and warranties of Vaughn set forth in Article 5
hereof;
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(v) the consents described in Section 7.4 hereof;
(vi) the Other Agreements contemplated by Article 6 hereof;
(vii) the Opinion of Counsel described in Section 7.5; or
(viii) all other documents, certificates, instruments and writings
required to be delivered by Vaughn or that may be reasonably
requested by PVS or the PVS Shareholders a reasonable time prior
to the Closing.
ARTICLE 11
INDEMNIFICATION
11.1 INDEMNIFICATION OF SURVIVING CORPORATION BY PVS SHAREHOLDERS.
Notwithstanding the Closing, the PVS Shareholders shall jointly and severally
indemnify and hold Surviving Corporation harmless against and in respect of, and
shall reimburse Surviving Corporation for:
(i) any and all losses, liabilities or damages, including all
reasonable attorneys' fees, court costs, and costs of collection,
resulting from any untrue representation, breach of warranty or
non-fulfillment of any covenant or agreement by PVS or the PVS
Shareholders contained in this Agreement after giving effect to
additional disclosure made by PVS and the PVS Shareholders by
delivery of the Exhibits hereunder;
(ii) any claims for finders fees or brokerage or other commission by
any person, firm or corporation, including all reasonable
attorneys fees, court costs and costs of collection, arising by
reason of any services alleged to have been rendered to or at the
instance of PVS or the PVS Shareholders with respect to this
Agreement or any of the transactions contemplated by this
Agreement; and
(iii) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, reasonable costs and expenses, including
all reasonable attorneys' fees, court costs and costs of
collection, incident to any of the foregoing or incurred in
investigating or attempting to avoid the same or to oppose the
imposition thereof consistent with the other terms of this
Agreement.
(iv) the failure to collect any and all accounts receivable of PVS
which were less than ninety (90)
26
<PAGE>
days old as of the Closing Date (net of reserve reflected in the
final determination of Book Value in accordance with
Section 3.2(a)) within ninety (90) days of their respective due
dates.
11.2 INDEMNIFICATION OF THE PVS SHAREHOLDERS BY VAUGHN. Notwithstanding the
Closing, Vaughn and the Surviving Corporation, as successor to Vaughn's
obligations, shall indemnify and hold the PVS Shareholders harmless against and
in respect of, and shall reimburse the PVS Shareholders for:
(i) any and all losses, liabilities or damages, including all
reasonable attorneys' fees, court costs, and costs of collection,
resulting from any untrue representation, breach of warranty or
non-fulfillment of any covenant or agreement by Vaughn contained
in this Agreement;
(ii) any claims for finders fees or brokerage or other commission by
any person, firm or corporation, including all reasonable
attorneys fees, court costs and costs of collection, arising by
reason of any services alleged to have been rendered to or at the
instance of Vaughn with respect to this Agreement or any of the
transactions contemplated by this Agreement; and
(iii) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, reasonable costs and expenses, including
all reasonable attorneys' fees, court costs and costs of
collection, incident to any of the foregoing or incurred in
investigating or attempting to avoid the same or to oppose the
imposition thereof consistent with the other terms of this
Agreement.
11.3 CLAIMS PROCEDURE. The following exclusive procedure shall govern any
and all indemnity claims which may be brought pursuant to the terms of this
Agreement.
(a) NOTICE OF CLAIM. The PVS Shareholders may seek indemnification
from Vaughn, or the Surviving Corporation, as successor to Vaughn. The Surviving
Corporation may seek indemnification from the PVS Shareholders. The party
seeking indemnification shall promptly give written notice to the Indemnifying
Party of all claims whether between the parties or raised by a third party, that
could constitute a claim for indemnification. The written notice shall specify
to the extent known by the party seeking indemnification:
(i) the factual basis for such claim and the alleged violation of this
Agreement, and
27
<PAGE>
(ii) the amount of the claim.
(b) INVESTIGATION: PAYMENT. Following receipt of notice from the
party seeking indemnification, the Indemnifying Party shall have 30 days to make
such investigation of the claim as the Indemnifying Party deems necessary or
desirable. For the purposes of such investigation, the party seeking
indemnification agrees to make available to the Indemnifying Party and/or its
authorized representatives the information relied upon by the party seeking
indemnification to substantiate the claim, as well as any other information
bearing thereon reasonably requested by the Indemnifying Party. If the party
seeking indemnification and the Indemnifying Party agree at or prior to the
expiration of the 30 day period (or any mutually agreed upon extension thereof)
to the validity and amount of such claim, the Indemnifying Party shall
immediately pay to the party seeking indemnification the full amount of the
claim.
(c) ARBITRATION. If the party seeking indemnification and the
Indemnifying Party do not agree within 30 days from the date of a claim (or any
mutually agreed upon extension thereof) the dispute shall be settled by
arbitration in accordance with the commercial rules of the American Arbitration
Association, such arbitration to be venued in Chicago, Illinois. The decision of
the Arbitrator(s) shall be final and binding upon the parties. Any expenses of
such arbitration including, without limitation, the fees of the arbitrators,
shall be paid as determined appropriate by the arbitrators. Third party claims
shall be settled by such means as may be appropriate subject to the terms of
11.3(d), below.
(d) PARTICIPATION IN DEFENSE. With respect to any claim made by a
third party as to which any party is entitled to indemnification, the
Indemnifying Party shall have the right, at its own expense, to participate
in or assume control of the defense of such claim, and the party seeking
indemnification shall cooperate fully with the Indemnifying Party. If the
Indemnifying Party elects to assume control of the defense of any such
third-party claim, the party seeking indemnification shall have the right to
participate in the defense of such claim at its own expense and, if it so
elects, the Indemnifying Party shall have no right to settle or compromise
such third-party claim. If the Indemnifying Party does not elect to assume
control or otherwise participate in the defense of any such third-party
claim, it shall be bound by the results obtained by the party seeking
indemnification with respect to such claim.
(e) COLLATERAL. If an indemnification amount owing by the PVS
Shareholders is determined by mutual agreement or by arbitration as provided in
this Section and not satisfied by the PVS Shareholders within 15 days after such
a determination, then such claim shall be satisfied by:
(i) offset against payments otherwise due the PVS Shareholders and, if
such offset is not sufficient to satisfy the
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<PAGE>
indemnification obligation; or
(ii) pursuant to the terms of the Stock Pledge Agreement attached as
Exhibit 6.2.
11.4 LIMITATION OF INDEMNIFICATION OBLIGATION. Notwithstanding any other
provisions in this Agreement, the liabilities of the parties under this
Agreement shall be limited as follows:
(i) Except as provided in Section 11.4(iv), a party's aggregate
liability for any and all claims (including, without limitation,
claims of any regulatory authority) shall be limited to the sum
obtained by multiplying the value of the Stock Consideration as
of the Closing Date by Ten Percent (10%).
(ii) Except as provided in Section 11.4(iv),a party's aggregate
liability for any and all claims (limited as provided in Section
11.4(i)) shall continue until issuance of the independent audit
report on the Surviving Corporation for the Surviving
Corporation's fiscal year ending January 31, 1997.
(iii) The provisions of Section 11.4(ii) notwithstanding, a party
shall remain liable for all claims brought pursuant to this
Section prior to the date specified in Section 11.4(ii) until
resolution and satisfaction of such claim in accordance with this
Section.
(iv) Between the date hereof and the Closing Date, the parties shall
conduct such diligence as they consider necessary and
appropriate. To the extent that the parties discover specific
contingent liabilities of any party during the diligence process,
the parties shall use their best efforts to quantify the
potential exposure associated with such contingent liability and
the potential liability of the obligated party for
indemnification claims shall increase by a percentage of the
value of the Stock Consideration equal to the agreed value of
such contingent liability. At closing, such Stock Consideration
shall be subject to the terms of the Stock Pledge Agreement
pending resolution of such contingencies. If the parties cannot
agree upon the value of such contingent liability or if such
value exceeds an additional Ten Percent (10%) of the Stock
Consideration hereunder, either party may elect to cancel and
terminate this Agreement and elect not to proceed with the
Merger.
29
<PAGE>
(v) The parties intend that the Merger contemplated by this Agreement
shall be treated as a "pooling of interests" in accordance with
generally accepted accounting principles and rules and
regulations promulgated by the SEC. To the extent that any
provision of this Section is deemed, by the SEC or in the
judgment of the Surviving Corporation, to make the "pooling of
interests" method of accounting unavailable, such provision shall
be deemed null and void and the indemnification provisions of
this Section shall be deemed amended to the extent required to
qualify for "pooling of interests" accounting treatment.
11.5 SOLE REMEDY. The rights of the Surviving Corporation and the rights of
the PVS Shareholders as set forth and as limited in this Article Il, shall be
the sole and exclusive remedies of Vaughn, or the Surviving Corporation as its
successor, and of PVS and the PVS Shareholders hereunder.
ARTICLE 12
POST-CLOSING AGREEMENTS
12.1 FURTHER ASSURANCES. Subsequent to the Closing Date, to the extent that
any additional instruments, agreements or consents are reasonably necessary to
consummate the transactions contemplated by this Agreement, the parties agree to
cooperate fully and to execute such instruments, agreements or consents in a
timely fashion upon request by another party hereto.
ARTICLE 13
MISCELLANEOUS
13.1 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota, excluding any choice of law
rules that may direct the application of the laws of another jurisdiction.
13.2 ENTIRE AGREEMENT. This Agreement and the exhibits and agreements
attached hereto constitute the entire agreement of the parties with respect to
the subject matter hereof and may not be modified, amended, or terminated except
by a written agreement signed by all of the parties hereto. The Confidentiality
Agreement previously executed by the parties shall remain in full force and
effect notwithstanding the Closing of the transactions contemplated by this
Agreement, except as may be required by law or generally accepted accounting
principles.
13.3 WAIVER AND AMENDMENT. Any party may waive any provision, breach or
default of this Agreement; provided, however, that no
30
<PAGE>
waiver of any provision, breach or default hereunder shall be considered
valid unless in writing and signed by the party giving such waiver, and no
waiver shall be deemed a waiver of any other provision or any subsequent
breach or default of the same or similar nature.
13.4 NOTICES. Any notices or other communications to any parties hereto
shall be deemed given when delivered by hand, facsimile transmission with
receipt confirmed, or certified mail, return receipt requested, to the
addresses set forth below, or to such other address as the parties may
designate from time to time, by written notice to the other parties:
to PVS: Satastar Corporate Services, Inc.
Attn: Robert J. Vavra
130 East St. Charles Road
Carol Stream, Illinois 60188
with a copy to: Wilbert F. Crowley
Cowen, Crowley & Nord, P.C.
55 West Monroe Street, Suite 500
Chicago, Illinois 60603
to Vaughn and/or Vaughn Communications, Inc.
Surviving Corporation: Attn: E. David Willette
5050 West Seventy-Eighth Street
Minneapolis, MN 55435
with a copy to: Vaughn Communications, Inc.
Attn: Charles Reinhart
5050 West Seventy-Eighth Street
Minneapolis, MN 5543
with an additional Barry F. Clegg, Esq.
copy to: Rider, Bennett, Egan & Arundel,
P.L.L.P.
2000 Metropolitan Centre
333 South Seventh Street
Minneapolis, Minnesota 55402
to PVS Shareholders: Robert J. Vavra
(home address)
Carl R. Birns
(home address)
Richard J. Polizzi
(home address)
with a copy to: Wilbert F. Crowley
Cowen, Crowley & Nord, P.C.
55 West Monroe Street, Suite 500
31
<PAGE>
Chicago, Illinois 60603
13.5 BINDING AGREEMENT. This Agreement shall be binding upon and inure to
the benefit of each party hereto, and its successors, assigns and transferees.
Other than as provided herein, neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties.
13.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original but which when taken
together, including counterpart signature pages signed separately but by all
parties in total, shall be deemed one instrument.
13.7 EXHIBITS. The Exhibits to this Agreement shall be deemed to be
incorporated by reference in this Agreement as if fully set forth herein.
[Remainder of this page intentionally left blank.]
32
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
VAUGHN COMMUNICATIONS, INC.
By
-----------------------------------
Its
--------------------------------
SATASTAR CORPORATE SERVICES, INC.
d/b/a PVS CORPORATE SERVICES
By
-----------------------------------
Its
--------------------------------
PVS SHAREHOLDERS
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
33
<PAGE>
EXHIBIT (10)(r)
VAUGHN COMMUNICATIONS, INC.
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE
The Plan is intended to provide a means for Vaughn Communications,
Inc. (the Company), by offering incentives to non-employee Directors, to
attract and retain persons of ability as members of the Company's Board of
Directors and motivate them to advance the interests of the Company.
It is intended that the options granted under the Plan constitute
"nonstatutory options," i.e., options not qualifying under Section 422 or
other similar provisions of the Internal Revenue Code 1986, as from time to
time amended.
2. SHARES SUBJECT TO THE PLAN
A total of 100,000 shares of authorized but unissued or reacquired
$.10 par value Common Stock of the Company (the "Shares") is reserved for
issuance upon exercise of options under the Plan. If any option expires or
terminates without having been exercised in full, the unacquired Shares shall
be available for the grant of future options under the Plan.
3. ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee").
4. ELIGIBILITY AND AMOUNT OF GRANT
Options for 2,000 Shares each shall be automatically granted by the
Company under the Plan on June 20, 1995, the date of the Company's 1995
Annual Meeting of Shareholders, and biannually on the date of each Annual
Meeting of Shareholders held in each odd calendar year thereafter, to each
non-employee director of the Company elected at each such Annual Meeting of
Shareholders or whose term of office as a director continues after such
Annual Meeting of Shareholders and who as of the date thereof has served for
at least two (2) calendar years (assuming for such purpose that the Annual
Meeting of Shareholders in each year is one calendar year after and prior to
the date of the preceding and subsequent Annual Meeting of Shareholders,
notwithstanding the actual calendar days then elapsed) (individually an
"Optionee" and collectively the Optionees").
<PAGE>
The only persons eligible to be Optionees under the Plan are
persons who are non-employee members of the Company's Board of Directors on
the respective dates of grant set forth above, but Optionees who cease to be
such thereafter may continue to hold and exercise the options granted to them
hereunder in accordance with the terms and conditions hereof.
5. OPTION PRICE
The option exercise price for the options granted under the Plan
shall equal One Hundred Percent (100%) of the fair market value of the
Company's Common Stock on the date of grant. Fair market value shall be
determined by the Committee based upon the last sale price per share of the
Company's Common Stock in the National Association of Securities Dealers
Automated Quotations System (NASDAQ) for National Market Issues or, as
applicable, for Small-Cap Issues, as reported by the National Association of
Securities Dealers for the last business trading day preceding the date of
grant, or, if the Common Stock is not traded on NASDAQ, through such other
measure or means as the Committee may in good faith determine to be
appropriate to determine such fair market value. The Committee may authorize
the Chief Executive Officer or Secretary of the Company to make any
determinations required in this Section 5.
6. OPTION TERMS
The options granted hereunder shall be evidenced by an Option
Agreement, in the form attached hereto as Exhibit A, executed as of the date
of grant by the Company and the Optionee, on identical terms and conditions
for each option, except for the respective date of grant and corresponding
option exercise price, and including the following:
(a) The Option Agreement shall specify that the option is a
nonstatutory option for 2,000 Shares and shall set forth the option
exercise price. It shall also specify that the option shall not be
exercisable for a period of six (6) months after the date of grant and
shall first become exercisable on the last day of such six month
period.
(b) The option price shall be paid at the time of exercise which
shall be in writing and, at the election of the Optionee, may be paid
in cash and/or by the sale and delivery of certificate(s) duly
endorsed for transfer, in shares of the Company's Common Stock already
owned by the Optionee. Any shares so sold to the Company in payment
of the option price shall be valued at fair market value on the
exercise date as determined by
2
<PAGE>
the Committee. Fair market value for this purpose shall be determined
in the same manner provided by Section 5 substituting the date of
exercise for the date of grant. Any fractional share not required for
payment of the option price shall be paid for the Company in cash on
the basis of the same value utilized for such exercise.
(c) Except as otherwise provided in this subsection and in
subsections (a) above and (e) below, the Optionee may exercise the
option in whole or in part at any time after grant of the option and
prior to seven (7) years from that date; provided, however, that the
option shall not be exercisable until, and shall be subject to,
approval of the Plan by the shareholders of the Company at a meeting
duly called and held for such purpose not later than the Annual
Meeting of Shareholders in 1996. Approval shall require a quorum and
a majority vote of the shares owned by those shareholders present, or
represented, and entitled to vote at the meeting.
(d) Unless the issuance of the Shares upon the exercise of an
option hereunder is registered under federal and state securities
laws, the Optionee shall be required to give an investment
representation at the time of exercise, and transfer of the Shares
shall be appropriately restricted. The Company shall not be obligated
for but does currently anticipate registration of the Shares issued
under the Plan under federal and certain state securities laws.
(e) If the Optionee, until such time continuously serving as a
Director of the Company, is terminated as a Director by reason of
death or disability or by retirement at or after age 55, the option,
to the extent not previously exercised, may be exercised in whole or
in part during the balance of term of the option, except that no
option shall be exercisable for a period of six (6) months after the
date of grant. In the event of the Optionee's death, the option may
be exercised by the personal representative of the Optionee's estate
and/or by the Optionee's heirs, as the case may be. If the Optionee's
service as a Director terminates for any other reason, the option
shall be exercisable according to its terms, but shall expire sixty
(60) days after the date the Optionee's service as a Director
terminates. Notwithstanding anything herein to the contrary, unless
expiring
3
<PAGE>
earlier, all options granted under the Plan shall terminate and expire
seven (7) years after the date of grant.
(f) The options hereunder shall not be transferable by the
Optionee except by will or the laws of descent and distribution.
During the Optionee's life, the options shall be exercisable only by
the Optionee and only while and if continuously serving as a Director
of the Company, except as provided in Section 6(f) above.
7. TERMINATION
Unless extended or sooner terminated by action of the Company's
Board of Directors, the Plan shall terminate ten (10) years from its
effective date. Options outstanding under the Plan at the time of termination
shall remain in effect until exercise or expiration.
8. EFFECTIVE DATE
The effective date of the Plan shall be June 20, 1995, the date of
adoption by the Company's Board of Directors. Options under the Plan shall
be automatically granted in accordance with Section 6 hereof.
9. ADJUSTMENT OF SHARES
In the event of a recapitalization, merger, consolidation,
reorganization, stock dividend, stock split or other change in capitalization
affecting the Common Stock of the Company, appropriate equitable Share and
per Share option price adjustments in outstanding options shall be made by
the Committee to prevent dilution or enlargement of rights.
10. AMENDMENT
The Company's Board of Directors may amend the Plan at any time as
determined to be in the best interests of the Company, including any
amendment to extend or terminate the Plan. The Board shall not, however,
without shareholder approval, increase the maximum number of Shares subject
to the Plan, or to the options to be automatically granted in accordance with
the Plan, or restrict the class of persons eligible to be granted options
under the Plan. Provided, further, in accordance with Rule 16b-3 (c) (2) (ii)
under the Securities Exchange Act of 1934, as said Rule may from time to time
be amended, that the amount and frequency of the option grants under the Plan
shall not, in any event, be amended more than once every six months, other
than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
4
<PAGE>
VAUGHN COMMUNICATIONS, INC.
1995 NON-EMPLOYEE DIRECTOR NONSTATUTORY
STOCK OPTION AGREEMENT
VAUGHN COMMUNICATIONS, INC., a Minnesota corporation (the
"Company"), pursuant to the 1995 Non-Employee Director Stock Option Plan
previously adopted by the Board of Directors of the Company (the "Plan"), and
in consideration of services as a member of the Board of Directors of the
Company to be rendered by __________________ (the "Optionee"), hereby grants
to the Optionee a nonstatutory stock option (the "Option") not in accordance
with Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to purchase 2,000 shares of the Company's $.10 par value Common
Stock (the "Shares") at a price of $____ per Share (the "Purchase Price"),
equal to 100% of the fair market value of the Common Stock on the date of
grant (set forth at the end of this Agreement), determined in accordance with
Section 5 of the Plan. This grant is made on the following terms and
conditions.
NONSTATUTORY STOCK OPTION
1. The Optionee may first exercise the Option at any time on or
after six (6) months after the date of grant (set forth at the end of this
Agreement) and thereafter may exercise the Option at any time on or before
___________, 19___, (seven (7) years after such date of grant); provided,
however, that the Option shall not be exercisable unless and until the Plan
has been approved by the shareholders of the Company as provided in the Plan.
2. The Option shall not be transferable by the Optionee, except
by will or the laws of descent and distribution. During the Optionee's life,
the Option shall be exercisable only by the Optionee and only while and if
the Optionee is continuously serving as a Director of the Company, except as
provided in Section 4 of this Agreement.
3. The Option may be exercised in whole or in part, from time to
time, by delivery to the Secretary of the Company of a written notice
specifying the number of Shares desired to be purchased and accompanied by
full payment of the Purchase Price, at the election of the Optionee, in cash
and/or by delivery of certificate(s) duly endorsed for transfer, in shares of
the Company's Common Stock already owned by the Optionee. Any shares
endorsed and delivered to the Company in payment of the Purchase Price shall
be valued at the fair market value of the shares
<PAGE>
on the date of exercise. Fair market value for this purpose shall be
determined in accordance with Section 6(b) of the Plan. Any fractional share
not required for payment of the Purchase Price shall be paid for by the
Company in cash on the basis of the same value utilized for such exercise.
4. All unexercised rights under the Option shall expire at the
end of the term specified in Section 1 above or on such earlier date sixty
(60) days after termination of Optionee's directorship for any reason other
than by reason of death or disability or retirement at or after age 55. In
the event of the Optionee's death, the Option may be exercised by the
personal representative of the Optionee's estate and/or by the Optionee's
heirs entitled by law to the Optionee's rights under the Option, as the case
may be.
5. Unless the issuance of the Shares purchased upon the exercise
of the Option is registered with federal and state securities authorities
(which is anticipated, but for which the Company has no obligation), or is
determined by counsel for the Company to be exempt from such registration
without need therefor, the Optionee shall be required to sign and be bound by
a customary "investment letter", setting forth the Optionee's investment
representation and securities law transfer restrictions consistent with
federal and state securities law exemptions from registration for issuance of
the Shares on exercise and consistent with Rule 144 under the Securities Act
of 1933 and requisite legends shall be placed upon the certificates for the
Shares. Without regard to registration or exemption therefrom on exercise,
because the Optionee may be an affiliate of the Company within the meaning of
said Rule 144, securities law transfer restrictions consistent with said Rule
144 shall in any event be applicable and requisite legends and stop transfer
orders shall be placed upon or against the certificates for the Shares by the
Company's Transfer Agent and Registrar.
6. If prior to the expiration of the Option, the Shares then
subject to the Option shall be affected by any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split, or other change
in capitalization affecting the present Common Stock of the Company, then the
number and kind of Shares covered by this Agreement, and the Purchase Price
per Share, shall be appropriately adjusted in accordance with the Plan to
prevent dilution or enlargement of the Optionee's rights which might
otherwise result.
7. It is intended that the Plan and this nonstatutory Option
comply and be interpreted in accordance with Rule 16b-3 under the Securities
Exchange Act of 1934, as amended. The
2
<PAGE>
provisions of the Plan pertaining to Options, to the extent not set forth in
this Agreement, are incorporated herein by reference.
IN WITNESS WHEREOF, this Non-Employee Director Nonstatutory Stock
Option Agreement is hereby executed as of the ___ day of ____________, 199__
(date of grant).
VAUGHN COMMUNICATIONS, INC.
By
-------------------------------
Its
--------------------------
OPTIONEE:
-------------------------
3
<PAGE>
RESOLUTION ADOPTED BY SHAREHOLDERS ON JUNE 20, 1995 PROVIDING FOR APPROVAL OF
1995 STOCK OPTION PLAN
RESOLVED, that the Vaughn Communications, Inc. 1995 Stock Option
Plan, heretofore adopted by the Board of Directors of Vaughn Communications,
Inc. (the "Company") on April 18, 1995, providing for the grant to selected
management and other key employees of the Company of incentive stock options
and/or nonstatutory stock options for up to an aggregate of 200,000 shares of
the Company's $.10 par value Common Stock, as described in Proposal 2 of the
Company's Proxy Statement dated May 19, 1995, is hereby approved.
<PAGE>
EXHIBIT (10)(s)
THIRD MODIFICATION AGREEMENT AND
AMENDMENT TO MORTGAGE
THIS THIRD MODIFICATION AGREEMENT AND AMENDMENT TO MORTGAGE ("Mortgage")
made and executed to be effective as of the first day of January, 1997 by and
between The Canada Life Assurance Company, a corporation under the laws of
the Dominion of Canada ("Mortgagee"), whose address is 330 University Avenue,
Toronto, Ontario Canada M5G 1R8 and Vaughn Communications, Inc. a Minnesota
corporation ("Mortgagor"), whose address is 5050 West 78th Street,
Minneapolis, MN 55435.
PRELIMINARY STATEMENTS OF FACTS:
A. Mortgagor has heretofore executed and delivered to Mortgagee its
Promissory Note dated February 26, 1988 in the original principal amount of
One Million Six Hundred Thousand and no/100 Dollars ($1,600,000.00) ("Note"),
reference being made to the Note for a statement of the terms and conditions
contained therein.
B. As security for the repayment of the Note, Mortgagor has heretofore
executed and delivered to Mortgagee the following documents (hereinafter
referred to as the "Security Documents"):
(a) A certain Mortgage and Security Agreement and Fixture
Financing Statement dated February 26, 1988, filed for record in
the Office of the Registrar of Titles, Hennepin County, Minnesota
on March 7, 1988 as Document No. 1912828 (hereinafter referred to
as the "Mortgage"); and
(b) A certain Assignment of Rents and Leases dated February
26,1988, filed for record in the Office of the Registrar of Titles,
Hennepin County, Minnesota on March 7, 1988 as Document No. 1912829
(hereinafter referred to as the "Assignment of Rents and Leases");
and
(c) Certain Financing Statements, filed in the Office of the
Secretary of State of Minnesota on March 7, 1988 as Document No.
1#126575#00 and in the office of the County Recorder of Hennepin
County, Minnesota on March 10, 1988 as Document No. 1029298
(hereinafter referred to as the "Financing Statement").
C. The Security Documents create a first lien upon certain real property
situated in the County of Hennepin, State of Minnesota more fully described
in Exhibit "A" attached hereto and made a part hereof (the "Premises"), grant
a security interest in the Premises and the personal property described
therein and assign all rents, leases, income and profits from the Premises.
D. The Note and Mortgage were amended by that certain Modification
Agreement and Amendment to Mortgage dated March 1, 1991, filed April 23, 1991
as Hennepin County Registrar of Titles Document No. 2168409 (hereinafter
referred to as the "First Modification").
<PAGE>
E. The Note and Mortgage were further amended by that certain Second
Modification Agreement and Amendment to Mortgage dated to be effective
March 1, 1994, filed November 4, 1994 as Hennepin County Registrar of Titles
Document No. 2565157 (hereinafter referred to as the "Second Modification").
F. Additionally, Mortgagor has heretofore executed and delivered a
certain Indemnity and Hold Harmless Agreement dated as of February 26, 1988
reference being made thereto for statement of its terms and conditions (the
"Hazardous Waste Indemnity").
G. The Note and Security Documents as modified by the First Modification
and the Second Modification and the Hazardous Waste Indemnity are hereinafter
referred to as the "Loan Documents").
H. The unpaid principal balance of the Note after payment of the
installment due on January 1, 1997 is in the amount of One Million Three
Hundred Seventy Thousand Four Hundred and Eighty-Four and 91/100 Dollars
($1,370,484.91).
I. The parties desire to extend the term and otherwise further modify the
Loan Documents as provided in this Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by the parties as follows:
1. MODIFICATION TO NOTE
1.1 The Maturity Date of the Note is extended to January 1, 2000 ("Third
Extended Maturity Date").
1.2 From and after January 1, 1997, interest shall accrue on the unpaid
principal balance of the Note at the per annum rate of Seven and Five-Eights
(7.625%) percent per annum ("Third Extension Rate").
1.3 The payment provisions of the Note are hereby amended by restating and
replacing additional paragraph 4 which was recited in paragraph 1.3 of the
Second Modification as follows:
"4. On the first day of April, 1994 and on the first day of each month
thereafter up to and including January 1, 1997, principal and interest shall
be paid in equal monthly installments of Twelve Thousand, Seven Hundred and
Twelve and 44/100 Dollars ($12,712,44) each; thereafter on the first day of
February, 1997 and on the first day of each month thereafter up to and
including December 31, 1999, principal and interest shall be paid in equal
monthly installments of Twelve Thousand Eight Hundred and Two and 11/100
Dollars ($12,802.11) each with a final payment of all unpaid principal and
accrued interest being due and payable in full on January 1, 2000 ("Third
Extended Maturity Date")."
1.4 The following additional paragraph is hereby made part of the Note:
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"The parties agree that the Undersigned shall, subject to the Lender's
available three (3) year funds, have the option to extend the Third
Extended Maturity Date of this Note for an additional term of three (3)
years ("Fourth Extended Term") expiring January 1, 2003 ("Fourth Extended
Maturity Date") on the following terms and conditions:
(a) At the time of exercising such option, the Undersigned shall not
then be in default under this Note and not have been in default more
than twenty (20) days at any time since the date hereof in the payment
of this Note, and any late fees and Default Rate Interest shall have
been paid in full;
(b) No Event of Default shall then be existing, nor have existed at any
time since the date hereof unless cured prior to the expiration of any
applicable permitted cure period, under the Mortgage hereafter referred
to;
(c) The per annum interest rate on this Note shall be adjusted for the
Fourth Extended Term to the Holders then prevailing three (3) year
commercial mortgage lending rate for loans of similar type and quality
("Fourth Extension Rate");
(d) The required monthly installments of principal and interest shall
be changed to an amount sufficient to amortize in constant equal
monthly payments beginning on the first day of the second month of
the Fourth Extended Term, the then remaining unpaid principal
balance together with interest at the Fourth Extension Rate over a
period of twelve (12) years and shall continue to be paid on the
first day of each month during the Fourth Extended Term with a
final payment of all unpaid principal together with accrued
interest thereon being due and payable in full on the Fourth
Extended Maturity Date;
(e) The Premises shall have been well maintained and be in a physical
condition acceptable to the Holder.
(f) At the time of renewal, the Premises, in Lender's sole
determination based upon stabilized market rents and expenses,
shall be capable of producing, on an annual basis, net operating
income of not less than Two Hundred and Thirty-One Thousand and
no/100 Dollars ($231,000.00) and a ratio of such net operating
income to the annual debt service based upon the interest rate to
be in effect in any renewal period of not less than 1.40 to 1.00.
(g) The Undersigned must notify the Holder in writing at the address
for payment of this Note by certified U.S. mail, return receipt
requested, or similar mailing not less than sixty (60) days nor more
than one hundred and twenty (120) days before the Third Extended
Maturity Date of its intention to exercise this right to extend this
Note for the Fourth Extended Term. Within thirty (30) days after
receipt of such notice the Holder will notify the Undersigned of the
Fourth Extension Rate and the Undersigned shall have fifteen (15) days
thereafter to notify Holder in writing of its acceptance of the Fourth
Extension Rate. If the Fourth Extension Rate is not acceptable to the
Undersigned, then the notice of intent to exercise the right to
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extend may be revoked and the Note shall be due and payable in full
in accordance with its terms.
If the above terms and conditions are satisfied and the Undersigned
extends the term of this Note for the Fourth Extended Term at the Fourth
Extension Rate, the Undersigned agrees to execute such documents and
provide such evidence as the Holder shall deem necessary to continue the
obligation of the Undersigned under this Note and each of the
instruments securing the same in full force and effect at the Fourth
Extension Rate including among other things a Note and Mortgage
Modification Agreement and an endorsement to the Mortgagee's Title
Insurance Policy issued to the Holder insuring the uninterrupted
continuity of the Holder's first lien under the Mortgage with no
additional exceptions to title. All expenses incurred in connection
with the adjustment of the interest rate and extension of the term,
including any necessary recording fees, mortgage registration tax, title
insurance fees and premiums, reasonable fees of Holder's counsel and the
like, shall be paid by the Undersigned."
1.5 The prepayment provisions as set forth in the second and third full
paragraphs on page 3 of the Note and as amended and restated in
paragraph 1.4 of the First Modification Agreement are hereby amended and
restated in their entirety to read as follows:
"PREPAYMENT. The Undersigned may make full (but not partial)
prepayment of the principal amount due upon giving the Holder sixty (60)
days prior written notice.
In addition to the outstanding principal and interest accrued thereon,
and all other fees, costs and charges owing hereunder the Undersigned
shall pay to the Holder a prepayment premium ("Premium").
The Premium shall be the greater of:
(a) 1% of the Note balance, or
(b) The difference between:
(i) the discounted value of all required monthly payments for the
remaining term of the Note and the discounted value of the Note
balance at maturity, calculated by utilizing a discount rate
based on the monthly equivalent yield-to-maturity rate of a U.S.
Treasury Note or bond, and
(ii) the Note balance at the date of prepayment.
The monthly equivalent yield-to-maturity rate shall be predicated on the
U.S. Treasury Note or Bond closest in maturity to the remaining term of
the Note, as selected by the Holder (as reported in The Wall Street
Journal or, if The Wall Journal is no longer published, some other
similar daily financial publication of national circulation) on the
fifth business day preceding the date of prepayment.
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The Undersigned expressly agrees that: (i) the Premium provided for
herein is reasonable; (ii) the Premium shall be payable notwithstanding
the then prevailing market rates existing at the time prepayment is
made; (iii) there has been a course of conduct between the Holder and
the Undersigned giving specific consideration in this transaction for
such agreement to pay the Premium; and (iv) the Undersigned shall be
estopped hereafter from claiming differently than as agreed to in this
paragraph. The Undersigned expressly acknowledges that its agreement to
pay the Premium to the Holder as herein described is a material
inducement to the Holder to extend the Note.
The Undersigned shall have the option of prepayment in full during the
final sixty (60) days of the Third Extended Term, with no Premium.
Provided the Loan is not in default, the Premium shall be waived by the
Holder where prepayment is the result of the application of condemnation
or insurance proceeds.
The Undersigned expressly agrees that in the event of an acceleration of
the maturity of this Note as a result of any event of default,
including, without limitation, any acceleration upon the transfer of any
interest in the Premises, a tender by the Undersigned or by anyone on
behalf of the Undersigned of payment of the amount necessary to satisfy
the indebtedness evidenced hereby made at any time prior to a
foreclosure sale, or a sale under the power of sale contained in the
Mortgage, shall constitute an evasion of the prepayment terms hereof and
shall be deemed to be a voluntary prepayment hereunder. Therefore, with
any such payment, the Undersigned shall pay the Premium. The
Undersigned expressly waives the provisions of any present or future
statute, law or judicial interpretation or principle which prohibits or
may prohibit the collection of the foregoing Premium in connection with
any such acceleration.
1.6 Except as amended hereby, the Note shall continue in full force and
effect in accordance with the terms as originally executed and modified by the
First Modification Agreement and Second Modification Agreement.
2. AMENDMENT TO MORTGAGE
2.1 The Mortgage shall continue to secure the indebtedness evidenced by
the Note, as amended and modified hereby, with all priorities enjoyed at
its inception.
2.2 Paragraph C. of the Preliminary Recitals of the Mortgage is amended
and restated in its entirety at follows:
"C. The Note bears interest at the per annum rate of Seven and
Five-Eights percent (7.625%) ("Interest Rate") subject to adjustment as
provided therein, except that during the period of and continuance of a
default under the Note or Event of Default under this Mortgage, the Note
shall bear interest at a per annum rate of interest of Four (4%) percent
in excess of the interest rate then in effect on the Note whether or not
the Mortgagee has exercised its option to accelerate the maturity of the
Note and declare the entire unpaid Indebtedness Secured Hereby due and
payable as more fully set forth in the Note ("Default Rate")."
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2.3 Paragraph E of the Preliminary Recitals of the Mortgage is amended and
restated in its entirety to read as follows:
"E. The Note is payable in installments with a final installment
payment of all unpaid principal and interest due on January 1, 2000
("Maturity Date").
2.4 Except as modified hereby, the Mortgage shall continue in full force
and effect in accordance with its terms as originally executed.
3. INDEMNITY
3.1 The Mortgagor hereby reaffirms and certifies as of the date hereof,
each and every representation, warranty, covenant and agreement contained in
the Hazardous Waste Indemnity.
3.2 In addition to and not in any manner a limitation of the terms and
conditions of the Hazardous Waste Indemnity, the Mortgagor shall hereinafter
indemnify and hold harmless the Mortgagee, its successors and assigns, from
any loss, damage, expense or cost arising out of or incurred by Mortgagee or
by which Mortgagee may sustain as a result of or in connection with any of
the following:
(a) Any violation or alleged violation of any Handicap Access
Laws. Handicap Access Laws shall include the Fair Housing
Amendments Act of 1988, the Americans with Disabilities Act of
1990, all rules and regulations from time to time in effect under
either such law and all other laws, rules and regulations that may
from time to time concern barrier-free access to the Premises.
(b) Any rents or other income generated at or by the Premises and received
by Mortgagor subsequent to an Event of Default under the Mortgage or
any time within the twelve (12) month period preceding such Event of
Default and which are not applied to the payment of debt service,
taxes, insurance or other reasonable and necessary expenses
attributable to the Premises.
(c) Failure by Morgagor to deliver to Mortgagee all security deposits or
similar deposits or guarantees and prepaid rents paid by tenants or
other occupants of the Premises.
(d) Any misappropriation or misapplication by Mortgagor of insurance
proceeds or condemnation awards.
(e) Failure by Mortgagor to pay taxes or insurance premiums or charges for
labor or materials or any and all charges which may create liens on
the Premises or any part thereof in violation of the Mortgage.
(f) Any fraud, misrepresentation or breach of warranty by Mortgagor in any
instrument relating to the Loan Documents.
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(g) Any amounts necessary to repair or replace damage to the Premises
caused by the willful or wanton acts or omissions of the Mortgagor.
3.3 The foregoing additional items shall be deemed to be additional
indemnities under the Hazardous Waste Indemnity and are hereby incorporated
therein and made a part thereof.
3.4 Except as modified hereby, the Hazardous Waste Indemnity shall
continue in full force and effect in accordance with its terms as originally
executed.
4. CONDITIONS TO EFFECTIVENESS
4.1 This Agreement and its effectiveness are specifically
conditioned on:
(a) Mortgagor, at its sole cost and expense, obtaining and
delivering to Mortgagee an Endorsement to the Mortgagee Title
Policy insuring the lien of the Mortgage, in form and content
acceptable to Mortgagee, stating that the coverage of said
Mortgagee Title Policy is in effect and unimpaired with no change
notwithstanding the execution and delivery of this Agreement.
(b) The payment by Mortgagor to Mortgagee of the reasonable
attorneys fees incurred by the Mortgagee in the negotiation and
delivery of this Agreement together with all out of pocket costs
incurred by the Mortgagee, including but not limited to any
mortgage registration tax and recording fees.
(c) The payment by Mortgagor to Mortgagee of an extension fee of
One Thousand Five Hundred and no/100 Dollars ($1,500,00).
5. MISCELLANEOUS
5.1 This Agreement is delivered in and shall in all respects be construed
according to the laws of the State of Minnesota.
5.2 This Agreement and each and every part hereof shall be binding upon
the parties hereto and their successors and assigns and shall inure to the
benefit of each and every future Holder of the Note including any successors
and assigns of the Mortgagee.
5.3 Nothing herein shall be construed to be a novation of the Note and the
Loan Documents and it is intended that the Mortgagee shall continue to be
entitled to all of the priorities existing under the Mortgage as of the date
first executed and delivered.
5.4 The liens, security interests, assignments and other rights evidenced
by the Mortgage, Assignment of Rents and Leases and other Loan Documents are
hereby renewed and extended to secure payment of the Note as modified hereby.
5.5 Mortgagor and Maker, upon request from Mortgagee, agree to execute
such other and further documents as may be reasonably necessary or
appropriate to consummate the
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transactions contemplated herein or to perfect the liens and security
interests to secure the payment of the loan evidenced by the Note.
5.6 Except as provided herein, the terms and provisions of the Note, the
Mortgage, the Assignment of Rents and Leases and the other Loan Documents
shall remain unchanged and shall remain in full force and effect. Any
modification herein of the Note, the Mortgage and the other Loan Documents
shall in no way affect the security of the Mortgage and the other Loan
Documents for the payment of the Note. The promissory note described in the
Mortgage and other Loan Documents and the note secured thereby shall
hereafter mean the Note as modified by this Agreement. The Note, the
Mortgage and the other Loan Documents as modified and amended hereby are
hereby ratified and confirmed in all respects.
5.7 The parties acknowledge that the liens and security interests created
and evidenced by the mortgage and the Assignment of Rents and Leases are
valid and subsisting and further acknowledge and agree that there are no
offsets, claims or defenses to the Note or the Mortgage or any other Loan
Documents.
5.8 This Agreement may be executed in any number of counterparts with the
same effect as if all parties hereto had signed the same document. All such
counterparts shall be construed together and shall constitute one instrument.
5.9 The requirement that the Mortgagor make monthly deposits of taxes,
assessments and insurance premiums in accordance with the Mortgage shall
continue to be waived in accordance with the waiver letter dated
February 2, 1988.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be executed
as of the date and year first above written.
VAUGHN COMMUNICATIONS, INC.
By
-------------------------------
Its
-------------------------------
THE CANADA LIFE ASSURANCE
COMPANY
By
-------------------------------
Its
-------------------------------
By
-------------------------------
Its
-------------------------------
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DOMINION OF CANADA )
) ss.
PROVINCE OF ONTARIO )
The foregoing instrument was acknowledged before me this 13th day of
January, 1997, by __________________, the Associate Treasurer and
_____________________, the Assistant Treasurer of the Canada Life Assurance
Company, a corporation under the laws of the Dominion of Canada, on behalf of
the corporation.
-----------------------------------
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 8th day of
January, 1997, by M. Charles Reinhart, the Secretary of Vaughn
Communications, Inc., a Minnesota corporation, on behalf of the corporation.
-----------------------------------
Notary Public
THIS DOCUMENT WAS DRAFTED BY:
James M. Christenson, Esq.
OPPENHEIMER WOLFF & DONNELLY
3400 Plaza VII
45 South Seventh Street
Minneapolis, Minnesota 55402
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EXHIBIT 13
1997 ANNUAL REPORT TO SHAREHOLDERS
THE COMPANY
Vaughn Communications, Inc., through its VAUGHN COMMUNICATIONS DIVISION, 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, Seattle, Raleigh and Houston. Sales offices are
located in New York, Los Angeles, Nashville, Ft. Lauderdale, Washington,
D.C. and St. Louis.
In addition to video services, the Company receives twenty percent of its
total revenue from the VAUGHN PRODUCTS DIVISION which manufactures and
sells gift products and collectibles to retailers in growing niche markets.
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LETTER TO SHAREHOLDERS
To Our Shareholders,
In fiscal 1997 we had mixed results as we positioned ourselves to take
advantage of continued growth opportunities across the nation in our industry.
We are pleased that our sales grew to $68.8 million, an increase of 15%.
Gross margins remained steady at 32%, making us one of the most profitable video
duplicators in the country.
Selling, general and administrative expenses for FY 1997, however, were up
21% as a result of our acquisition and growth investments and a slower than
expected consolidation timetable from the acquisitions. Net income, therefore,
decreased 10% to $2,015,000.
We continue to see opportunities to consolidate our markets and we
continue to receive high marks from our customers. We have an extraordinary
organization of committed people who care deeply about the success of their
company, most of whom are shareholders, striving to meet the requirements of
our customers. Our superior results over the past years are directly
attributable to these people.
To assure that our performance over the long term remains superior,
we will continue our focus on three key objectives: revenue growth,
total customer satisfaction, and capitalizing on technological opportunities.
REVENUE GROWTH: We have prioritized revenue growth through existing
channels, through acquisitions, and through opening new facilities in high
potential cities.
In FY 1997 we increased our sales force by 30%. The additional sales
people are experienced in the video industry and have joined us because they
see us as the company that is progressively growing and best meeting the
needs of their customers. In FY 1997 we added 2,500 customers, bringing our
active customer base to 10,000.
While expanding through existing sales channels is our preferred source
of growth, we also pursue selected acquisitions as a key strategy. Our
acquisition strategy is focused on consolidating the geographic markets that
we serve. In fiscal years 1996 and 1997 we acquired companies facilities in
Tampa, Milwaukee, Denver, and Chicago. These consolidations have the benefit
of reducing duplicate cost structures and improving the profitability in the
market. Our most recent merger with Satastar Corporate Services (PVS) in
Chicago was completed mid-year. The consolidation of our facilities in
Chicago with those of PVS has taken longer than expected, but we are now on
track. We continue to solicit and receive opportunities for acquisitions and
have several under evaluation.
Our third priority for revenue growth is startups in new high potential
cities. In fiscal year 1997 we expanded into the Seattle and Washington, D.C.
markets. In Seattle, we converted a
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sales office into a full duplication facility. In Washington, D.C. we opened
a new sales office to focus on serving that growing market. We continue to
be opportunistic in our approach to entering new cities.
TOTAL CUSTOMER SATISFACTION: "The only reason we exist is for our
customers". That motto forms the cornerstone of our Total Customer
Satisfaction Philosophy. We serve thousands of active customers (giving us
100,000 orders every year). These are mostly business-to-business customers
generating both large and small orders. They demand professional and
responsive service, no matter how large the order. Our staff of sales and
customer service personnel are focused on providing a service level that will
keep our customers for life, regardless of their duplication needs. Our
value to our clients goes well beyond the video duplication function that we
provide. We provide consultative assistance (from the original footage to
the packaging of the video) that makes our clients' media communication
projects succeed. Our clients' success translates into our own success.
We monitor the level of our customers' satisfaction on a regular basis.
A recent survey concluded that 94% of our customers are satisfied overall,
and that 97.1% of our customers would recommend us to others. Referrals of
new customers has been a valuable component of our growth. One of this
Company's most important competitive advantages is the extraordinary service
commitment of our people for their customers.
TECHNOLOGICAL OPPORTUNITIES: In 1994 we began to invest in new
communications technology, educating our people, and building an innovative
organization to take advantage of the emerging technology needs of our
customers. Looking ahead, we see opportunities in Digital Video Disk (DVD),
electronic distribution, and CD-ROM/DVD replication.
Much has been written about DVD, a technology used to increase the density
of standard CD-ROM to the level required for full screen, full motion video of
over two hours in length. DVD is expected to first take hold in the home
entertainment market followed by use in our business-to-business market. To
take advantage of this trend, in 1995 we launched a video compression service.
This service, using state-of-the-art high-quality compression algorithms for
MPEG-1, MPEG-2, QuickTime, and AVI, is required by every author developing video
programming of any type of CD-ROM or DVD. We are pleased with the progress and
with our revenue from this service.
Much has also been written about the Internet and its potential for
distribution of full motion video. Although not practical today, as
transmission bandwidth and downloaded storage media expand, electronic
distribution of video material becomes a more viable distribution option. In
fiscal year 1997 we began work with file servers, leveraging our compression
experience, to load and manipulate video files/clips. This capability allows us
to offer innovative customized video programming for clients, unavailable
without our file server expertise. In the future, we will develop the capability
of electronic distribution of video to each of our twelve manufacturing
locations.
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Our final area of expansion via technological opportunities is in the
Compact Disk replication industry. The majority of the growth in this
industry has come from the CD music and CD-ROM game/entertainment markets.
The business-to-business software markets have continued to use computer
diskettes, but are now changing to CD-ROM. We have many customers who are
beginning to buy computer software in CD form. We have twelve manufacturing
locations and six additional sales offices strategically located to serve our
customers. We intend to enter the CD-ROM replication business so that as DVD
replication becomes a technology that our customers request, our equipment
and people will be immediately ready to accommodate their needs. We are
ideally positioned to add this new media duplication to our portfolio of
products and services.
Our focus is to grow our revenue, increase our customer satisfaction
levels, and exploit the technology opportunities in our markets. We have a
wonderful organization of talented and dedicated people, and we hold leadership
positions in the markets that we serve. We think that's a winning combination.
E. D. Willette Donald J. Drapeau
Chairman and Chief Executive Officer President and Chief Operating Officer
FINANCIAL SUMMARY
%
F'97 F'96 Change
----------- ----------- ------
Revenue $68,798,000 $59,569,000 15%
Pretax Income 3,475,000 3,787,000 -8%
Net Income 2,015,000 2,247,000 -10%
----------- ----------- ------
----------- ----------- ------
Net Income $.51 $.62 -18%
----------- ----------- ------
----------- ----------- ------
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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 1997 AND 1996 OPERATING RESULTS
The Company's strategy is to increase revenue and profitability through
growth in existing channels, through acquisitions, and through improvement in
efficiencies. In fiscal 1997 the Company was partially successful in
implementing this strategy. The Company merged with Satastar Corporate
Services, Inc., a videotape duplicator located in Chicago, expanded the
Seattle operation from a sales office to a full service duplication facility,
and completed the integration of Indian Arts and Crafts, Inc. (acquired
January 31, 1996) into the Products Division by consolidating the Division's
operations in Seattle. In spite of these accomplishments, the financial
results for fiscal 1997 did not meet the Company's expectations. Lower than
expected sales, coupled with increased costs associated with expanding the
business, resulted in a decrease in net income from the previous year. In
response to these results, the Company implemented cost containment measures
during the year and expects these measures to have a positive impact on next
year's results.
The Company's net sales increased from $59,569,000 in fiscal 1996 to
$68,798,000 in fiscal 1997, a 15% increase, while gross margins remained at
32%. Selling, general and administrative expenses for fiscal 1997 were up
21% over the previous year and represented 25% of net sales, up one
percentage point from last year. Operating profit decreased 7% from last
year to approximately $4,712,000. Interest expense was down slightly from
the previous year. The Company's effective tax rate in fiscal 1997 was 42%.
Net income decreased 10% from $2,247,000 in fiscal 1996 to $2,015,000 in
fiscal 1997.
The net contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION:
On June 28, 1996, the Company acquired Satastar Corporate Services, Inc. by
issuing 165,357 shares of common stock in exchange for all the outstanding
capital stock of Satastar. The business combination has been accounted for as a
pooling of interest, and, accordingly, the financial statements and analysis
include the combined results of operations from the date Satastar commenced
operations.
The Communications Division's sales of $55,040,000 in fiscal 1997 were a 5%
increase from the previous year's sales of $52,365,000. The slowdown in sales
growth in fiscal 1997 is attributed in part to a decrease in sales to the
Company's largest customers. While the Company added more new customers in
fiscal 1997 than in fiscal 1996, it was unable to offset the reduced sales to
its largest accounts. The Company believes that by refocusing its sales
efforts, the growth in sales
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will continue. There can be no assurance, however, that such growth will be
at or near historical levels, particularly since the growth of the videotape
duplication market may not be as great as historical levels.
The gross profit margin increased slightly to 32.9% in fiscal 1997 from 32.7% in
fiscal 1996. Although the selling 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 1997 increased 12% from
$12,384,000 in fiscal 1996 to $13,872,000 in fiscal 1997, and represented 25% of
net sales in fiscal 1997 compared to 24% of net sales in fiscal 1996. The
increase in selling, general and administrative expenses can be attributed in
part to additional costs associated with the acquisition of Satastar, and
expenses incurred during the consolidation of the Company's existing facility in
Chicago with the facility used by Satastar.
Net interest expense decreased 14% in fiscal 1997 due to lower levels of
borrowing.
Pre-tax profit for the Communications Division was $3,314,000, a 11% decrease
from the previous year's pre-tax profit of $3,707,000. The decrease was
attributable primarily to the higher levels of operating expenses.
The Company spent approximately $2,750,000 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 $1,400,000 for equipment in fiscal 1998.
PRODUCTS DIVISION:
The Products Division's sales of $13,758,000 in fiscal 1997 were up 91% from the
previous year. The increase was due entirely to the acquisition of Indian Arts
and Crafts, Inc. on January 31, 1996. The sales from the newly acquired product
line offset a slight decrease in sales of the pre-existing product line.
The fiscal 1997 gross profit margin of 26% remained approximately the same as
the previous year. A slight decrease in raw material costs was offset by higher
labor costs. The higher labor costs were associated with operating two
facilities prior to consolidating operations in Seattle in September, 1996. The
company expects that the combined operations will result in improved
efficiencies next year.
Operating expenses for fiscal 1997 increased 85% to $3,270,000 due to the
acquisition of Indian Arts and Crafts, Inc. As a percentage of sales, operating
expenses decreased from 24.5% in fiscal 1996 to 23.8% in fiscal 1997.
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Interest expense increased from $75,000 in fiscal 1996 to $195,000 in fiscal
1997 due primarily to higher debt associated with the acquisition.
Pre-tax income increased 100% in fiscal 1997, from $80,000 to $161,000.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations continues to be the Company's primary source of
funds to finance operating needs and capital expenditures. In fiscal 1997, cash
flows from operations were approximately $4,000,000 and were essentially
equivalent to fiscal 1996. In addition to the cash provided by operations, the
Company also relied on borrowings under the $17,000,000 credit facility with
Firstar Bank, (of which approximately $8,200,000 was available at January 31,
1997), and other long-term financing to invest approximately $3,000,000 in new
equipment and reduce debt by approximately $3,400,000.
Based on past performance and current expectations, the Company believes that
working capital levels are adequate to meet the operating requirements of the
Company for the at least next twelve months. The Company's working capital,
coupled with its ability to borrow additional funds, will allow the Company to
continue to make long-term investments for future growth, including selective
acquisitions and investments in joint ventures. Expenditures for new equipment
are expected to be about $1,600,000 in fiscal 1998.
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 31% over fiscal 1995, from approximately
$45,471,000 to approximately $59,569,000, while the gross profit margin remained
constant at 32%. Selling, general and administrative expenses for fiscal 1996
were up 29% over the previous year and represented 23% of net sales, down
slightly from last year. Operating profit increased 36% to approximately
$5,077,000 over fiscal 1995, while interest expense increased to approximately
7
<PAGE>
$1,357,000 in fiscal 1996, up approximately $647,000 from fiscal 1995, due
primarily to increased debt associated with the acquisitions. The Company's
effective income tax rate for fiscal 1996 was 40.7%, an increase of 4.8
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 19%
from $1,893,000 in fiscal 1995 to $2,247,000 in fiscal 1996.
The net contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION:
The Communications Division sales were up 37% from $38,300,000 in fiscal 1995 to
$52,365,000 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 32.7% in fiscal 1996 from 32.4% 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 $4,906,000 increased 38% 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 $1,229,000 for fiscal 1996, up
approximately $652,000 from fiscal 1995, due primarily to increased borrowings
resulting from the acquisitions. Pre-tax profit for the Communications Division
was $3,707,000 in fiscal 1996, a 29% increase from the prior year.
Excluding the acquisitions, the Company spent approximately $2,600,000 on
equipment and facilities to expand its production capacity. The investment was
funded by long-term financing and internally generated funds.
8
<PAGE>
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.
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.
9
<PAGE>
SELECTED FINANCIAL DATA FROM CONTINUING OPERATIONS (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended January 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $68,798 $59,569 $45,471 $35,014 $27,100
Cost of goods sold.................. 47,111 40,518 30,920 23,802 18,547
------- ------- ------- ------- -------
Gross profit........................ 21,687 19,051 14,551 11,212 8,553
Operating expenses.................. 16,975 13,973 10,821 8,914 6,960
------- ------- ------- ------- -------
Operating income.................... 4,712 5,078 3,730 2,298 1,593
Interest expense.................... (1,295) (1,357) (710) (573) (474)
Other income (expense).............. 58 66 (67) 24 62
------- ------- ------- ------- -------
Income from continuing operations
before income taxes.............. 3,475 3,787 2,953 1,749 1,181
Income taxes........................ 1,460 1,540 1,060 667 366
------- ------- ------- ------- -------
Income from continuing operations... 2,015 2,247 1,893 1,082 815
Income from
discontinued operations.......... - - 493 74 175
------- ------- ------- ------- -------
Net income.......................... $ 2,015 $ 2,247 $ 2,386 $ 1,156 $ 990
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per common share:
Continuing operations............ $ .51 $ .62 $ .56 $ .32 $ .26
Discontinued operations.......... - - .14 .02 .06
------- ------- ------- ------- -------
$ .51 $ .62 $ .70 $ .34 $ .32
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average common
and common equivalent shares
outstanding...................... 3,924 3,678 3,419 3,348 3,135
</TABLE>
<TABLE>
<CAPTION>
January 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 9,268 $ 7,559 $ 4,186 $ 2,420 $ 2,800
Total assets..................... 34,751 32,816 22,186 19,573 13,355
Long-term obligations
(excluding current portion)..... 5,603 7,778 3,626 4,024 3,568
Total liabilities................ 17,903 19,298 13,681 13,646 8,654
Total stockholders' equity....... 16,848 13,518 8,505 5,927 4,701
</TABLE>
10
<PAGE>
Vaughn Communications, Inc.
Consolidated Balance Sheets
JANUARY 31
1997 1996
---------------------------
ASSETS
Current assets:
Trade receivables, less allowance of $650,000
and $626,000, respectively $10,685,149 $10,118,138
Other receivables 179,369 182,325
Inventories 9,256,455 7,778,267
Deferred income taxes 115,070 113,191
Prepaid expenses and other current assets 668,061 742,108
Income taxes receivable 664,042 145,107
---------------------------
Total current assets 21,568,146 19,079,136
Property, plant and equipment:
Land 48,424 48,424
Buildings and improvements 2,866,038 2,452,467
Machinery and equipment 22,039,414 19,295,714
---------------------------
24,953,876 21,796,605
Less accumulated depreciation (16,237,440) (13,045,330)
---------------------------
8,716,436 8,751,275
Intangible assets, net of accumulated amortization
of $620,000 and $312,000, respectively 3,549,917 3,827,559
Long-term receivable 705,781 691,558
Other 210,943 466,290
---------------------------
$34,751,223 $32,815,818
---------------------------
---------------------------
11
<PAGE>
JANUARY 31
1997 1996
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks under credit facilities $ 4,781,312 $ 4,014,405
Accounts payable 2,982,508 2,937,357
Salaries, wages and payroll taxes 696,894 583,396
Income taxes payable - 197,026
Other 1,009,306 928,206
Current portion of long-term debt and capital
lease obligations 2,830,033 2,859,475
---------------------------
Total current liabilities 12,300,053 11,519,865
Long-term debt, net of current maturities 4,563,880 6,381,006
Capital lease obligations, net of current portion 963,533 1,372,094
Deferred income taxes 75,326 25,326
SHAREHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares--20,000,000
Issued and outstanding shares--3,726,513 and
3,462,826, respectively 372,652 346,283
Additional paid-in capital 7,578,406 6,289,365
Retained earnings 8,897,373 6,881,877
---------------------------
Total shareholders' equity 16,848,431 13,517,525
---------------------------
$34,751,223 $32,815,816
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
12
<PAGE>
Vaughn Communications, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Net sales $68,797,983 $59,568,901 $45,470,721
Cost of goods sold 47,111,338 40,518,292 30,919,928
-------------------------------------------------------
Gross profit 21,686,645 19,050,609 14,550,793
Selling, general and administrative expenses 16,974,225 13,973,199 10,821,247
-------------------------------------------------------
Income from operations 4,712,420 5,077,410 3,729,546
Other income (expense):
Interest income 57,615 36,384 31,646
Interest expense (1,294,539) (1,356,958) (709,827)
Other - 30,000 (98,056)
-------------------------------------------------------
Income from continuing operations before
income taxes 3,475,496 3,786,836 2,953,309
Income taxes 1,460,000 1,539,660 1,059,850
-------------------------------------------------------
Net income from continuing operations 2,015,496 2,247,176 1,893,459
Loss from discontinued operations net of tax benefit - - (61,915)
Gain on sale of display operations - - 554,266
-------------------------------------------------------
Net income $ 2,015,496 $ 2,247,176 $ 2,385,810
-------------------------------------------------------
-------------------------------------------------------
Net income per share:
Continuing operations $.51 $.62 $.56
Discontinued operations - - .14
-------------------------------------------------------
$.51 $.62 $.70
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
Vaughn Communications, Inc.
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, 1994 2,914,768 $291,477 $3,377,879 $2,257,391 $ 5,926,747
Stock options exercised 82,890 8,289 91,042 - 99,331
Tax benefit on stock options exercised - - 102,063 - 102,063
Purchase of treasury stock - - - (8,500) (8,500)
Net income - - - 2,385,810 2,385,810
-------------------------------------------------------------------------
Balance at January 31, 1995 2,997,658 299,766 3,570,984 4,634,701 8,505,451
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 - - - 2,247,176 2,247,176
-------------------------------------------------------------------------
Balance at January 31, 1996 3,462,826 346,283 6,289,365 6,881,877 13,517,525
Stock options exercised 275,278 27,528 529,307 - 556,835
Common Stock received as partial consideration
of stock options exercised (11,591) (1,159) (149,524) - (150,683)
Tax benefit on stock options exercised - - 909,258 - 909,258
Net income - - - 2,015,496 2,015,496
-------------------------------------------------------------------------
Balance at January 31, 1997 3,726,513 $372,652 $7,578,406 $8,897,373 $16,848,431
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
14
<PAGE>
Vaughn Communications, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $2,015,496 $2,247,176 $2,385,810
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of display business - - (554,266)
Amortization 277,642 190,767 5,478
Depreciation 3,195,898 2,877,538 2,159,790
Deferred income taxes 48,121 168,639 99,479
Changes in operating assets and liabilities:
Receivables (564,055) (541,104) (1,522,405)
Inventories (1,478,188) 80,364 (1,359,102)
Income taxes 193,295 353,128 (461,777)
Prepaid expenses and other current assets 74,047 (81,485) (53,879)
Accounts payable 45,151 (1,072,440) (791,731)
Salaries, wages and payroll taxes 113,498 (118,013) 109,606
Other liabilities 81,100 (127,381) (448,860)
-------------------------------------------------------
Net cash provided by (used in) operating activities 4,002,005 3,977,189 (431,857)
INVESTING ACTIVITIES
Purchases of businesses, less cash acquired - (4,355,010) -
Additions to property, plant and equipment (3,069,391) (2,627,110) (2,107,346)
Long-term receivables (14,223) 158,908 75,956
Net carrying amount of property disposals 1,444 5,938 119,235
Cash proceeds from sale of display business - - 800,000
Other 255,347 18,992 (48,921)
-------------------------------------------------------
Net cash used in investing activities (2,826,823) (6,798,282) (1,161,076)
FINANCING ACTIVITIES
Increase in long-term debt 400,000 5,740,922 232,420
Proceeds from sale of Common Stock under option
plans 406,152 126,524 118,831
Repayments of long-term debt and capital leases (3,404,244) (3,181,486) (1,487,796)
(Repayments) borrowings under revolver 766,907 (1,058,792) 1,765,724)
Lease financing of equipment 656,003 1,188,697 968,982
-------------------------------------------------------
Net cash (used in) provided by financing activities (1,175,182) 2,815,865 1,598,161
-------------------------------------------------------
Change in cash and cash equivalents - (5,228) 5,228
Cash and cash equivalents at beginning of year - 5,228 -
-------------------------------------------------------
Cash and cash equivalents at end of year $ - $ - $ 5,228
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
15
<PAGE>
Vaughn Communications, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Capital lease of equipment $ 93,112 $ 163,488 $ 202,528
</TABLE>
SEE ACCOMPANYING NOTES.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 20% 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 include the accounts of the Company and
all of its majority-owned subsidiaries after elimination of all significant
intercompany accounts and transactions.
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 are stated on the basis of cost. Assets are
depreciated using the straight-line and declining balance methods over their
estimated useful lives which are as follows:
Buildings 40 years
Equipment 3-5 years
Leasehold Improvement 5-10 years
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 is assessed
annually and/or when factors indicating impairment are present.
17
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT
In June, 1996, the Company merged with Satastar Corporate Services, Inc. by
exchanging 165,357 shares of its common stock for all the outstanding capital
stock of Satastar Corporate Services, Inc. The business combination has been
accounted for as a pooling of interest, and accordingly, the financial
statements have been restated to include the combined results of operations from
the date Satastar commenced operations (see Note 10).
INCOME TAXES
The Company accounts for income taxes utilizing the liability method. Deferred
taxes are recorded to reflect the tax consequences of differences between tax
and financial reporting basis of assets and liabilities.
NET INCOME PER SHARE
Net income per 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 1996 and 1995 amounts have been reclassified to conform to the current
year's presentation.
18
<PAGE>
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:
1997 1996
-------------------------
Raw material $2,190,327 $2,329,560
Finished goods 7,066,128 5,448,707
-------------------------
$9,256,455 $7,778,267
-------------------------
-------------------------
3. NOTES PAYABLE TO BANK
In February, 1996, the Company amended its credit facility with a bank to
provide for borrowings up to $17,000,000. The agreement provides term financing
to fund acquisitions and equipment purchases, and a revolving credit facility to
be used to finance working capital. The interest rate on the term debt and the
revolving debt is at the prime rate (8.25% at January 31, 1997). Advances under
the credit facility are limited to the lesser of $17,000,000 less the sum of the
outstanding principal amounts on any term notes payable to the bank, or the
collateral value of receivables and inventory. Interest on the credit facility
is payable monthly. All the Company's assets except real estate and fixtures
have been pledged to secure this indebtedness. This facility expires on May 31,
1997.
Pursuant to the loan agreement, the Company is required, among other things, to
maintain minimum levels of net worth, net income, debt service coverage 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.
19
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following at January 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<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 prime
(8.25% on January 31, 1997). $3,250,000 $4,250,000
First mortgage loan on land and building secured by
properties having a net book value of $653,000 at
January 31, 1997. 1,366,545 1,406,759
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
prime (8.25% on January 31, 1997). 330,555 613,889
Term note payable to bank in 36 monthly installments of
$11,111, secured by all the Company's assets except
real estate and fixtures thereon. Interest is payable at
prime (8.25% on January 31, 1997). 344,444 -
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 $2,048,000 at January 31, 1997.
Note I is payable in annual installments of $83,333
plus accrued interest. 166,667 250,000
Note II is payable in annual installments of $107,143
plus accrued interest. 642,857 750,000
Term note payable to bank in 48 monthly installments of
$10,125. Interest is payable at prime (8.25% at
January 31, 1997). 91,125 212,625
20
<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 (8.25% at
January 31, 1997). 105,000 122,500
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 (8.25% on January 5, 1997). Secured by certain
assets. 66,667 100,000
Other notes payable, all of which were paid in full in
fiscal 1997. - 541,451
-----------------------
6,363,860 8,247,224
Current portion (1,799,980) (1,866,218)
-----------------------
$4,563,880 $6,381,006
-----------------------
-----------------------
</TABLE>
On January 1, 1997, the Company renewed its mortgage for three years at an
interest rate of 7.625%. It is payable in monthly installments with the balance
payable in full on January 1, 2000. The agreement grants the Company a three
year renewal option at the then prevailing three year commercial mortgage
lending rate. 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.
Required annual principal payments on long-term debt are as follows for years
ending January 31: 1998--$1,799,980; 1999--$1,476,764; 2000--$2,463,187;
2001--$374,643; 2002--$124,643; thereafter--$124,643.
Interest paid approximated interest expense for 1995, 1996 and 1997.
21
<PAGE>
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:
JANUARY 31
1997 1996
--------------------------
Equipment $4,392,000 $4,454,000
Less accumulated amortization (2,224,000) (2,020,000)
--------------------------
$2,168,000 $2,434,000
--------------------------
--------------------------
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 $1,724,000, $1,069,000 and $830,000 in
1997, 1996 and 1995, respectively.
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,
1997:
CAPITAL OPERATING
LEASES LEASES
--------------------------
Year ending January 31:
1998 $1,136,270 $1,549,587
1999 627,803 1,433,629
2000 266,593 933,899
2001 166,871 354,254
2002 97,339 237,097
Thereafter - 630,871
--------------------------
Total minimum lease payments 2,294,876 $5,139,337
------------
------------
Amount representing interest (301,290)
------------
Present value of net minimum lease payments 1,993,586
Current portion (1,030,053)
------------
Long-term capital lease obligations $ 963,533
------------
------------
6. STOCK OPTIONS
Under the terms of the Company s stock option plans, 249,364 shares of Common
Stock were reserved at January 31, 1997 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.
22
<PAGE>
A summary of outstanding options and shares reserved under the plans is as
follows:
WEIGHTED
SHARES AVERAGE
RESERVED OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
--------------------------------------------
Balance January 31, 1994 208, 486 806,233 $1.58
Options exercised - (82,888) 1.14
Options granted (71,058) 71,058 5.65
Terminated/expired 36,181 (36,181) 3.02
--------------------------
Balance January 31, 1995 173,609 758,222 1.96
Adoption of new plan 300,000 -
Options exercised - (148,869) 1.28
Options granted (137,206) 137,206 6.54
Terminated/expired 1,494 (1,494) 3.82
--------------------------
Balance January 31, 1996 337,897 745,065 2.88
Options exercised - (275,278) 2.02
Options granted (114,670) 114,670 10.74
Terminated/expired 26,137 (26,137) 9.79
--------------------------
Balance January 31, 1997 249,364 558,320 $4.73
--------------------------
--------------------------
As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the Company
has elected to follow Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," to measure compensation cost for employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for year
ended January 31, 1996 and 1997, respectively: risk-free interest rates ranging
from 5.26% to 7.5%; dividend yield of 0%; volatility factor of the expected
market price of the Company's common stock of .60; and a weighted average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions
23
<PAGE>
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair value
of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The Company's pro forma
information follows:
YEAR ENDED JANUARY 31
1997 1996
-----------------------
Pro forma net income $1,851,000 $2,091,000
Pro forma net income per share $.48 $.57
24
<PAGE>
The following table summarizes information about the stock options outstanding
at January 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AS OF 1/31/97 CONTRACTUAL LIFE EXERCISE PRICE AS OF 1/31/97 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.7500 - $0.7500 139,500 0.42 $ 0.7500 139,500 $ 0.7500
1.7500 - 2.0625 64,589 1.19 1.9261 57,851 1.1902
2.2500 - 3.5000 59,606 3.07 3.1145 59,606 3.1145
3.5063 - 5.6250 58,527 2.09 4.8190 50,174 4.7264
5.8438 - 6.5000 64,000 6.80 6.1123 38,500 6.2902
6.8750 59,212 4.48 6.8750 26,594 6.8750
6.8758 - 9.2500 63,136 4.45 8.6667 27,046 7.9823
9.5000 370 4.79 9.5000 370 9.5000
11.0500 25,000 9.38 11.0500 2,500 11.0500
13.0000 24,380 6.35 13.0000 2,780 13.0000
-----------------------------------------------------------------------------------
$0.7500 - $13.0000 558,320 3.25 $ 4.7264 404,921 $ 3.3243
</TABLE>
25
<PAGE>
7. INCOME TAXES
The provision for federal and state income tax expense from continuing
operations was as follows:
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------
Current:
Federal $1,185,300 $1,142,300 $ 959,200
State 226,600 228,660 178,650
-------------------------------------
1,411,900 1,370,960 1,137,850
Capital loss carryforward - (213,000)
Deferred 48,100 168,700 135,000
-------------------------------------
$1,460,000 $1,539,660 $1,059,850
-------------------------------------
-------------------------------------
The components of the deferred tax assets and liabilities at year-end were:
YEAR ENDED JANUARY 31
1997 1996
---------------------
Deferred tax assets:
Inventory reserves $ 390,800 $ 318,800
Bad debt expense 248,000 212,100
Additional tax cost of inventory 143,000 75,200
Other 7,000 8,200
---------------------
788,800 614,300
Deferred tax liabilities:
Rental equipment depreciation (667,000) (501,100)
Accumulated depreciation (82,000) (25,300)
---------------------
(749,000) (526,400)
---------------------
Net deferred tax assets $ 39,800 $ 87,900
---------------------
---------------------
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:
26
<PAGE>
7. INCOME TAXES (CONTINUED)
YEAR ENDED JANUARY 31
1997 1996 1995
-----------------------------------
Taxes at statutory rate of 34% $1,219,000 $1,274,300 $1,098,800
State income taxes, net of federal
tax benefit 158,000 166,960 126,450
Intangible amortization 77,000 64,600 5,500
Realization of capital loss carryforward - - (213,000)
Other 6,000 33,800 7,100
-----------------------------------
1,460,000 1,539,660 1,024,850
Benefit allocated to discontinued
operations - - 35,000
-----------------------------------
$1,460,000 $1,539,660 $1,059,850
-----------------------------------
-----------------------------------
The Company paid income taxes of $1,327,000, $938,000 and $1,288,000 in 1997,
1996 and 1995, respectively.
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.
27
<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,
leather products and soft goods.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Net sales from continuing operations:
Communications Division $55,040,394 $52,365,437 $38,269,712
Products Division 13,757,589 7,203,464 7,201,009
-------------------------------------
Total sales $68,797,983 $59,568,901 $45,470,721
-------------------------------------
-------------------------------------
Operating profit from continuing
operations:
Communications Division $ 4,345,161 $ 4,905,638 $ 3,556,392
Products Division 367,259 171,772 173,154
-------------------------------------
Total operating profit 4,712,420 5,077,410 3,729,546
Interest expense, net of interest income (1,236,924) (1,320,574) (678,181)
Other income (expense) - 30,000 (98,056)
-------------------------------------
Income from continuing operations
before income taxes $ 3,475,496 $ 3,786,836 $ 2,953,309
-------------------------------------
-------------------------------------
Identifiable assets:
Communications Division $27,321,777 $26,376,905 $18,325,803
Products Division 7,429,446 6,438,913 3,860,442
-------------------------------------
Total assets $34,751,223 $32,815,818 $22,186,245
-------------------------------------
-------------------------------------
Depreciation and amortization:
Communications Division $ 3,257,280 $ 2,994,128 $ 2,064,014
Products Division 216,260 74,177 101,254
-------------------------------------
Total $ 3,473,540 $ 3,068,305 $ 2,165,268
-------------------------------------
-------------------------------------
Capital expenditures:
Communications Division $ 2,752,630 $ 2,740,709 $ 2,255,527
Products Division 409,873 50,489 54,347
-------------------------------------
Total $ 3,162,503 $ 2,791,198 $ 2,309,874
-------------------------------------
-------------------------------------
</TABLE>
28
<PAGE>
10. ACQUISITIONS
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was merged with the Company in June
1996 by the issuance of 165,357 shares of common stock in exchange for all of
the outstanding capital stock of Satastar Corporate Services, Inc. The business
combination has been accounted for as a pooling of interest, and accordingly,
the financial statements have been restated to include the combined results of
operations from the date Satastar commenced operations.
Included in results of operations for the year ended January 31, 1997 are the
following results of the previously separate companies for the period of
February 1, 1996 to June 28, 1996:
YEAR ENDED JANUARY 31, 1997
COMPANY SATASTAR COMBINED
-------------------------------------------
Net sales $67,436,266 $1,361,717 $68,797,983
Net income (loss) 2,099,227 (83,731) 2,015,496
The following is a reconciliation of revenue and earnings previously reported by
the Company for the years ended January 31, 1996 and 1995 with the combined
amounts currently presented in the financial statement for the period.
YEAR ENDED JANUARY 31, 1996
COMPANY SATASTAR COMBINED
-------------------------------------------
Net sales $55,513,000 $4,056,000 $59,569,000
Net income 2,145,000 102,000 2,247,000
YEAR ENDED JANUARY 31, 1995
COMPANY SATASTAR COMBINED
-------------------------------------------
Net sales $41,603,000 $3,868,000 $45,471,000
Net income 2,044,000 342,000 2,386,000
29
<PAGE>
10. ACQUISITIONS (CONTINUED)
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 receive $200,000 a
year for seven years under non-compete and consulting agreements. Goodwill
recorded in this transaction is being 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 is being 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.
30
<PAGE>
10. ACQUISITIONS (CONTINUED)
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 is being
amortized over 10 years using the straight-line method.
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1994, are as follows:
YEAR ENDED JANUARY 31
1996 1995
----------------------------
Sales $70,126,000 $64,153,000
Income from continuing operations 2,526,000 2,482,000
Net income 2,526,000 2,974,000
Income per common share:
Continuing operations $.66 $.66
Discontinued operations - .13
----------------------------
$.66 $.79
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,
1997 approximated their fair value.
31
<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, 1997 and 1996, and
the related consolidated statements of income, shareholders equity and cash
flows for each of the three years in the period ended January 31, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended January 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
March 31, 1997
32
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
E. DAVID WILLETTE, Chairman and Chief Executive Officer. Age: 61
WILLIAM D. SMITH, JR., Chief Operating/Financial Officer, Viromed
Laboratories, Inc. (laboratory testing and products). Age: 46
R. F. HEEGAARD, Chairman, Homestyles Publishing and Marketing,
(magazine publishing), Minneapolis, Minnesota. Age: 70
LAURENCE F. LEJEUNE, President, LeJeune Investment Co.
(diversified investments) Minneapolis, Minnesota. Age: 60
HAROLD G. WAHLQUIST, President and Chief Executive Officer, First
Community Bank Group, Inc. (a bank holding company),
Minneapolis, Minnesota. Age: 58
MICHAEL R. SILL, Chief Executive Officer, Road Machinery &
Supplies Co. (distribution of construction equipment and
services), Savage, Minnesota. Age: 65
RODNEY P. BURWELL, Chairman of the Board, Xerxes Corporation
(manufacturer of fiberglass underground fuel storage tanks),
Minneapolis, Minnesota. Age: 58
ROBERT HARMON, Retired Former President, Centercom, Inc.,
Milwaukee, Wisconsin. Age: 50
JEFFREY JOHNSON, Retired Former Vice-President and Secretary,
Centercom, Inc., Milwaukee, Wisconsin. Age: 51
DONALD J. DRAPEAU, President and Chief Operating Officer. Age: 43
EXECUTIVE OFFICERS
E. DAVID WILLETTE, Chairman and Chief Executive Officer
DONALD J. DRAPEAU, President and Chief Operating Officer
WILLIAM D. DORNBUSCH, Vice President, General Manager, Vaughn
Products Division
M. CHARLES REINHART, Chief Financial Officer and Secretary
33
<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. 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.
CALENDAR PERIOD SALE PRICE
-------------------------------------------------- ----------------
HIGH LOW
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
Second Quarter........................... 19.00 9.00
Third Quarter............................ 15.00 9.50
Fourth Quarter........................... 10.50 7.00
1997: First Quarter............................ $ 8.00 $ 6.00
As of January 31, 1997, the Company had 336 shareholders of record.
---------------------------------------------------------------------------
34
<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
Chase 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 Tuesday, June 17, 1997 at The Marquette Hotel,
7th & Marquette, Minneapolis, Minnesota.
FORM 10-K REPORT
THE COMPANY'S 1997 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
35
<PAGE>
Exhibit 23-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 31, 1997 included in
the 1997 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 respects 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 31, 1997, 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 30, 1997
