<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO ________________________
COMMISSION FILE NUMBER 0-15424
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VAUGHN COMMUNICATIONS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
MINNESOTA 41-0626191
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYEE IDENTIFICATION NO.)
5050 WEST 78TH STREET, MINNEAPOLIS, MINNESOTA 55435
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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612/832-3200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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 12 MONTHS (OR FOR SUCH SHORTER PERIODS 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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COMMON STOCK, $.10 PAR VALUE 4,011,023 OUTSTANDING SHARES AS OF AUGUST 31,
1997.
<PAGE>
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - July 31, 1997 and January
31, 1997
Condensed consolidated statements of income - Three months ended
July 31, 1997 and 1996; Six months ended July 31, 1997 and 1996
Condensed consolidated statements of cash flow - Six months ended
July 31, 1997 and 1996
Notes to condensed consolidated financial statements - July 31,
1997
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
- 1 -
<PAGE>
PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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JULY 31 JANUARY 31
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ASSETS 1997 1997
---- ----
<S> <C> <C>
Current Assets
Trade accounts receivable less allowance of $925,000
July 31, 1997 and $650,000 at January 31, 1997 $13,527,861 $10,685,149
Inventories 8,792,739 9,256,455
Other 866,977 1,626,542
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Total Current Assets 23,187,577 21,568,146
Property, plant and equipment 27,324,659 24,953,876
Less accumulated depreciation 17,902,829 16,237,440
---------- ----------
9,421,830 8,716,436
Intangible and Other Assets 9,320,380 4,466,641
---------- ----------
$41,929,787 $34,751,223
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,479,367 $ 2,982,508
Notes payable to banks 6,154,824 4,781,312
Salaries, wages and payroll taxes 228,674 696,894
Current portion of long-term debt and capital lease obligations 3,600,859 2,830,033
Other 1,246,002 1,009,306
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Total Current Liabilities 13,709,726 12,300,053
Long-term debt (less current portion) 7,657,195 4,563,880
Capital lease obligations (less current portion) 1,053,009 963,533
Deferred taxes 75,326 75,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and outstanding July 31, 1997 -
4,010,756 shares; January 31, 1997 - 3,726,513 shares 401,075 372,652
Additional paid-in capital 8,790,854 7,578,406
Retained earnings 10,242,602 8,897,373
---------- ----------
Total Shareholders' Equity 19,434,531 16,848,431
$41,929,787 $34,751,223
---------- ----------
---------- ----------
</TABLE>
Note: The balance sheet at January 31, 1997 has been derived from the audited
financial statements at that date. See Notes to Condensed Financial
Statements.
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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<CAPTION>
Three Months Ended Six Months Ended
July 31 July 31
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1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $19,180,773 $18,300,366 $37,446,312 $37,616,131
COST AND EXPENSES:
Costs of goods sold 12,924,529 12,244,977 25,008,565 25,331,748
Selling and administrative 4,874,785 4,538,061 9,535,833 9,310,901
Interest 337,155 372,236 644,653 712,428
Other expense (income) (46,381) (15,104) (67,957) (20,265)
---------- ---------- ---------- ----------
18,090,088 17,140,170 35,121,094 35,334,812
INCOME BEFORE INCOME TAXES 1,090,685 1,160,196 2,325,218 2,281,319
Income taxes 465,000 489,086 980,000 974,086
---------- ---------- ---------- ----------
NET INCOME $ 625,685 $ 671,110 $1,345,218 $1,307,233
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER
COMMON SHARE $ 0.16 $ 0.17 $ 0.35 $ 0.33
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
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SIX MONTHS ENDED JULY 31
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1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,345,218 $ 1,307,233
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 1,822,725 1,686,266
Receivables (2,750,353) (2,053,271)
Inventories 595,220 141,880
Other Assets 1,017,252 428,230
Accounts Payable (503,138) (199,814)
Other Liabilities (499,528) 733,283
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Net cash provided by (used in) operating activities 1,027,396 2,043,807
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,033,091) (1,324,665)
Purchase of business less cash acquired (5,811,009) -
Other 229,603 191,379
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Net cash used in investing activities (6,614,497) (1,133,286)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (1,327,282) (1,342,359)
Borrowings under revolver 1,373,512 16,158
Lease financing of equipment - 93,112
Increase in long term debt 1,500,000 -
Increase in bank debt 2,800,000 -
Common stock issued in purchase of business 1,200,000 -
Other 40,871 322,568
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Net cash provided by financing activities 5,587,101 (910,521)
Change in cash - -
Cash and cash equivalents at beginning of year - -
---------- ----------
Cash and Cash Equivalents at end of period $ $ -
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 31, 1997
NOTE A - BASIS OF PRESENTATIONS
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended July 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending January 31, 1998. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended January 31, 1997. Prior
period financial statements have been restated to reflect the acquisition on
June 28, 1996 of Satastar Corporate Services, Inc. which was accounted for as a
pooling of interests. (See Note B)
NOTE B - MERGER WITH SATASTAR CORPORATE SERVICES, INC.
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was merged with the Company on June 28,
1996 by the issuance of 165,357 shares of common stock, $.10 par value, 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 period ended July 31, 1996 are the
following results of the previously separate companies for the period of
February 1, 1996 to June 28, 1996:
Three Months Ended July 31, 1996
--------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $17,771,900 $528,466 $18,300,366
Net Income (Loss) 719,396 (48,286) 671,110
Six Months Ended July 31, 1996
------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $36,254,414 $1,361,717 $37,616,131
Net Income (Loss) 1,390,964 (83,731) 1,307,233
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NOTE C - ACQUISITIONS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") replicator
located in San Jose, California. The initial purchase price was $5,500,000,
including $2,800,000 of cash, 171,210 shares of Vaughn Communications, Inc.
common stock valued at $1,200,000, and long-term debt to the sellers of
$1,500,000. The purchase price may be increased to a maximum of $8,000,000
depending upon Certified Media's attaining certain financial objectives through
January 31, 1999. Goodwill recorded in this transaction is being amortized over
15 years using the straight-line method.
Also on July 31, 1997, the Company acquired certain assets of Dub South, a
videotape duplicator located in Atlanta, Georgia. The noncontingent purchase
price included $311,000 of cash and the assumption of approximately $439,000 of
liabilities. The purchase price may be increased by an additional $1,200,000,
depending on the profit performance for the next five years. There was no
goodwill recorded on this transaction.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended July 31, 1997,
reflect the purchase of the businesses, but do not include any results from
operations since the transactions were completed on the last day of the period.
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1996, are as follows:
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Three Months Ended July 31 Six Months Ended July 31
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net Sales $21,403,000 $20,596,000 $41,047,000 $41,362,000
Net Income 261,000 242,000 850,000 677,000
Net Income per Common Share $.06 $.06 $.21 $.17
</TABLE>
NOTE D - EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change
in primary earnings per share for the second quarter ended July 31, 1997 and an
increase of $.02 per share in primary earnings per share for the second quarter
ended July 31, 1996. The impact is expected to result in an increase of $.01
and $.04 per share for the six months ended July 31, 1997 and 1996,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") replicator
located in San Jose, California. The initial purchase price of $5,500,000
included $2,800,000 of cash, $1,500,000 of long-term debt to the sellers, and
171,210 shares of Vaughn Communications, Inc. common stock valued at $1,200,000.
The purchase price may be increased to a maximum of $8,000,000 in the event
certain financial objectives are met, or likewise, the price could be reduced if
certain objectives are not met.
Also on July 31, 1997, the company acquired certain assets from Dub South, a
videotape duplicator located in Atlanta, Georgia. The non-contingent purchase
price included $311,000 of cash and the assumption of $439,000 of long-term
debt. The purchase price may be increased by $1,200,000 in the event certain
financial objectives are met.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended July 31, 1997
reflect the purchase of the businesses, but do not include any results from
operations since the transactions were completed on the last day of the period.
Net sales increased 5% in the second quarter of 1997 to $19,200,000, an increase
of approximately $900,000 from the second quarter of 1996. For the first six
months of 1997 sales of $37,446,000 were approximately even with the same period
last year. Gross margins in the second quarter remained at 33% for both years,
while year-to-date gross margins have also remained at 33%. Operating expenses
as a percentage of sales for the first six months have remained at 25%, while
interest expense has declined slightly. Net income decreased 7% in the second
quarter of 1997 to $626,000, while for the first six months net income increased
3% to $1,345,000 in 1997. The contribution each division made to these results
is discussed below.
COMMUNICATIONS DIVISION
The Communications Division's net sales of $13,900,000 in the second quarter of
1997 were an 8% increase over last year's second quarter sales of $12,900,000.
For the first six months of 1997, sales were approximately $27,800,000, a 3%
increase over the previous year's sales of $26,900,000. Gross margins as a
percentage of sales increased slightly in the second quarter of 1997 from 33% in
1996 to 34% in 1997. Year-to-date gross margins have also increased from 33% in
1996 to 34% in 1997. Selling and administrative expenses as a percentage of
sales increased in the first six months of 1997 to 28% from 27% in the first six
months of 1996, while interest expense declined slightly.
The increase in sales, combined with the improved gross margins, more than
offset the increase in operating expenses and resulted in a 32% increase in
pretax profit in the second quarter of 1997 to $578,000. Year-to-date pretax
profits have increased 41%, from $988,000 in 1996 to $1,397,000 in 1997.
PRODUCTS DIVISION
The Products Division's net sales decreased 2% in the second quarter of 1997
from $5,410,000 in 1996 to $5,323,000 in 1997. For the first six months sales
declined from $10,683,000 in 1996 to $9,616,000 in 1997, a decrease of 10%. The
operations of the Products Division are seasonal, with approximately 80% of
sales occurring in the first half of the year to serve the summer tourist
industry, hence it is unlikely that the sales shortfall will be made up in the
second half of the year.
Gross margins as a percentage of sales have also declined from 33% in 1996 to
30% in 1997, primarily due to the decrease in sales resulting in less leveraging
of the Company's fixed expenses. Operating expenses have declined by 11% from
the previous year and as a percentage of sales have remained at 19%.
- 7 -
<PAGE>
As a result of the decrease in sales and gross margins, pretax profit for the
second quarter declined by 29% from $760,000 in 1996 to $539,000 in 1997.
Year-to-date, pretax profit decreased from $1,292,000 in 1996 to $929,000 in
1997, or 28%.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's principal sources of liquidity continue to be operating income,
long-term debt secured by specific equipment, and its revolving credit facility.
At July 31, 1997, approximately $1,600,000 of this facility was available
compared to $4,300,000 the previous year. The primary reason for the decrease
was the additional borrowing of $2,800,000 used to fund the acquisition of
Certified Media. The Company believes that the liquidity provided by the
sources described above will be adequate to meet its normal operating
requirements over the near term. The Company continues to investigate potential
acquisitions and divestitures, and depending on the size and structure of the
transaction, additional funding may be required or generated. As of August 31,
1997, no definitive agreements have been reached regarding any such
transactions.
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<PAGE>
PART II - OTHER INFORMATION
VAUGHN COMMUNICATION, INC.
ITEM 2. CHANGES IN SECURITIES
a) Not Applicable.
b) Not Applicable.
c) During the quarter ended July 31, 1997, the Company sold unregistered
securities as follows: as of July 31, 1997, the Company issued 171,210
shares of its common stock to the shareholders of Certified Media
Corporation ("CMC") in consideration of the acquisition by the Company of
substantially all of the assets of CMC. There were no underwriters
involved with the acquisition. The shares issued to the shareholders of
CMC 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 CMC represented that they acquired the shares for
investment and the certificates representing the shares issued to the
shareholders of CMC were legended with respect to restrictions on transfer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Vaughn Communications, Inc. (the
"Company") was held June 17, 1997. The Company's Board of Directors solicited
proxies for the Meeting pursuant to its Proxy Statement dated May 20, 1997 (the
"Proxy Statement") and in accordance with Regulation 14A under the Securities
Exchange Act.
The following proposals, described in the Proxy Statement, were presented to the
Shareholders and approved as follows:
1) Board nominees Rodney Burwell, Michael Sill and E. David Willette were
reelected by plurality vote (as set forth below) to serve as members of the
Company's Board of Directors for three-year terms expiring at the 2000
Annual Meeting of Shareholders, and until their successors are elected and
have qualified. There was no solicitation in opposition.
Votes Votes Votes Broker
For Withheld Against Non-Votes
----- -------- ------- ---------
Rodney Burwell 2,861,648 - 12,349 -
Michael Sill 2,857,648 - 16,349 -
E. David Willette 2,873,897 - 100 -
The remaining members of the Board of Directors were not elected at the 1997
Annual Meeting. Messrs. Jeffrey Johnson, Laurence LeJeune, and Harold Wahlquist
continue to serve terms expiring at the 1998 Annual Meeting of Shareholders; and
until their successors are elected and have qualified. Messrs. Robert Harmon,
Roger Heegaard, William Smith and Donald Drapeau continue to serve terms
expiring at the 1999 Annual Meeting of Shareholders; and until their successors
are elected and have qualified.
The shareholder actions summarized above are described in further detail in the
Proxy Statement which is filed as Exhibit 22 to this 10-Q Report.
- 9 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list and Exhibit Index of the Exhibits filed
herewith.
NO. DESCRIPTION
--- -----------
(10) Agreement with Certified Media Corporation
(11) Computation of earnings per share
(22) Proxy Statement dated May 20, 1997
for the Company's Annual Meeting
of Shareholders held June 17, 1997
incorporated by reference to filing
thereof on May 20, 1997
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended July 31, 1997 for which this Form 10-Q
is filed, the Company did not file with the Securities and
Exchange Commission any current reports on Form 8-K.
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto authorized.
Vaughn Communications, Inc.
----------------------------------
Date
---------------- ----------------------------------
E. David Willette
Chief Executive Officer
Date
---------------- ----------------------------------
M. Charles Reinhart
Chief Financial Officer
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<PAGE>
PURCHASE AND SALE AGREEMENT
This Agreement is made and entered into as of the ___ day of _________,
19__, by and between Vaughn Communications, Inc. a Minnesota corporation with
its principal offices in Minneapolis, Minnesota ("Buyer"), and Certified Media
Corporation, a California corporation with its principal offices in Fremont,
California ("Seller") or ("Company"), and Alan Gill, Perry Hovanic, John Coyle,
and Ernest Wong referred to as Shareholders ("Shareholders").
WHEREAS, Seller is engaged in the sale and duplication of compact discs and
computer diskettes.
WHEREAS, the Buyer wishes to purchase and the Seller wishes to sell certain
of the assets of the Seller on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants of Seller and Buyer set forth herein, Buyer and Seller hereby agree as
follows:
1. Purchase and Sale
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, the Seller hereby agrees to sell, assign and transfer to Buyer that
list of Assets and Liabilities as is set forth on Exhibits A, B, C, D, E, F, G,
H, and I to this Agreement.
2. Definitions
2.1 As used throughout this Agreement the following words and phrases
shall have the following meanings:
(A) AGREEMENT means this Purchase and Sale Agreement by and between
Seller and Buyer along with all schedules and exhibits and amendments
thereto.
(B) ASSETS means all those assets purchased hereunder including all
Fixed Assets, Intangibles, Inventory, Accounts Receivable, Notes
Receivable, Cash, and Other Assets and including, without limitation, all
assets of every type and nature, used in Seller's Business, unless
specifically excluded herein below.
(C) LIABILITIES means only those liabilities which are identified in
writing in this Agreement including Current Liabilities, Notes and
Contracts payable, and Other Liabilities so identified.
(D) BUSINESS means the sale and duplication of optical and magnetic
disks as is presently conducted by Seller.
<PAGE>
(E) CLOSING or CLOSING DATE means July 29 1997, the date on which the
transaction contemplated by the Agreement shall be completed. Buyer and
Seller recognize the need to perform the obligations, obtain the rights and
complete the transactions contemplated by the Agreement within the time
periods herein specified.
(F) FIXED ASSETS means equipment, accessories, machinery and fixtures
identified in Exhibit A attached hereto.
(G) INTANGIBLES means all items which are not tangible including:
noncompete agreements, business and financial records relating to the
business, computer records and tapes, copyrights, copyright applications,
corporate names including the names Certified Media Corporation and CMC,
customer lists, goodwill, patents, patent applications, proprietary
information, trademarks, trademark applications, trade names, trade
secrets, and any and all of Seller's rights to any in the foregoing as are
identified in Exhibit B attached hereto.
(H) INVENTORY means all finished goods, raw materials, work in
process, supplies and inventory of Seller identified in Exhibit C attached
hereto.
(I) ACCOUNTS AND NOTES RECEIVABLE means all accounts and notes owed
to the Seller identified in Exhibit D attached hereto.
(J) CASH means all funds in hand or on deposit or invested for the
account of the Seller identified in Exhibit E attached hereto.
(K) OTHER ASSETS means those assets identified in Exhibit F attached
hereto.
(L) CURRENT ASSETS means all Cash, Accounts and Notes Receivable,
Inventory and Other current Assets, net of the amount reserved for bad
debt.
(M) CURRENT LIABILITIES means accounts payable, current portion of
long term debt, and accrued taxes identified in Exhibit G attached hereto.
Taxes or other liabilities not yet payable at the Closing Date for which no
reserve or appropriate accrual has been made will not be assumed by Buyer
and shall be retained by Seller and paid as and when due.
(N) NOTES AND CONTRACTS PAYABLE means all debt owed or contracts to
pay by the Seller identified in Exhibit H attached hereto.
(O) OTHER LIABILITIES means those liabilities identified in Exhibit I
attached hereto.
(P) INCOME means the pre-tax earnings of the Company and of the
continuing operation of the Business (following Closing) as reported under
accounting methods consistent with previous Company practice, including
appropriate reserve for doubtful accounts and accrual of vacation, bonus,
leases and rent and interest expense.
2
<PAGE>
For purposes of this definition of Income, no increase in expenses (above
the current pre-closing level) will be made, except those incurred in the
Fremont operation and consulting/non-compete expenses resulting from this
purchase transaction. No corporate allocation, purchase money interest or
goodwill amortization expense incurred by Buyer in connection with this
purchase will be included in determining Income.
3. Purchase Price
3.1 Base Amount: Subject to any adjustments to which the Buyer or Seller
may be entitled in accordance with other Sections of this Agreement, the total
non-contingent purchase price to be paid by Buyer shall be the sum of Five
Million Five Hundred Thousand Dollars ($5,500,000), ("Base Price") payable as
follows:
(A) The sum of Two Million Eight Hundred Thousand Dollars
($2,800,000) shall be paid to the Seller in cash, certified check or wire
transfer on the Closing Date; and
(B) The sum of One Million Five Hundred Thousand Dollars ($1,500,000)
at Closing by delivery of a Promissory Note ("the Note") in the form
attached hereto as Exhibit J issued by Buyer to Seller, secured pursuant to
a Security Agreement in the form attached hereto as Exhibit K; and
(C) At Closing by delivery of certificates of the Buyer's Common
Stock issued in the name of the Seller representing market value of
$1,200,000 ("Stock Consideration"). Market value of the Stock
consideration will be based on the average closing price of the Buyer's
Stock quoted on the Nasdaq National Market over the seven trading days
ending seven days prior to the Closing Date.
(D) In addition to the above (A) through (C), Buyer will also assume
those liabilities of Seller shown on the Company's May 31, 1997 Balance
Sheet as scheduled on Exhibits G, H, and I attached, including the
subordinated Note payable to Shareholders in the amount of $400,000.
3.2 Contingent Amount: Subject to any adjustments to which Buyer or
Seller may be entitled in accordance with other Sections of this Agreement, the
Base Price will be adjusted up to a maximum level of Seven Million Five Hundred
Thousand Dollars ($7,500,000) ("Maximum Price") as follows:
(A) A portion of Income earned during the calendar year 1997 and the
13 months ending January 31, 1999 will be added to the Base Price according
to the following schedule:
i) Of the first $1 million of Income earned during the 25-month
period, 20% will be added to the Base Price;
ii) Of the Income exceeding $1 million up to $2.2 million,
during the 25-month period, 50% will be added to the Base Price;
3
<PAGE>
iii) Of the Income exceeding $2.2 million up to the Maximum
Price during the 25-month period, 65% will be added to the Base Price.
(B) Reduced Income earned for the period of calendar 1997, which is less
than the Seller's forecast of $990,000 ("Forecast"), will result in an
adjustment reducing the Base Price (in addition to the upward adjustment
under paragraph 3.2(A) above) as follows:
i) At Income of $890,000 to $990,000 for 1997, the amount of
Income shortfall below $990,000 will be deducted from the Base Price.
ii) At Income of $590,000 to $889,000 for 1997, the amount of
shortfall below $890,000, multiplied by two, will be deducted from the
Base Price.
iii) At Income of $0 to $589,000 for 1997, one-half the amount of
shortfall below $589,000 will be deducted from the Base Price.
iv) At Income less than $0 for 1997, no adjustment will be made
under the provisions of this paragraph.
(v) In the event that 1997 Income is less than Forecast but is
made up at January 31, 1999 such that cumulative Income for the period
of 1997 through January 31, 1999 is at least $3.427 million, the Base
Price will not be adjusted and the Maximum Price will be paid.
(vi) The Base Price reduction determined by this Section 3.2 (B)
above will be further modified in the event total cumulative Income
through January 31, 1999 exceeds $2,327,000 as follows:
At cumulative Income of $2,427,000 the adjusted Base Price
will be increased by $120,000.
For each additional incremental $100,000 increase in
cumulative Income, up to $3,427,000 of Income, $120,000 will be added
back to the adjusted Base Price (at which point the Maximum Price
will apply).
(C) The adjustment to the Base Price as determined in paragraphs 3.2
(A) and 3.2 (B) will be affected by amending the principal amount of the
Note to Sellers as of January 31, 1999. The term, payment schedule and
interest rate of the Note will not be amended.
3.3 Allocation: It is agreed that the purchase price to be paid Seller by
Buyer under the terms of this Agreement shall be allocated among the Assets to
be purchased as will be set forth in Exhibit Z prepared by Buyer and Seller at
Closing. The parties agree to report or cause the reporting of this transaction
for state and federal income tax purposes on a basis consistent with and
reflecting the allocation of purchase price set forth in Exhibit Z as of the
Date of Closing.
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3.4 Shareholder Consent: The Shareholders hereby consent to the terms of
this Agreement. The parties expressly acknowledge that the Shareholders shall
be liable for obligations of Seller pursuant to Section 11 of this Agreement and
are parties hereto for the purpose of consenting to the terms hereof.
3.5 Stock Restriction: Seller and Shareholders acknowledge and agree
that the shares of common stock comprising the Stock Consideration have not been
and will not be registered with the SEC or any state securities regulatory
agency and as such may not be sold, pledged or otherwise transferred without
such registration or an exemption therefrom. Seller and Shareholders also
acknowledge and agree that the shares comprising the Stock Consideration are
restricted securities pursuant to SEC Rule 144 and as such cannot be resold or
otherwise transferred for a period of one (1) year from the date of issuance,
and then only in accordance with the restrictions imposed by Rule 144, unless
such shares are earlier registered for resale with the SEC. Seller and
Shareholders agree to give Buyer at Closing an Investment Letter in the form of
Exhibit AA.
Seller and Shareholders agree to timely make all filings with the SEC
required under the Securities Exchange Act of 1934 with respect to their
ownership of the Stock Consideration (including, if required and without
limitation, Initial Statements of Beneficial Ownership on Form 3, Statements of
Changes of Beneficial Ownership on Form 4, and Annual Statements of Changes of
Beneficial Ownership on Form 5) for as long as they or their Affiliates (as
defined in the Securities Exchange Act of 1934) continue to own the Stock
Consideration; provided, however, that Buyer prepares all necessary documents
for execution by Seller and Shareholders with information timely provided by
Seller and Shareholders.
4. Conduct of the Business
4.1 Operation Until Closing: Pending consummation of the sale and
purchase of the Assets pursuant to this Agreement and until the Closing, Seller
shall continue to operate the Business in the same manner as it has been
operated by Seller prior to the execution of this Agreement. However, Seller
shall not sell, lend, lien, pledge, hypothecate, mortgage or otherwise encumber
the Assets nor shall Seller make any acquisition, enter into any purchase
contracts, sales contracts, leases or other commercial or financial arrangements
which may affect the Assets or the Business nor take any other action not in the
ordinary course of business without the prior express written consent of Buyer.
4.2 Negative Covenants: From the date hereof through the Closing Date,
unless and until Buyer otherwise consents in writing, Seller will not cause or
permit the Company to (a) change or alter the makeup of the Current Asset
components or the physical contents or character of the Inventories, so as to
adversely affect the nature of its Business or adversely change the total dollar
valuation of such components from that reflected on the May 31, 1997 Financial
Statements other than in the ordinary course of business; (b) incur any
obligations or liabilities (absolute or contingent) other than current
liabilities incurred and obligations under contracts entered into in the
ordinary course of business; (c) mortgage, pledge or voluntarily subject to
lien, charge or other encumbrance any Assets, tangible or intangible, other than
the lien of current
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property taxes not due and payable; (d) sell, assign or transfer any of its
Assets or cancel any debts or claims, other than in the ordinary course of
business; (e) waive any right of any substantial value whether or not in the
ordinary course of business; (f) declare or make any payment or distribution to
shareholders with respect to the shares or purchase or redeem any shares of its
capital stock; (g) grant any increase in the salary or other compensation of
any of its directors, officers, or employees or make any increase in any
benefits to which such employees might be entitled; (h) institute any bonus,
benefit, profit sharing, stock option, pension, retirement plan or similar
arrangement, or make any changes in any such plans or arrangements presently
existing; (i) change its authorized stock or issue, sell, buy or redeem or
issue rights to subscribe to, or options or warrants to purchase, enter into
agreements, commitments or obligations to issue, sell buy or redeem any shares
of its capital stock; (j) amend its articles of incorporation or bylaws; or
(k) enter into any transaction other than in the ordinary course of business.
4.3 Access to Books, Records and Premises: From the date of this
Agreement through the Closing Date, Seller shall cause the Company to grant
Buyer and its authorized representatives full access to the properties, books
and records, premises, employees, distributors, customers and auditors of he
Company during reasonable business hours for purposes of enabling Buyer to fully
investigate the business of the Company. Seller shall cause the Company to
deliver monthly financial statements to Buyer as described in Section 5.7 from
the date of this Agreement through the Closing Date, which statements shall be
prepared on a basis consistent with generally accepted accounting principles and
with the financial statements of May 31, 1997. Any information obtained by
Buyer in connection with such review shall be maintained by Buyer on a
confidential basis (subject only to review by Buyer's counsel and accountants),
and shall not be disclosed to any other person in the event that the
transactions contemplated by this Agreement are not consummated.
4.4 Risk of Loss: The risk of loss shall remain with Seller until the
Closing Date, and Seller shall continue in force any and all fire, casualty,
theft or other insurance policies relating to the Business and Assets of the
Company.
4.5 Additional Schedules: No later than July 11, 1997, Seller shall cause
the Company to prepare and to deliver to Buyer each of the following schedules:
Schedule 4A: This schedule sets forth a list of all equipment,
machinery, furniture, fixtures, furnishings, leasehold improvements and
other similar property that are owned by the Company and that are being
used by the Company in connection with the Business conducted by it. (ref.
Exhibit A)
Schedule 4B: This schedule lists each motor vehicle owned or leased
by the Company, together with vehicle identification numbers, any
outstanding loan against such vehicle, the person to whom the vehicle is
assigned and the location of the vehicle. (ref. Exhibit A)
Schedule 4C: This schedule lists all Intangible personal property
used by the Company in the conduct of its trade or Business, including
without limitation, all trademarks, trade names, service names, service
marks, copyrights, patents, patent
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licenses, applications for any and all of the foregoing and registrations
thereof owned by the Company or used in its operations. (ref. Exhibit B)
Schedule 4D: This schedule lists each policy of fire, liability and
other forms of insurance owned by the Company, the amount of premium
thereon and the expiration date thereof.
Schedule 4E: This schedule lists all permits, licenses and other
approvals and authorizations which are necessary to conduct the Business of
the Company and sets forth the title, issuing agency and expiration thereof
and indicates which of such permits, licenses and approvals are not
possessed or held by the Company.
Schedule 4F: This schedule lists all personal property owned by any
third parties (whether a customer, supplier or other person) in the
possession of the Company or for which the Company is responsible, other
than leased property set forth on schedule 4K or 4L.
Schedule 4G: This schedule lists each bank or other financial
institution in which the Company has an account or depository arrangement,
together with the names of all persons authorized to take any actions with
respect thereto.
Schedule 4H: This schedule lists each employee of the Company and the
position, title, remuneration (including any scheduled salary and
remuneration increases), the date of employment and accrued vacation pay of
each such employee and the date and amount of last two salary reviews and
increases.
Schedule 4I: This schedule lists the amount of sales made during
fiscal years ending 1995, 1996, and year-to-date 1997, to the Company's
fifteen (15) largest accounts, the principal contact at each such account
and the Company's responsible sales employee for each such account.
Schedule 4J: This schedule contains a true and complete description
of all real properties owned by the Company, including the legal
description thereof, a list of all buildings or other improvements located
thereon and list of all restrictions, easements or other encroachments or
encumbrances affecting such property. Including description of any
underground storage tanks owned or used. (ref. Exhibit F)
Schedule 4K: This schedule lists and describes each lease for real
property, whether written or oral, to which the Company is a party,
together with the term, rental and other material provisions thereof, and
any other instrument under which the Company claims or holds an interest in
real property owned by another person. Include a description of any
underground storage tanks owned or leased. Furnish copies of all such
leases. (ref. Exhibit N)
Schedule 4L: This schedule list and describes each lease for, or
license for the use of equipment or personal property, whether written or
oral, to which the Company is a
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party, together with the term, rental, security agreements, and other
material provisions thereof. (ref. Exhibit H) Furnish copies of all such
leases or licenses.
Schedule 4M: This schedule list the Accounts Receivable aged as of
the most recent month-end. (ref. Exhibit D)
Schedule 4N: This schedule lists the following agreements, whether
oral or written, to which the Company is a party, as of the date of such
schedule, to the extent such agreements are not set forth in other
schedules. Furnish copies of all such agreements.
(a) Each contract, agreement or arrangement made in the ordinary
course of business by the Company, not terminable by the Company on
less than thirty (30) days notice and involving an expenditure of more
than $1,000.00 for purchase of any services, materials, supplies or
equipment.
(b) Each contract, agreement or commitment for the same by the
Company for delivery of its products or services over a period of more
than thirty (30) days from the date of this agreement and for an
aggregate price of more than $5000.00.
(c) Each contract or commitment for capital expenditures of any
amount.
(d) Each contract continuing over a period of twelve (12) months
or more from its date, which cannot be terminated by Seller upon
thirty (30) days notice, or less.
(e) Each agreement for the sale of any capital equipment or real
property.
(f) Each employment contract or agreement relating thereto
between the Company and any officer, consultant, director or employee,
including any bonus, incentive or deferred compensation plans, any
confidentiality or non-compete agreements, amounts of indebtedness of
employee to the Company or Company to employee, and any arrangements
which encourage or compensate Company's employees to stay with Company
following the Closing Date.
(g) Each plan or contract or arrangement of the Company,
providing for pensions, life insurance, medical insurance, disability
insurance, vacations and other employees' benefits or compensation
plans, whether formal or informal.
(h) Each agreement, if any, with any union covering employees in
the bargaining unit represented by such union.
(i) Each agreement not made in the ordinary course of the
Company's business.
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(j) Each contract between the Company and any dealer,
distributor, broker, agent or sales representative.
(k) Each contract or agreement relating to the property listed
in Section 4.5 Schedule 4C to be delivered to Buyer by Seller.
(l) Each agreement not otherwise listed on Section 4 to which
the Company is a party or which has, or may have, a material effect on
the Company or its future business prospects.
True and correct copies of all documents listed in any schedule delivered
pursuant to this Section 4 will be delivered or made available to Buyer or will
be made available upon request and will be signed by an officer of the Company
for identification upon request by Buyer.
4.6 Updating of Schedules: Between the date of this Agreement and the
Closing Date, Seller shall deliver to Buyer updated schedules to reflect any
material changes in the schedules delivered to Buyer pursuant to Section 4.5 of
this Agreement. On the Closing Date, Seller shall deliver to Buyer an officer's
certificate confirming the accuracy, as of the Closing Date, of each of the
schedules delivered to Buyer pursuant to this Agreement; provided, however, that
Buyer shall not be obligated to proceed with the closing of the transactions
contemplated by this Agreement if there are material adverse changes from the
schedules initially delivered to Buyer.
4.7 Contractual Obligations: Buyer agrees to assume only the obligations
identified in Exhibits G, H and I. Buyer's agreement to assume the obligations
is limited to those obligations for which Seller has provided to Buyer, prior to
Closing, a true and complete copy of each and every writing evidencing such
obligation.
5. Representations and Warranties of Seller
Seller hereby represents and warrants to Buyer that:
5.1 General: The statements set forth in Sections 4 and 5 or this
Agreement are true, accurate, complete and not misleading in any respect on the
date of this Agreement and will remain so as of the Closing.
5.2 Standing: Seller is a corporation duly organized, validly existing,
and in good standing under the laws of the State of California. Seller has all
the necessary corporate powers to own properties, and to carry on the business
as now owned and operated by it. Seller is qualified to do business in each
state or jurisdiction where its failure to so qualify would materially adversely
affect its ability to transfer the assets to Buyer as required hereunder.
5.3 Authority: Seller has the right, power, legal capacity and authority
to enter into and perform its obligations under this Agreement, and no approval
or consent of any person, authority or entity that has not been obtained is
necessary in connection herewith. The execution and delivery of this Agreement
by Seller has been duly authorized by its Board of Directors and by all
requisite shareholder action.
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5.4 Material Change: Since May 31, 1997, the Company has not:
(A) made transactions relating to the business except in the ordinary
course of business.
(B) Disclosure: experienced any material change in the information
set forth in the documents furnished or schedules or exhibits to this
Agreement between the date of such schedule or exhibit and the date of this
Agreement or the Closing Date. Seller has not knowingly withheld from
Buyer any material fact relating to the Assets, Business, operations,
financial condition or prospects of the Company. No representation or
warranty in this Agreement or other document furnished in connection with
the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein to make the statements therein not misleading. Without limiting
the scope of the foregoing, Seller is not aware of any change or occurrence
that has taken place or is pending that could have a material adverse
effect on the value of the Assets or the Business of the Company, or the
ability of the Company to operate its Business subsequent to the Closing
Date in the manner in which it has been operated by the Company before the
Closing Date, or which could materially increase the costs incurred by the
Company in operating its business subsequent to the Closing Date, including
any pending or present change in any law or regulation, or other
requirement, concerning license or approvals.
(C) Waivers: given any waivers or releases of any claim or right
pertaining to the business.
(D) Litigation: instituted, been named as a party, settled or agreed
to settle any litigation, action or proceeding before any court or
governmental body;
(E) failed to replenish the Company's inventories and supplies in a
normal and customary manner consistent with the Company's prudent business
practices, nor made any purchase commitments in excess of the normal,
ordinary and usual requirements of the Company's business or at any price
materially in excess of the then current market price, or upon terms and
conditions more onerous in any material respect than those usual and
customary in the Company's business, nor made any material changes in the
Company's marketing, selling, pricing, advertising, or personnel practices
inconsistent with the Company's past practices;
(F) failed to pay its liabilities as and when due in the ordinary
course of the Company's business;
(G) suffered any change, event or condition which has materially and
adversely affected the Company's condition (financial or otherwise),
properties, assets, liabilities, business or prospects;
(H) paid or agreed to pay, conditionally or otherwise, any bonus,
additional compensation, pension, or severance pay to any of Seller's
present or former employees,
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directors or officers whose annual base compensation (including bonuses and
commissions) exceeded $20,000, whether under any existing profit sharing,
pension, or other plan or otherwise;
(I) altered or revised its accounting principles, procedures, methods
or practices;
(J) removed, or permitted to be removed, from any building, facility
or real property, any machinery, equipment, fixture, vehicle, or other
personal property or parts thereof, except in the ordinary course of
business (and in compliance with this Agreement);
(K) changed its credit policy as to sales of inventories or
collection of receivables;
(L) received a written communication from any customer which
accounted for more than two percent (2%) of Seller's revenues for the
Business during the last full fiscal year to the effect that such customer
does not intend to continue to purchase merchandise from Seller;
(M) other events or conditions that have or might have a material
adverse affect on the business.
5.5 No Liens or Encumbrances: The Company has good and marketable title
to all of the personal property and assets, tangible and intangible, employed in
the operation of its business, free of any mortgages, liens, claims, charges,
leases, security interests, pledges, easements, encumbrances and title retention
agreements of any kind whatsoever except such property and assets as may be
leased by the Company pursuant to leases described on schedules 4B, 4K, 4L,
delivered pursuant to Section 4.5 or pledged to secure debts described on
Exhibit H (which pledge or security interest will be listed and described on
Exhibit H).
5.6 Liabilities: There are no liabilities, responsibilities, debts,
claims or obligations known or unknown, liquidated or contingent, fixed or
contingent related to the assets or the business which could become the
obligation or responsibility of Buyer other than those set out on Exhibits G, H
and I. All other liabilities shall be retained by Seller and are expressly not
assumed by Buyer.
5.7 Financial Statements: Financial statements of the Company ("Financial
Statements") are attached to this Agreement as Exhibit L and will have been
furnished to Buyer as follows:
(A) Unaudited balance sheets of the Company as of April 30, May 31
and June 30, 1997, and unaudited statements of income and expenditures,
retained earnings and statement of change in financial position for the
period then ended will be furnished by July 21, 1997; and for the month end
period through Closing will be furnished within 30 days of Closing.
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(B) Unaudited balance sheets of the Company as of December 31, 1994,
1995, and 1996, and the unaudited statements of income for the fiscal
periods then ended, prepared by the Company, will be furnished by July 21,
1997.
Such Financial Statements present fairly and accurately in all material
respects the results of operations of the Company for the periods covered by
such statements, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with past practices, and
include all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair presentation of the financial condition of the Company and
the results of the Company's Business operations for the periods covered by such
statements.
5.8 No Defaults: Schedules 4B, 4K, 4L, and 4N accurately and completely
list all Contracts or Leases to which the Company is a party or by which it is
bound or affected. All Contracts required to be listed on these Schedules are
valid and binding, enforceable in accordance with their respective terms, and in
full force and effect. Except as noted on Exhibit V, there is not under any
Contract any default by the Company, or, to the knowledge of Seller, any other
party thereto, or event which, after notice or lapse of time, or both, would
result in a default which would enable any party thereto to terminate such
Contract. Except as expressly set forth in Exhibit V, neither the Sellers nor
the Company have knowledge of any intention by any party to any Contract to (1)
terminate or amend the terms thereof, (2) refuse to renew the same upon
expiration of its term, or (3) renew the same upon expiration only on terms and
conditions which are more onerous than those pertaining to the existing
Contract. True and complete copies of all Contracts (together with any and all
amendments thereto) and a copy of the Company's forms of invoices and purchase
orders have been delivered to Buyer. Except as reflected in Exhibit V, none of
the Contracts relating to Personal Property would be classified for accounting
purposes as capital or financing leases. Other than the Contracts, the Company
requires no contract, agreement, license, franchise or permit to enable it to
carry on its business substantially as presently conducted. None of the
Contracts would be breached by virtue of the consummation of the transactions
contemplated hereby, and the consummation of the transactions contemplated
hereby will not affect the validity, enforceability or continuation of any of
the Contracts. All such Contracts are assignable to Buyer and will be assigned
to Buyer at Closing along with the consent, if required, of the parties thereto.
5.9 Inventory: All inventories reflected in the Financial Statements are
stated at the lower of cost or market first in, first out method and, as so
stated, are in good condition and are currently usable or salable, in the
ordinary course of business of the Company, without discount.
5.10 Accounts and Notes Receivable: The accounts and notes receivable of
the Company as set forth in Exhibit D are valid, assignable, and enforceable
obligations due to the Company and shall be collectible by the Company in the
ordinary course of business. The goods and services sold and delivered by the
Company that gave rise to such accounts and notes receivable were sold and
delivered in conformity with the applicable purchase orders, agreements and
specifications. Such accounts and notes receivable are subject to no valid
defense or offsets except routine customer complaints of an immaterial nature.
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5.11 Taxes: The Company has filed all income, excise, corporate franchise,
property, payroll and other tax returns or reports required to be filed by it,
as of the date hereof and has paid all taxes and assessments relating to the
time periods covered by such returns or reports. The amounts set up as
provisions for taxes in the Financial Statements are sufficient for the payment
of all unpaid federal, state or local taxes of the Company accrued for or
applicable to all periods ended on or prior to the date of this Agreement, or
which may subsequently be determined to be owing by the Company with respect to
all periods ending on or prior to the Closing Date. There are no present
disputes as to taxes of any nature payable by the Company. The most recent tax
year for which the Company's federal income tax returns have been audited by the
Internal Revenue Service is its tax year ending ___________________.
5.12 Lawsuits, Proceedings, etc.: Except as described on Exhibit Y there
is no action or proceeding (whether or not purportedly on behalf of the Company)
pending or, to the best knowledge of Seller, threatened against the Company,
nor, to the best knowledge of Seller, does there exist any basis therefor, which
might result in any adverse change in the condition, financial or otherwise, of
the Company's Business or Assets. No order, writ or injunction or decree has
been issued by, or requested of, any court or governmental agency which does or
may result in any adverse change in the Company's Assets or properties or in the
financial condition of the Company or its Business. The Company is not liable
for damages to any employee or former employee as a result of any violation of
any state or federal laws directly or indirectly relating to such employee or
former employee.
5.13 Regulatory Violations:
(A) The Company is not currently being charged with nor, to the best
knowledge of Seller, is it operating its Business in violation of the
federal Occupational Safety and Health Act of 1970, or the regulations
promulgated thereunder, the Environmental Quality Improvement Act of 1970,
or the regulations promulgated thereunder, or any other applicable law or
regulation relating to the environment or occupational health and safety.
(B) Except as disclosed in Exhibit R, (i) the Company has not
received written notice of any violation by the Company of any
Environmental Law, and, to the Seller's knowledge, no condition or event
has occurred which, with notice or passage of time or both, would
constitute a violation of any Environmental Law; (ii) no pollutants,
contaminants or hazardous or toxic wastes, substances or materials, as
defined by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, the Resource Conservation and Recovery
Act of 1976, as amended, the Toxic Substances Control Act, or any other
similar Federal, state or local statute, have been manufactured, generated,
stored, handled, disposed, buried, dumped or used on, at or in connection
with the Real Property, or to the Seller's knowledge, by any other occupant
of the Real Property; (iii) no asbestos, asbestos-containing materials,
polychlorinated biphenyls (PCBs), PCB compounds, or other pollutants,
contaminants, hazardous or toxic wastes, substances or materials have been
placed on the Real Property by the Seller,
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or to Seller's knowledge, by any other occupant of the Real Property, nor
have they been used in the construction, repair, or alteration of any
portion of the Real Property by the Seller, or to the Seller's knowledge,
by any other occupant of the Real Property; and (iv) there are no
above-ground or underground storage tanks, wells, pools, settling ponds,
traps, drains or other similar above-ground or subsurface structures
present on or under the Real Property.
5.14 Post Balance Sheet Changes: The Company has not (a) mortgaged, pledged
or subjected to lien, charge or other encumbrance any asset, tangible or
intangible, other than the lien of current or real property taxes not yet due
and payable; (b) suffered any damage, destruction or loss, whether or not
covered by insurance, materially adversely affecting its assets or its business;
(c) made or suffered any amendment or termination of any material business; (d)
received notice or had knowledge of any labor organizing efforts or labor
trouble other than routine grievance matters, none of which is material; (e)
revalued any of its assets; or (f) entered into any transactions not in the
ordinary course of business.
5.15 Compliance with Laws and Licenses: Schedule 4E is an accurate and
complete list of all of the Licenses issued to or held by the Company. Except
for such non-compliance which could not have a materially adverse effect upon
the Assets or the operation of the Company's business, the Company has complied
with the Licenses listed on Schedule 4E and all laws, rules, regulations and
ordinances of any government or governmental agency. Neither the ownership nor
use of the Company's properties nor the conduct of its business conflicts in any
material respect with the rights of any other person, firm or corporation.
Neither Seller nor the Company is in violation of, or in default under, any
terms or provisions of any lien, mortgage, lease, license, deed of trust,
agreement, instrument, order, judgment or decree, except for such violations or
defaults which could not have a materially adverse affect upon the Assets or the
operation of the Company's business. All of the Licenses listed on Schedule 4E
are valid and binding and in full force and effect without conditions. There is
not under any License listed on Schedule 4E any default by either Seller or the
Company or any event which, after notice or lapse of time, or both, would
constitute a default, which, in either case, could result in a revocation,
termination, non-renewal or impairment of such License. The Company has
delivered true and complete copies of all Licenses listed on Schedule 4E
(together with any and all amendments thereto) to Buyer. All reports of Sellers
and the Company to municipal authorities are true in all material respects and
have been duly filed. Other than the Licenses listed on Schedule 4E, the Seller
and the Company require no license, franchise or permit to carry on the
Company's business as now conducted. None of the Licenses listed on Schedule 4E
would be breached by virtue of the transactions contemplated hereby, provided
the Consents are obtained.
5.16 Condition of the Company's Assets: All of the Company's tangible
Assets are currently in good and usable condition and are fit for their intended
purposes, ordinary wear and tear excepted. There are no defects in such Assets
or other conditions which, in the aggregate, materially and adversely affect the
operation or value of such Assets. Such Assets and the other properties being
leased by the Company pursuant to the leases described on schedule 4B, 4K, or 4L
delivered by Seller pursuant to Section 4.5 constitute all of the operating
Assets being utilized by the Company in the conduct of its Business.
5.17 Real Estate: The Company does not own any real property in fee simple.
Schedule 4K of Section 4.5 contains a complete list and description of all
leases to which the Company is a
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party or of which the Company is a beneficiary. Schedule 4K includes a full
legal or location description of the Real Property which is the subject of such
leases. All of the leases required to be listed on Schedule 4K are valid,
binding and enforceable in accordance with their respective terms, except as
noted on Schedule 4K.
5.18 Employees:
(A) Seller has no information indicating that any management or key
employee of the Company intends to terminate his employment with the
Company. To the best of knowledge of the management of the Seller, there
is not pending or threatened any labor dispute, strike or work stoppage
against the Company. To the best knowledge of the management of the
Seller, neither the Company nor any representative or employee of the
Company has committed any unfair labor practices in connection with the
operation of the Company's Business, and there is not pending or threatened
any charge or complaint against the Company by the National Labor Relations
Board or any comparable state agency. To the best knowledge of the
management of the Seller, the Company is not, and will not become, liable
for any retroactive workers' compensation insurance premiums or retroactive
unemployment compensation experience ratings or charges in connection with
the operation of its Business relating to the period of time prior to the
date of this Agreement.
(B) Schedule 4H of Section 4.5 contains, as of the dates shown on
such Schedule, accurate and complete information as to names and rates of
compensation (whether in the form of salaries, bonuses, commissions or
other supplemental compensation now or hereafter payable) and shows each
such employee's compensation for the two (2) years immediately prior to the
date of this Agreement, including amounts and dates of change in
compensation, of all employees of the Company (grouped by categories as
indicated thereon). Schedule 4N (f) of Section 4.5 contains information as
to any employment contracts or severance arrangements involving the
indebtedness of such employees to the Company and any arrangements
involving the indebtedness of the Company to such employees in any amount.
(C) The Company is not a party to any collective bargaining agreement
or any employment agreement with any employee of the Company, other than
oral employment agreements at the sufferance of the Company. The Company
has complied in all material respects and shall comply in all material
respects with all laws and regulations relating to the employment of labor,
including those related to wages, hours, collective bargaining,
discrimination and the payment of Social Security or similar taxes. There
are no unfair labor practice charges or claims pending against the Company,
nor any pending or, to the best of Seller's or the Company's knowledge,
threatened charges against the Company with respect to any wage and hour,
employment discrimination or other statutory violation by the Company.
There is no union campaign being conducted to solicit cards from employees
to authorize the union to request an NLRB certification election with
respect to any employees of the Company.
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5.19 Changes in Suppliers and Customers: Seller is not aware of any fact
which indicates that any of the suppliers supplying products, components or
materials to the Company intends to cease selling such products to the Company
or to limit or reduce such sales of products to the Company nor is Seller aware
of any fact which indicates that any major customer of the Company intends to
terminate, limit or reduce its business relations with the Company.
5.20 Intangible Property Rights: Schedules 4C and 4E are true and
complete lists of all Intangibles applied for, issued to or owned by the Company
or under which the Company is licensed or franchised. All of the Intangibles
required to be listed on Schedules 4C and 4E are valid and in good standing are
assignable and, to Seller's knowledge, uncontested, and the Company has
delivered to Buyer copies and required assignments of all documents establishing
those Intangibles. The Intangibles listed on Schedules 4C and 4E are all such
property necessary to operate the business of the Company as now operated. The
Company is not infringing upon or otherwise acting adversely to any Intangibles
owned by any other person or persons. No employee of the Company has any right
in or to the Company's proprietary information, including without limitation,
computer programs used in the Company's business.
The Company owns or exclusively holds all rights to, free and clear of all
liens, claims and restrictions, all patents, trademarks, service marks, trade
names, and copyrights used in the conduct of the Company's Business as now
conducted. The Company does not, to the knowledge of Seller, after due inquiry
and the exercise of reasonable diligence, infringe upon the right or claimed
right of any person under or with respect to any of the above. The Company is
not obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant to
any patent used in the conduct of its Business, nor is the Company presently
under any license or contract obligation to pay royalties or fees with respect
to third-party trademarks, copyrights or other intellectual property in
connection with the conduct of the Company's Business.
Seller has no knowledge of, nor has Seller received any notice of, any
facts which indicate that the Company does not either (i) own or (ii) have the
unrestricted right to the use of all know-how, customer lists, inventions,
designs, processes, computer programs and technical data necessary to the
development, manufacture, operation and sale of all products and services sold
by it, including trade secrets, free and clear of any rights, liens and claims
of others. To the knowledge of Seller, after due inquiry and the exercise of
reasonable diligence, the Company is not using any confidential information or
trade secrets of any former employer or any of its past or present employees.
5.21 No Brokers or Finders: No person, firm or corporation has any right,
interest or valid claim against Seller or the Company for any commission, fee or
other compensation as a finder or broker in connection with the transactions
contemplated by this Agreement.
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5.22 ERISA:
(A) All "employee benefit plans," as defined in Section 3(3) of
ERISA, sponsored, maintained or contributed to by the Company are listed
on Schedule 4N(g) hereto, and complete and accurate copies of the plans
(or related insurance policies) have been furnished to Buyer. Except as
disclosed in Schedule 4N(g), the Company is not a party to, does not have
in effect or to become effective after the date of this Agreement any
bonus, cash or deferred compensation, severance, medical, health or
hospitalization, pension, profit sharing or thrift, retirement, stock
option, employee stock ownership, life or group insurance, death benefit,
welfare, salesmen incentive, vacation, sick leave, disability, trust
agreement, arrangement or other welfare or pension benefit plan (as such
terms are defined by ERISA).
(B) Each employee benefit plan required to be listed in Schedule
4N(g) hereto has been administered in compliance with applicable
provisions of ERISA and the Code.
(C) All reporting and disclosure requirements under ERISA and the
Code for the plans listed in Schedule 4N(g) hereto have been complied
with, except for such non-compliance which could not result in a
termination or fine or have a materially adverse affect upon such plans.
(D) All benefits provided under all employee benefit plans listed in
Schedule 4N(g) hereto are covered by insurance, other than Company
policies for profit sharing, sick leave, personal leave and vacation.
(E) The Company does not contribute to and is not required to
contribute to any "multi-employer plan," as defined in Section 414(f) of
the Code and Section 3(37) of ERISA, and the Company has not incurred or
does not reasonably expect to incur any "withdrawal liability" under
Section 4201 ET SEQ. of ERISA.
(F) Neither Buyer, nor any trade or business under common control
with Buyer (within the meaning of Sections 414(b) and 414(c) of the Code)
or any officers, directors, employees or affiliates of the same shall,
from and after the Closing Date, have any liability, obligation or
responsibility with respect to any employee benefit plan maintained or
provided by the Company, or any affiliate thereof, before the Closing
Date (including but not limited to liability for contributions to or the
benefits payable under any such employee benefit plan), except for the
continuation of insurance plans, the continuation of insurance protection
to employees as mandated by applicable law or such benefits as Buyer, in
its sole discretion, may determine to provide to the Company's employees
after the Closing Date.
5.23 Insurance: Schedule 4D is an accurate and complete list of all
fire, theft, casualty, liability and other insurance policies insuring the
Company, its business, or any of the Assets, specifying the type and amount of
coverage and expiration dates. All such policies are in full
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force and effect. No insurance policy of the Company has been canceled and no
application of the Company for an insurance policy has been rejected during the
past five years.
5.24 Full Disclosure: There has been and will be no material change
in the information set forth in the documents furnished or schedules or exhibits
to this Agreement between the date of such schedule or exhibit and the date of
this Agreement or the Closing Date. Seller has not knowingly withheld from
Buyer any material fact relating to the Assets, Business, Operations, Financial
Condition or Prospects of the Company. No representation or warranty in this
Agreement or other document furnished in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein to make the statements
therein not misleading. Without limiting the scope of the foregoing, Seller is
not aware of any change or occurrence that has taken place or is pending that
could have a material adverse effect on the value of the Assets or the Business
of the Company, or the ability of the Company to operate its Business subsequent
to the Closing Date in the manner in which it has been operated by the Company
before the Closing Date, or which could materially increase the costs incurred
by the Company in operating its business subsequent to the Closing Date,
including any pending or present change in any law or regulation, or other
requirements, concerning license or approvals.
5.25 The representations and warranties made by Seller in this
Agreement are made as of the date of this Agreement and as of the Closing Date.
Such representations and warranties shall survive the Closing date and shall
continue until their expiration in accordance with the terms of this Agreement.
6. Representations and Warranties of Buyer
The Buyer hereby represents and warrants to the Seller as follows:
6.1 Organization and Standing: Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Minnesota, and has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement.
6.2 Corporate Authorization: The execution, delivery and performance
of this Agreement by Buyer have been duly authorized by proper corporate action
of Buyer and are within its corporate powers. This Agreement constitutes the
legal, valid and binding obligation of Buyer and is enforceable against Buyer in
accordance with its terms.
6.3 No Brokers or Finders: No person, firm or corporation has any
right, interest or valid claim against Buyer for any commission, fee or other
compensation as a finder or broker in connection with the transactions
contemplated by this Agreement.
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6.6 No Defaults: The Buyer is not in default or breach under any
provisions of this Agreement or any other Agreement between the parties on the
date of this Agreement and will not be in default or breach as of the Closing.
6.7 Lawsuits, Proceedings, etc.: Except as disclosed to Seller in
writing there is no action or proceeding (whether or not purportedly on behalf
of the Buyer) pending or, to the best knowledge of Buyer, threatened against the
Buyer, nor, to the best knowledge of Buyer, does there exist any basis therefor,
which might result in any adverse change in the condition, financial or
otherwise, of the Buyer's Business or Assets. No order, writ, or injunction or
decree has been issued by, or requested of, any court or governmental agency
which does or may result in any adverse change in the Buyer's Assets or
properties or in the financial condition of the Buyer or its Business. The
Buyer is not liable for damages to any employee or former employee as a result
of any violation of any state or federal laws directly or indirectly relating to
such employee or former employee.
6.8 No Breaches: The Buyer is not in violation of, and the execution,
delivery and performance of this Agreement will not result in any breach or
acceleration of, any of the terms or conditions of its articles of incorporation
or bylaws or of any mortgage, bond, indenture, agreement, contract, license or
other instrument or obligation to which the Buyer is a party or by which its
Assets are bound, nor will they result in any violation of any statute,
regulation, judgment, writ, injunction or decree of any court, threatened or
entered in a proceeding or action in which the Buyer may be bound or to which
any of its Assets are subject.
7. Employees
7.1 Buyer will not subsequent to Closing, have any obligation to offer
employment to any individuals employed by Seller, except as indicated by Section
6.5. Except as disclosed pursuant to Section 4.5, 4N (f) (g), there are no
other written or oral agreements or commitments to employees which cannot be
terminated at anytime by Seller.
7.2 Whether or not Buyer after Closing offers employment to any
employee of Seller, Seller shall retain and remain solely liable for any and all
claims, including without limitation, retirement benefits, accrued vacation,
workman's compensation and medical claims which arise out of, are associated
with or are based upon conditions or events which occurred prior to Closing.
8. Closing
8.1 General Procedure: At the Closing each party shall deliver to the
other party, in form and substance satisfactory to the other party, such
documents, instruments and materials required to effectuate the provisions of
this Agreement.
8.2 Time and Place: The Closing shall take place on July 29, 1997 in
Fremont, California, at a time and place mutually determined, or such other date
and location as is determined by the parties.
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8.3 Additional Agreements:
(A) Property Lease: On the Closing Date, Buyer shall enter into a
lease agreement or assignment for the property located at 48541 Warm
Springs Boulevard, Suite 505, Fremont, California 94538, and owned by
___________________. Such lease agreement or assignment shall be in the
form of Exhibit N or Exhibit M to this Agreement.
(B) Personal Service Agreements: On the Closing Date, Buyer shall
enter into employment agreements or consulting/non-compete agreements
with Alan Gill, John Coyle, Perry Hovanic, and Ernest Wong; which
employment agreements will include covenants not to compete, all of which
will be attached hereto as Exhibit O.
9. Conditions of Buyer's Obligation
9.1 The obligation of Buyer to complete the purchase of the assets on
the Closing Date in accordance with the terms set forth in this Agreement is, at
the option of the Buyer, subject to the satisfaction (or waiver by Buyer) of
each of the following conditions:
(A) Accuracy of Representations and Warranties: The representations
and warranties made by Seller in this Agreement shall be correct in all
material respects on and as of the Closing Date with the same force and
effect as though such representations and warranties had been made on the
Closing Date.
(B) Personal Service and Lease Agreements: Shareholders of Seller
shall have entered into non-compete and/or employment agreements
described in Section 8.3. Buyer and landlord shall have entered into a
lease agreement as described in Section 8.3.
(C) Opinion of Counsel: Buyer shall have received the opinion of
Lawrence Smith, the Seller's legal counsel, dated the Closing Date and in
form and substance satisfactory to Buyer's legal counsel, stating the
substance of the representations and warranties set forth in Sections 5.2
and 5.3of this Agreement. Counsel shall be entitled to rely upon
certificates of governmental officials and, as to factual matters, upon
certificates of the president of the Company.
(D) Delivery of Closing Documents: Seller shall have delivered to
Buyer each of the items listed in Section 2.1 (Exhibits A through I),
Section 4.5 and 4.6 and 5.7 and such items shall be satisfactory in form
to Buyer and include:
(1) A Bill of Sale transferring the assets to Buyer duly
executed by Seller in the form attached as Exhibit P.
(2) Assignments executed by Seller to the corporate name,
trademarks, trade names, copyrights and other intangibles listed on
Exhibit Q.
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(3) Assignments or consents executed by Seller or third parties
for leases, licenses, contracts or other agreements listed in Section
4.5 herein and Exhibit attached as Exhibit M.
(4) Certified copy of corporate resolutions, and if required by
statute, shareholder approval authorizing the execution of this
Agreement and the consummation by Seller of the transactions of the
Agreement.
(5) A certified check for all Cash purchased, described in
Exhibit E, (less an allowance to cover outstanding checks). The
balance of such Cash shall be remitted to Buyer within thirty (30)
days after Closing.
(6) The results of UCC, tax, bankruptcy and judgment lien
searches, obtained by Buyer at its expense and dated within seven (7)
days prior to the Closing Date, in the name of the Seller, the Company
and any trade name used by the Company in the Secretary of State's
records of the State of California, and in all appropriate local
filing offices are satisfactory to Buyer.
(7) Appropriate payoff letters from the Company's creditors with
respect to all Long-Term Debt and other indebtedness of the Company,
and, if such debt is to be repaid pursuant to the terms of this
Agreement, releases in form reasonably satisfactory to counsel for
Buyer from all persons holding liens or other interests in any of the
Assets (other than liens for current taxes not yet due and payable).
(8) A Certificate of Good Standing for the Company from the
State of California and the Articles of Incorporation of the Company
certified by an appropriate government official as of the Closing
Date, delivered within two weeks of the closing.
(9) The Investment Letters executed by each of the Shareholders
to whom the Buyer's Common Stock is to be issued pursuant to Section
3.1A herein, in the form of Exhibit AA.
(10) All other documents, certificates, instruments and writings
required hereunder to be delivered by the Company and/or Seller, or
that may reasonably be requested by Buyer at or prior to the Closing
Date.
(E) Covenants and Conditions: Seller shall have performed or caused
the company to perform in all material respects all of his obligations
and agreements and complied or caused the Company to comply in all
material respects with all covenants and conditions contained in this
Agreement to be performed or complied with on or before the Closing Date.
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(F) Adverse Change: Between the date of this Agreement and the
Closing Date, in Buyer's sole judgment, using a standard of reasonable
business judgment, there shall have been no material adverse change in the
Company or its condition (financial or otherwise), operations, business or
prospects, and the Company shall not have suffered any material loss by
fire, flood, act of God, natural disaster, blizzard, windstorm, or other
casualty which has not been fully restored or replaced.
(G) Legal Proceedings: There shall not be pending or threatened any
lawsuit, claim, legal action, administrative proceeding or investigation
involving either Seller, the Company, the Assets or the Shares which would
materially adversely affect the Company, the Assets, the Shares of the
transactions contemplated by this Agreement.
(H) Licenses in Effect: All of the Licenses shall be in full force
and effect on the Closing Date without conditions.
(I) Encumbrances: Except for Permitted Liens (Exhibit J) there shall
be no security interest, mortgage, pledge, conditional sales agreements, or
other lien or encumbrance, affecting any of the Assets (other than liens
for current taxes not yet due and payable).
10. Conditions to Obligations of Seller
10.1 The obligation of Seller hereunder to complete the sale of the assets
on the Closing Date on the terms set forth in this Agreement in subject to the
satisfaction (or waiver by the Seller) of each of the following conditions:
(A) Accuracy of Representations and Warranties: The representations
and warranties of Buyer in this Agreement shall be correct in all material
respects as of the Closing Date.
(B) Personal Service Agreements: The Buyer shall have entered into
the agreements described in Section 6.5.
(C) Opinion of Counsel: Seller shall have received the opinion of
Rider, Bennett, Egan & Arundel, the Buyer's legal counsel, dated the
Closing Date and in form and substance satisfactory to Seller's legal
counsel, stating the substance of the representations and warranties set
forth in Sections 6.1 and 6.2.
(D) Property Lease: Buyer shall have entered into or assumed the
assignment of the lease agreement described in Section 4.5 (4K).
(E) Debt Repayment: Buyer shall have entered into an assignment of
the Shareholder Note listed on Exhibit H.
(F) Payment: Buyer shall have delivered the purchase price payment
according to the terms of Sections 3.1 and 3.2 of this Agreement.
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11. Indemnification
11.1 General: The covenants, representations and warranties contained in
this Agreement shall survive the Closing.
11.2 Seller: Seller shall indemnify and hold Buyer harmless against and
from any losses, claims, costs, demands, damages, suits or liabilities,
including without limitation in each case the cost, expenses and attorney's fees
reasonably incurred by Buyer resulting from, arising out of, incident to or
based upon: (i) Seller's ownership of the Assets and activities associated with
the conduct of the Business prior to Closing; (ii) any breach of any of the
representations, covenants or warranties provided in this Agreement, or any
misrepresentation in any certificate or document delivered to Buyer hereunder;
or (iii) any claims by third parties alleging strict liability in tort, express
or implied warranty or contract seeking compensation for property damage, bodily
injury and or death related to or arising out of, incident to or associated with
the design, manufacture, sale, installation, operation, use, service and/or
maintenance of any product associated with the Business prior to Closing.
Seller agrees to keep, pay and perform all such liabilities and obligations not
expressly assumed hereunder by Buyer in accordance with their respective terms
and conditions and shall indemnify, defend and hold harmless Buyer in respect
thereto and any costs, expenses (including reasonable attorneys' fees), or
other liabilities incurred by Buyer with respect to such liabilities and
obligations of Seller.
11.3 Setoff and Reconciliation of Values:
(A) The exact value as of the Closing Date of Assets purchased and
obligations being assumed by Buyer shall be reconciled and verified by
Buyer subsequent to Closing.
Should the verification determine at any time that:
(1) liabilities undisclosed on Exhibit G, H, or I which Buyer,
in its sole discretion, elects to pay in order to preserve the
business operations and reputation of the Business, including interest
and attorneys' fees, to discharge such undisclosed liabilities will be
set off as described below. This provision notwithstanding, the
parties agree and acknowledge that Buyer is not assuming and shall not
be required to pay any liabilities not disclosed on Exhibits G, H or
I, attached hereto.
(2) any matter described in Section 11.2 above has arisen, the
cost to Buyer of such breach will be set off as described below.
(3) Accounts or Notes Receivable listed on Exhibit D are
uncollectable for 90 days past their invoice due date, the amount of
such uncollectables exceeding an aggregate amount equal to the
accounts receivable reserve for bad debt will, 100 days after Closing,
be set off as described below.
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(4) The excess of Current Assets over combined Current
Liabilities and First Bank Working Capital debt as of Closing is less
than the May 31, 1997 level of $391,103, (which is
$1,960,032-$776,068-$792,861) the amount which would restore the
excess will be set off as described below.
Any amounts to be set off in paragraphs 1 through 4 above will be applied
against any amounts then owed by Buyer to Seller beginning with amounts owed for
payment of principal or interest under the Note. Amounts setoff under this
provision will be adjustments to the Note portion of the purchase price as of
the Closing Date. Buyer shall notify Seller in writing of the nature, reason and
amount of Buyer's claim for setoff. Seller shall be entitled to contest any
such claimed setoff by written notice to Buyer within thirty (30) days after the
postmark date of Buyer's notice thereof. If Seller does not so contest, Buyer
shall effect the setoff by reducing payments due under the Note in the order of
their maturity. If Seller does so contest, and within sixty (60) days of
Buyer's original notice any dispute as to claimed setoff cannot be settled by
the parties without arbitration, the dispute shall be resolved according to the
provisions of Section (B) below.
(B) Disputes which arise under the provisions of this Section 11.3 or
under the provisions of any other section of this Agreement shall be resolved in
San Francisco, California through arbitration in accordance with rules and
procedures of the American Arbitration Association for commercial transactions
of such nature.
(C) Shareholders Guaranty: The parties acknowledge and agree that
Seller may make distribution of its assets to the Shareholders after
consummation of the transactions contemplated by this Agreement. Because
such distributions may leave Seller without significant assets, the
Shareholders hereby jointly and severally guaranty the indemnity
obligations of Seller, but only to the extent of distributions actually
received from Seller. In the event of the existence of an indemnification
liability hereunder, Buyer agrees to look first to the assets of Seller in
accordance with the terms of this Agreement before looking to the
Shareholders in accordance with this Section. To the extent that Buyer
looks to the Shareholders for satisfaction of any indemnification
liability, such liability shall be satisfied as follows:
(i) First, by setoff against any amounts then owed by Buyer to
the Seller or the Shareholders for payment of principal or interest
pursuant to the Note or under the Consulting or Employment and
Noncompetition Agreements.
(ii) Second, by surrender of Buyer's common stock held by the
Shareholders at its then current market value.
(iii) Third, by collection of any remaining amount of
indemnification liability from the Shareholders, up to but not
exceeding the amount of any distributions made by Seller to the
Shareholders after the Closing Date.
It is understood by the parties that claims made under this Section 11 may
be, upon recovery by the Buyer, subsequently paid to third parties or may
be retained by the Buyer,
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depending upon the nature of the claim. In the event an Indemnification
Claim is determined to be payable to the Buyer and no claim must be
subsequently paid by the Buyer to third parties, and such claim restores to
the Buyer all of the Purchase Price (as defined in Section 3), then upon
payment of such claim to the Buyer, Buyer agrees to deliver back to the
indemnifying party those Assets which were purchased pursuant to this
Agreement and which remain in the possession of Buyer. Such return of
Assets shall be limited solely to those identifiable Assets (not including
cash or Assets which have been reduced to cash and not including assets
which have been purchased to replace the Purchased Assets) which remain in
the possession of Buyer.
11.4 Indemnification of Buyer: Buyer shall indemnify and hold Seller
harmless against and from any losses, claims, cost, demands, damages, suits or
liabilities, including, without limitation, in each case the costs, expenses and
attorney's fees reasonably incurred by Seller resulting from, arising out of or
based upon: (1) any breach of any of the representations, covenants, warranties
provided in this Agreement, or any misrepresentation in any certificate or
document delivered to Seller hereunder; or (ii) Buyer's operation of the
Business subsequent to Closing.
11.5 Indemnification Claims - Interest: Interest on any claim for
indemnification pursuant to this Section 11 shall accrue at a rate equal to the
reference rate as publicly announced from time to time by First Bank National
Association, Minneapolis, Minnesota, from the date the claim arose until the
claim is satisfied by payment.
11.6 Legal Proceedings: In the event Buyer or Seller become involved in
any legal, governmental or administrative proceeding which may result in damage
to such party, or if any such proceeding is threatened or asserted which will
damage the business or reputation of the Company, such party shall promptly
notify the indemnifying party in writing and in full detail of the filing, or
the threat or assertion of such filing, and of the nature of any such
proceeding. If the Indemnifying Party does not elect to assume control or
otherwise participate in the defense of any third party claim, it shall be
bound by the results obtained by the Indemnified Party with respect to such
claim.
11.7 Bulk Sales Compliance: Seller has agreed to indemnify and hold Buyer
harmless from all liabilities arising from its operation of business that have
not been assumed by Purchaser as set forth above. In reliance upon said
indemnification, Buyer waives and releases Seller from its obligation to execute
and deliver an Affidavit listing creditors as required by California's Bulk
Transfer Law.
12. Possession of Properties and Assets; Loss or Damage
12.1 Seller's Remedies: If the transaction contemplated by this Agreement
is not consummated because of a default by Buyer of its obligations hereunder
and provided Seller is not in default, Seller shall be entitled (but not
required), to seek any other remedies which may be available, including money
damages. In the event of a default by Buyer and the filing of a lawsuit which
results in a final judgment (not subject to further appeal) in favor of Seller
for damages or
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other remedy, Seller shall be entitled to reimbursement by Buyer of the
reasonable legal fees and expenses incurred by Seller.
12.2 Buyer's Remedies: The parties recognize that if Seller refuses to
perform under the provisions of this Agreement, monetary damages alone will not
be adequate. Buyer shall therefore be entitled, to seek any other remedies
which may be available, including money damages. In the event of any action to
enforce this Agreement, Seller shall waive the defense that there is an adequate
remedy at law. In the event of a default by Seller and the filing of a lawsuit
which results in a final judgment (not subject to further appeal) in favor of
Buyer for damages or other remedy, Buyer shall be entitled to reimbursement by
Seller of the reasonable legal fees and expenses incurred by Buyer.
12.3 Buyer shall not acquire any title to or right in the assets until
Closing, and accordingly, all risk of loss with respect to the assets shall be
borne by Seller.
12.4 At Closing, the assets shall be in substantially the same condition as
of the date of this Agreement except for normal transactions of the business,
and ordinary wear thereof, provided, however, that if at Closing the assets
shall have suffered loss or damage to an extent which substantially affects the
value of such property, Buyer shall have the right, at its election, to either:
(i) complete the acquisition with a reduction in the purchase price equal to
the loss or damage, said reduction to be from the cash amount to be paid by
Buyer to Seller as set forth in Section 3.1 (A); or (ii) to terminate this
Agreement, in accordance with Section 13 hereof.
13. Termination
13.1 Mutual Termination: This Agreement may be terminated by mutual
agreement of Buyer and Seller at any time.
13.2 Default: This Agreement may be terminated by either Buyer or Sellers,
if the terminating party is not then in material default, upon written notice to
the other party, upon the occurrence of the following: prior to the Closing
Date, Sellers or Buyer shall be come aware of any material breach of any
representation, warranty, obligation or agreement by the other party (the
"Breaching party"), they shall give prompt written notice to the Breaching Party
of the nature of such breach. The Breaching Party shall use its best efforts to
cure the breach prior to the Closing Date. If the Breaching Party has not cured
the breach on or before the Closing Date, the parties shall negotiate in good
faith a mutually acceptable compromise taking into account the economic effect
of the breach on the Buyer or Sellers, as the case may be, and shall consummate
the transactions contemplated hereby. If the parties are unable to reach
agreement and consummate the transactions contemplated by this Agreement, the
Closing shall be postponed and the Breaching Party shall use its best efforts to
cure the breach as soon as practicable. The exact date and time of the
postponed Closing Date shall be agreed upon by Buyer and Sellers, provided that
in no event shall the postponed Closing Date occur after September 1, 1997. If
the Breaching Party has not cured the breach before that date, then if Buyer is
the nondefaulting party, it shall have all rights and remedies provided in this
Agreement and at law or equity, including without limitation, that the Sellers
shall be liable to Buyer for any damages incurred or suffered by Buyer.
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14. Miscellaneous
14.1 Binding Effect: This Agreement shall be binding upon and inure to the
benefit of and be enforceable against the parties hereto and their respective
successors.
14.2 Governing Law: This Agreement shall in respects of substantive issues
be governed by, and enforced and interpreted in accordance with, the laws of the
State of California.
14.3 Notices: All notices or other communications provided for herein
shall be in writing and shall be deemed validly given, when delivered personally
or sent by registered or express mail, postage prepaid, and, pending the
designation of another address, addressed as follows:
If to Seller: Alan Gill
5212 Caminito
Providencia
Rancho Sante, CA 92067
(619) 756-6941 (Home)
(510) 249-0600 (Business)
With a copy to: Lawrence E. Smith
Centerpoint Building
18 Crow Canyon Court, Suite 280
Sam Ramon, CA 94583
(510) 820-4310
If to Buyer: E. D. Willette
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
(612) 832-3200
With a copy to: Rider, Bennett, Egan & Arundel
Attn: Barry Clegg
2000 Lincoln Center
333 South Seventh Street
Minneapolis, Minnesota 55402
(612) 340-7951
M. Charles Reinhart
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
(612) 832-3200
27
<PAGE>
14.4 Entire Agreement and Counterparts: This Agreement, the exhibits
attached hereto, and schedules delivered pursuant to the provisions hereof, set
forth the entire agreement between Seller and Buyer relating to the transaction
contemplated herein, superseding any prior oral or written agreement or
understanding between them. This Agreement shall be amended or modified only by
written instrument signed by both parties.
14.5 Assignment: Seller hereby agrees that Buyer may assign its rights,
and delegate its responsibilities, under this Agreement, including to a
wholly-owned subsidiary corporation, in which case the Buyer shall remain fully
obligated to on all responsibilities and duties hereunder in all events and
shall use its best efforts cause such subsidiary corporation to complete the
purchase of the assets in the manner contemplated by this Agreement. The
provisions of this Section notwithstanding, this Agreement is not intended to
and shall not create any rights or third parties not signatories to this
Agreement with respect to Buyer or its assets.
14.6 Expenses, Taxes: Each party shall pay for its own legal, accounting
and other similar expenses incurred in connection with the transactions
contemplated by this Agreement; provided, however, that in the event a full
certified Audited Financial Statement is required by the Buyer, the audit fee
for the audit agreed to under this Agreement shall be paid by Sellers.
14.7 Publicity: All notices to third parties and other publicity relating
to the matters contemplated by this Agreement shall be jointly planned and
coordinated between Seller and Buyer, and neither party shall unilaterally
release such notices or publicity without the prior written approval of the
other party.
14.8 Negotiation: Unless this Agreement is terminated, Seller will not
enter into negotiations with any other party for the sale of the Company's
assets or the Shares. Sellers will promptly notify Buyer of any offer, inquiry
or proposal received by Buyer or its representatives for such sale.
28
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the
date set forth in the first paragraph.
VAUGHN COMMUNICATIONS, INC.
By
--------------------------
E. David Willette
Chief Executive Officer
CERTIFIED MEDIA CORPORATION
By
-------------------------
Alan Gill, President
By
-------------------------
Alan Gill, Shareholder
By
-------------------------
Perry Hovanic, Shareholder
By
-------------------------
John Coyle, Shareholder
By
-------------------------
Ernest Wong, Shareholder
29
<PAGE>
VAUGHN COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
July 31 July 31
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,746,565 3,569,504 3,807,034 3,598,718
Net effect of dilutive stock options
based on the treasury stock method
using average market price 133,113 348,536 130,303 339,292
--------- --------- --------- ---------
TOTAL 3,879,678 3,918,040 3,937,337 3,938,010
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income $ 1,345,218 $ 1,307,233 $ 625,685 $ 671,110
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income per Share $ .35 $ .33 $ .16 $ .17
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FULLY DILUTED:
Average shares outstanding 3,746,565 3,569,504 3,807,034 3,598,718
Net effect of dilutive stock options
based on the treasury stock method
using the quarter-end market price
if higher than average market price 142,612 353,865 132,194 340,035
----------- ----------- ----------- -----------
TOTAL 3,889,177 3,923,369 3,939,228 3,938,753
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income $ 1,345,218 $ 1,307,233 $ 625,685 $ 671,110
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income per Share $ .35 $ .33 $ .16 $ .17
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
EXHIBIT 11
- 12 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,527,861
<ALLOWANCES> 925,000
<INVENTORY> 8,792,739
<CURRENT-ASSETS> 23,187,577
<PP&E> 23,324,659
<DEPRECIATION> 17,902,829
<TOTAL-ASSETS> 41,929,787
<CURRENT-LIABILITIES> 13,709,726
<BONDS> 8,710,204
0
0
<COMMON> 401,075
<OTHER-SE> 19,033,456
<TOTAL-LIABILITY-AND-EQUITY> 41,929,787
<SALES> 37,446,312
<TOTAL-REVENUES> 37,446,312
<CGS> 25,008,565
<TOTAL-COSTS> 25,008,565
<OTHER-EXPENSES> 9,467,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 644,653
<INCOME-PRETAX> 2,325,218
<INCOME-TAX> 980,000
<INCOME-CONTINUING> 1,345,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,345,218
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
