<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, 1998
--------------------------------------------------
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.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0626191
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYEE
ORGANIZATION) IDENTIFICATION NO.)
5050 WEST 78TH STREET, MINNEAPOLIS, MINNESOTA 55435
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
612/832-3200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(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
--- ---
COMMON STOCK, $.10 PAR VALUE 4,082,052 OUTSTANDING SHARES AS OF AUGUST 31, 1998.
<PAGE>
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - July 31, 1998 and January
31, 1998
Condensed consolidated statements of income - Three months ended
July 31, 1998 and 1997; Six months ended July 31, 1998 and 1997
Condensed consolidated statements of cash flow - Six months ended
July 31, 1998 and 1997
Notes to condensed consolidated financial statements - July 31,
1998
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
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)
<TABLE>
<CAPTION>
July 31 January 31
----------- -----------
ASSETS 1998 1998
---- ----
<S> <C> <C>
Current Assets
Trade accounts receivable less allowance of
$1,408,000 at July 31, 1998 and $1,126,000
at January 31, 1998 $17,950,091 $13,822,621
Inventories 8,985,636 8,887,898
Other 982,653 1,301,287
----------- -----------
Total Current Assets 27,918,380 24,011,806
Property, plant and equipment 35,600,183 31,185,406
Less accumulated depreciation 22,020,460 19,899,664
----------- -----------
13,579,723 11,285,742
Intangible and Other Assets 10,084,461 9,014,076
----------- -----------
$51,582,564 $44,311,624
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,685,881 $ 3,216,356
Notes payable to banks 7,244,435 5,760,436
Salaries, wages and payroll taxes 264,794 818,300
Current portion of long-term debt and capital
lease obligations 4,148,069 3,867,986
Other 2,170,746 1,255,415
----------- -----------
Total Current Liabilities 20,513,925 14,918,493
Long-term debt (less current portion) 5,571,279 6,517,724
Capital lease obligations (less current portion) 3,513,780 2,502,540
Deferred taxes 54,326 54,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and
outstanding July 31, 1998 - 4,082,052 shares;
January 31, 1998 - 4,088,582 shares 408,205 408,858
Additional paid-in capital 8,984,859 9,074,004
Retained earnings 12,536,190 10,835,679
----------- -----------
Total Shareholders' Equity 21,929,254 20,318,541
$51,582,564 $44,311,624
----------- -----------
----------- -----------
</TABLE>
Note: The balance sheet at January 31, 1998 has been derived from the audited
financial statements at that date. See Notes to Condensed Financial
Statements.
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<PAGE>
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31 July 31
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $23,719,426 $19,180,773 $47,414,650 $37,446,312
COST AND EXPENSES:
Costs of goods sold 16,161,903 12,924,529 31,918,461 25,008,565
Selling and administrative 5,737,687 4,874,785 11,661,489 9,535,833
Interest 500,901 337,155 959,047 644,653
Other expense (income) (22,580) (46,381) (54,847) (67,957)
----------- ----------- ----------- -----------
22,377,911 18,090,088 44,484,150 35,121,094
INCOME BEFORE INCOME TAXES 1,341,515 1,090,685 2,930,500 2,325,218
Income taxes 555,000 465,000 1,230,000 980,000
----------- ----------- ----------- -----------
NET INCOME $ 786,515 $ 625,685 $ 1,700,500 $ 1,345,218
----------- ----------- ----------- -----------
NET INCOME PER
COMMON SHARE
Basic $ 0.19 $ 0.16 $ 0.42 $ 0.36
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.19 $ 0.16 $ 0.41 $ 0.35
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended July 31
------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,700,500 $ 1,345,218
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 2,510,630 1,822,725
Receivables (3,574,551) (2,750,353)
Inventories 43,326 595,220
Other Assets 537,678 1,017,252
Accounts Payable 3,210,095 (503,138)
Other Liabilities (642) (499,528)
----------- -----------
Net cash provided by (used in) operating activities 4,427,036 1,027,396
INVESTING ACTIVITIES
Additions to property, plant, and equipment (4,266,577) (1,033,091)
Purchase of business less cash acquired (1,580,528) (5,811,009)
Other 80,990 229,603
----------- -----------
Net cash used in investing activities (5,766,115) (6,614,497)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (2,633,100) (1,327,282)
Borrowings under revolver 1,483,999 1,373,512
Lease financing of equipment 2,577,978 -
Increase in bank debt - 4,300,000
Common stock issued in purchase of business - 1,200,000
Other (89,798) 40,871
----------- -----------
Net cash provided by financing activities 1,339,079 5,587,101
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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VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1998
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,
1998 are not necessarily indicative of the results that may be expected for the
year ending January 31, 1999. 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, 1998.
NOTE B - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended July 31
1998 1997
---- ----
<S> <C> <C>
Basic net income per share:
Net income $ 786,515 $ 625,685
Weighted average shares outstanding 4,086,382 3,807,034
Net income per share $.19 $.16
Diluted net income per share:
Net income $ 786,515 $ 625,685
Shares used in calculation:
Weighted average shares outstanding 4,086,382 3,807,034
Common shares issuable under stock option plans 97,564 132,194
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4,086,382 3,807,034
--------- ---------
--------- ---------
Net income per share $.19 $.16
<CAPTION>
Six Months Ended July 31
1998 1997
---- ----
<S> <C> <C>
Basic net income per share:
Net income $1,700,500 $1,345,218
Weighted average shares outstanding 4,087,464 3,746,565
Net income per share $.42 $.36
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<PAGE>
Diluted net income per share:
Net income $1,700,500 $1,345,218
Shares used in calculation:
Weighted average shares outstanding 4,087,464 3,746,565
Common shares issuable under stock option plans 77,110 142,612
--------- ---------
4,164,574 3,889,177
--------- ---------
--------- ---------
Net income per share $.41 $.35
</TABLE>
NOTE C - ACQUISITIONS
On February 1, 1998, the Company completed the acquisition of the assets of
Copywise, Inc. ("Copywise"), a floppy disk replicator located in Fremont,
California. The acquisition will be accounted for by the purchase method of
accounting. Goodwill associated with the purchase will be amortized over 15
years. The noncontingent purchase price was approximately $1,670,000 of cash
and the assumption of approximately $667,000 of liabilities. The purchase
price may be increased by an additional $1,560,000 depending upon the
attainment of certain financial objectives by the acquired business through
January 31, 2000.
In July, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation ("CMC"), a compact disc replicator
located in Fremont, 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 $7,500,000
depending upon CMS's attainment of specific financial objectives through
January 31, 1999. Goodwill recorded in this transaction is being amortized
over 15 years using the straight-line method.
In July 1997, the Company also 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.
All the acquisitions have been accounted for by the purchase method of
accounting, and the consolidated financial statements for the period ended July
31, 1998, reflect the purchase of the businesses and include any results from
operations subsequent to the closing date of the respective transactions.
The following unaudited pro forma information presents the consolidated results
of operations of the Company as if the acquisitions had been completed as of
February 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, 1997 July 31, 1997
------------- -------------
<S> <C> <C>
Net Sales $23,614,000 $44,632,000
Net Income 362,000 1,107,000
Net Income per Common Share
Basic $.09 $.27
Diluted $.09 $.27
</TABLE>
- 6 -
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales increased 24% in the second quarter of 1998 to $23,700,000, an
increase of $4,500,000 from the second quarter of 1997. For the first six
months of 1998 sales of $47,400,000 were $9,968,000, or 27% greater than the
same period in 1997. Gross margins declined slightly to 31.9% in the second
quarter of 1998 from 32.6% for the same quarter in 1997. Year-to-date gross
margin declined from 33.2% in 1997 to 32.7% in 1998. Second quarter operating
expenses as a percentage of sales declined from 25.4% in 1997 to 24.2% in 1998.
For the six-month period operating expenses declined from 25.5% in 1997 to
24.6% in 1998. Interest expense increased by $163,000 in the second quarter of
1998 and by $315,000 for the first six months of 1998. The increase was due to
additional borrowings associated with the acquisitions of Certified Media
Corporation and Copywise, Inc. and increased working capital borrowings needed
to support the sales growth. Net income of $787,000 in the second quarter of
1998 was a 26% increase over the previous year's second quarter. For the first
six months net income also increased 26% from $1,345,000 in 1997 to $1,700,000
in 1998. The contribution each division made to these results is discussed
below.
COMMUNICATIONS DIVISION
On February 1, 1998, the Company acquired the assets of Copywise, Inc.
("Copywise"), a floppy disk replicator located in Fremont, California, for a
non-contingent purchase price of approximately $1,670,000 cash and the
assumption of approximately $667,000 of liabilities. The acquisition has been
accounted for as a purchase, and the operating results are included in the
Company's results as of the date of acquisition. The operations of Copywise
have been merged into the Company's preexisting facility in Fremont.
The Communications Division's net sales increased 42% in the second quarter of
1998 to $19,640,000. This was an increase of $5,782,000 from the prior year's
second quarter. For the first six months sales increased 41% from $27,830,000
in 1997 to $39,369,000 in 1998. The increase is attributable to a 14% increase
in sales from already existing facilities, and the inclusion of sales from the
Company's acquisitions of Copywise and Certified Media (which was acquired on
July 31,1997).
Gross margins have decreased slightly from the previous year. For the second
quarter, gross margins were 32.2% compared to 33.9% the previous year, while
year-to-date gross margins have declined from 34.4% to 31.2%. The decrease is
due to the lower margins being realized on the sale of CD replication.
Operating expenses as a percentage of sales for the first six months have
declined from the prior year's 28% to 26% in the current year. The decrease is
a result of the increase in sales which increased the leveraging of fixed costs
and continued efforts to control expenses.
Pretax income in the second quarter of $711,000 was 23% ahead of last year's
second quarter. For the first six months of 1998 pretax income of $2,151,000
is 54% ahead of last year.
PRODUCTS DIVISION
The Products Division's net sales decreased 23% in the second quarter of 1998
to $4,079,000. For the first six months, sales have declined 16% from
$9,616,000 in 1997 to $8,045,000 in 1998. The decrease can be attributed in
part to "softness" in the markets served by the Company, and, to a lesser
degree, a transition in sales personnel. The business is highly seasonal, with
approximately 80% of the sales occurring in the first six months, and it is
unlikely the Company will be able to make up the shortfall in the second half
of the year. Gross margins have improved slightly in the first six months,
from 29.8% in 1997 to 30.3% in 1998. For the second quarter gross margins were
30.5% in 1998 compared to 29.2% in 1997. Recognizing the declining sales, the
Company instituted cost containment measures
- 7 -
<PAGE>
which resulted in a $274,000 (15%) reduction in operating expenses for the
first six months of 1998 compared to the first six months of 1997. The
decrease in operating expenses partially offset the decline in sales and
resulted in a 16% decrease in pretax income for the first six months, from
$929,000 in 1997 to $779,000 in 1998. In the second quarter, pretax income was
$381,000 compared to $539,000 in 1997.
LIQUIDITY AND SOURCES OF CAPITAL
Cash provided by operations and financing provided by banks and third parties
continue to be the Company's primary sources of funds to finance operating
needs and capital expenditures. In the first six months of 1998, cash flow
from operations of $4,427,000, along with borrowings from third parties, was
used to fund capital expenditures of approximately $4,267,000 and to fund the
$1,580,000 purchase price of Copywise.
Based on past performance and current expectations, the Company believes that
working capital levels, coupled with its ability to borrow additional funds
under its $17,000,000 credit facility with a bank (of which approximately
$3,700,000 is available at July 31, 1998), are adequate to meet the operating
requirements of the Company for the next six months. The Company continues to
explore strategic acquisitions and divestitures as well as alternative funding
proposals. As of August 31, 1998, no definitive agreements have been reached
regarding any such transactions.
OTHER
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has substantially completed
its assessment of the year 2000 problem, and currently believes that costs of
addressing this issue will not have a material adverse impact on the Company's
financial position. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in
a material financial risk to the Company. In order to assure that this does
not occur, the Company plans to devote all resources required to resolve any
significant year 2000 issues in a timely manner.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure requirements of Item 305 of Regulation S-K are not applicable to
the Company.
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<PAGE>
PART II - OTHER INFORMATION
VAUGHN COMMUNICATIONS, INC.
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 23, 1998. The Company's Board of Directors solicited
proxies for the Meeting pursuant to its Proxy Statement dated May 26, 1998 (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 Jeffrey Johnson and Harold Wahlquist 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 2001 Annual Meeting
of Shareholders, and until their successors are elected and have qualified.
There was no solicitation in opposition.
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Withheld Against Non-Votes
--- -------- ------- ---------
<S> <C> <C> <C> <C>
Jeffrey Johnson 3,355,004 - - 244,740
Harold Wahlquist 3,316,087 38,200 16,349 245,462
</TABLE>
The remaining members of the Board of Directors were not elected at the
1998 Annual Meeting. Messrs. 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.
Messrs. Rodney Burwell, Michael Sill and E. David Willette continue to
serve terms expiring at the 2000 Annual Meeting of Shareholders, and until
their successors are elected and have qualified.
2) By the affirmative vote of 1,869,764 in favor and the negative vote of
825,632 with 12,862 abstentions and 891,491 broker non-votes, the
Shareholders approved adoption by the Company of its 1998 Stock Option
Plan. The Plan provides for the grant to select management and other
employees of the Company of stock options to purchase up to 300,000 shares
of authorized but unissued Common Stock pursuant to incentive stock options
under Section 422 of the Internal Revenue Code and/or nonstatutory stock
options not qualifying thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list and Exhibit Index of the Exhibits filed
herewith.
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<S> <C>
(10) 1998 Stock Option Plan together with form of
nonstatutory stock option agreement and form
of incentive stock option agreement.
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(22) Proxy Statement dated May 26, 1998 for the
Company's Annual Meeting of Shareholders
held June 23, 1998, incorporated by reference
to filing thereof on May 26, 1998.
(27) Financial data schedule
</TABLE>
(b) Reports on Form 8-K
During the quarter ended July 31, 1998 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.
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: September 10, 1998 \s\ E. David Willette
------------------------ ----------------------------------
E. David Willette
Chief Executive Officer
Date: September 10, 1998 \s\ M. Charles Reinhart
------------------------ ----------------------------------
M. Charles Reinhart
Chief Financial Officer
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VAUGHN COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
1. PURPOSE
The Plan is intended to provide a means for Vaughn Communications, Inc.
(the "Company"), by offering incentives to selected management and other key
employees of the Company, and of any majority owned direct or indirect
subsidiaries of the Company, to attract and retain persons of ability and
motivate them to advance the interests of the Company.
It is intended that some of the options granted under the Plan will be
designated and constitute "incentive stock options" within the meaning of
Section 422 or other similar provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and the other options granted under the Plan will be
designated and constitute "nonstatutory options," i.e., options not qualifying
under Section 422 or other similar provisions of the Code. Unless otherwise
indicated, the terms and conditions of the Plan shall apply equally to all
options granted hereunder, whether incentive stock options or nonstatutory
options. It is also intended that the Plan be administered so as to comply with
Rule 16b-3 under the Securities Exchange Act of 1934.
2. SHARES SUBJECT TO THE PLAN
A total of 300,000 shares of authorized but unissued or reacquired $.10 par
value Common Stock of the Company is reserved for issuance upon exercise of
options under the Plan. If any option expires or terminates without having been
exercised in full, the unacquired shares shall be available for the grant of
future options under the Plan.
<PAGE>
3. ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the Board
of Directors of the Company (the "Committee"). Each of the members of the
Committee shall be a "Non-Employee Director" within the meaning of Rule 16b-3,
as then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934. A "Non-Employee Director" under Rule 16b-3 means a
director of the Company who is not (1) currently an officer of the Company or
its parent or subsidiary or otherwise currently employed by the Company or its
parent or subsidiary, (2) does not receive compensation, either directly or
indirectly, from the Company or its parent or subsidiary for services rendered
as a consultant or in any capacity other than as a director, except for an
amount that does not exceed the dollar amount for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K, (3) does not possess an
interest in any other transaction for which disclosure would be required
pursuant to Item 404(a) of Regulation S-K, and (4) is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(b) of
Regulation S-K.
4. ELIGIBILITY AND AMOUNT OF GRANT
The Committee shall determine the grantees to whom (the "Optionees"), and
the number of shares for which, incentive stock options and/or nonstatutory
options shall be granted under the Plan. Optionees shall be management or other
employees of the Company, including officers, or of any of the Company's
aforesaid subsidiaries, who the Committee determines have contributed materially
to the success of the Company or are in a position to contribute materially to
the future success of the Company. Except as hereinafter limited, an eligible
Optionee may be granted one or more options hereunder which may be incentive
stock options and/or nonstatutory options. No eligible Optionee may receive
options hereunder in any fiscal year of the Company,
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<PAGE>
including for purposes of such calculation only all options received by the
Optionee in such fiscal year under any other stock option plans of the Company,
totaling more than Fifty Thousand (50,000) shares.
Notwithstanding the foregoing and except as hereafter provided, an
individual shall not be eligible to receive incentive stock options under the
Plan, if before the incentive stock option is granted the individual owns
(directly and through application of the constructive stock ownership
attribution rules of Section 425(d) of the Code) more than Ten Percent (10%) of
the total combined voting power of all classes of stock of the Company or any
subsidiary. This stock ownership provision shall not apply, and the individual
shall be eligible to receive an incentive stock option, if at the time such
option is granted the option exercise price is at least One Hundred Ten Percent
(110%) of the fair market value of the stock subject to the option and the
incentive stock option is not exercisable after the expiration of five years
from the date the option is granted.
Notwithstanding any other provision in this Plan, the aggregate fair market
value (determined at the time an option is granted) of shares with respect to
which incentive stock options are exercisable for the first time by an Optionee
during any calendar year (under this Plan and all other such plans of the
Company and its subsidiaries pursuant to Section 422 or other similar provisions
of the Code) shall not exceed $100,000. To the extent necessary to avoid such
limitation, the shares granted to any Optionee under this Plan shall be deemed
to be nonstatutory options.
5. OPTION PRICE
The option exercise price for all incentive stock options granted under the
Plan (except as otherwise herein provided) shall equal One Hundred Percent
(100%) of the fair market value of
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<PAGE>
the Company's Common Stock on the date of grant. The option exercise price for
the nonstatutory options granted under the Plan shall not be less than 85% of
the fair market value of the Common Stock on the date of grant. Fair market
value shall be determined by the Committee based upon the last sale price of the
Common Stock in the National Association of Securities Dealers Automated
Quotations System (NASDAQ) for National Market Issues or, as applicable, for
Small-Cap Issues, as reported by the National Association of Securities Dealers
for the last business trading day preceding the date of grant, or through such
other measure or means as the Committee may in good faith determine to be
appropriate to determine such fair market value. The Committee may authorize
the Chief Executive Officer or Secretary of the Company to make any
determinations required in this Section 5.
6. OPTION TERMS
Options granted hereunder shall be evidenced by an Option Agreement
executed as of the date of grant by the Company and the Optionee, on such terms
as may be determined by the Committee, including the following:
(a) The Option Agreement shall specify whether the option is an
incentive stock option or a nonstatutory option and shall set forth
the number of shares and the option exercise price to which the option
pertains. It shall also specify that the option shall vest on a
year-to-year cumulative basis as to the number of shares covered by
the option as follows: ten percent (10%) on the date of grant; plus
fifteen percent (15%) on the first anniversary date of the date of
grant; plus twenty-five percent (25%) on the second anniversary date
of the date of grant; plus twenty-five percent (25%) on the third
anniversary date of the date of grant; plus twenty-five percent (25%)
on the fourth anniversary date of the date of
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<PAGE>
grant. The option shall be exercisable in whole or in part as to any
vested portion during the option term which shall be up to ten (10) years
as specified by the Committee in the Option Agreement (except as otherwise
provided in Section 4, this subsection and subsection (e) below and/or in
the Option Agreement), except that the option shall first become
exercisable six months after the date of grant and shall not be exercisable
prior thereto.
(b) The option exercise price shall be paid at the time of
exercise which shall be in writing and, at the election of the
Optionee, may be paid in cash and/or by the sale and delivery of
certificates(s) duly endorsed for transfer, in shares of the Company's
Common Stock already owned by the Optionee. Any shares so sold to the
Company in payment of the option exercise price shall be valued at
fair market value on the exercise date as determined by the Committee,
or by the Chief Executive Officer or the Secretary of the Company as
the Committee's designee (as provided in Section 5). Fair market
value shall be deemed to be the last sale price of the Common Stock in
the NASDAQ for National Market Issues or, as applicable, for Small-Cap
Issues, as reported by the National Association of Securities Dealers
for the last business trading day preceding the date of exercise. Any
fractional share not required for payment of the option exercise price
shall be paid for by the Company in cash on the basis of the same
value utilized for such exercise.
(c) If available, the Committee may also permit the Optionee to
utilize any so-called "cashless exercise" procedures; to exercise the
option through a national bank or trust company or brokerage firm
which is a member of the
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National Association of Securities Dealers, pursuant to which upon
presentation of written exercise to such bank, trust company or broker and
to the Company, and upon authorization therefor by the Committee, any or
all of the shares an Optionee is entitled to receive on exercise is sold by
such bank, trust company or broker, or an agent therefor, and the option
exercise price for the shares purchased by the Optionee is credited to a
designated account of the Company on either the trade date or the customary
settlement date, provided only that if the Company is not to receive credit
of the option exercise price to its account until such settlement date, on
or before the trade date the selling bank, trust company or broker confirm
to the Company its obligation to pay the same to the Company as of the
settlement date. The balance of the proceeds for any shares sold in a
cashless exercise of an option, less customary brokerage commissions,
handling fees, other related brokerage charges and interest expense pending
settlement and delivery of certificate(s), if applicable, shall be credited
to the Optionee's account. If the sale proceeds are insufficient therefor,
such costs of sale shall be paid directly by the exercising Optionee. The
Company shall instruct the Company's Transfer Agent and Registrar, in
accordance with the request of the selling bank, trust company or broker
and/or Optionee, to issue certificate(s) for the portion of the shares
acquired on exercise which are sold in the cashless exercise to the selling
bank, trust company or broker or its designee, and to issue certificate(s)
for such shares acquired on exercise which are not sold in the cashless
exercise, if any, to the Optionee or the Optionee's designee.
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The Committee, however, shall be free to alter the above or
establish any rules appropriate to the use of any cashless exercise
procedure, but shall not permit the same, unless or until exercise and
sale of the shares are registered under the Securities Act of 1933 and
in compliance with any applicable registration requirements of state
securities law, and, in the case of officers of the Company or other
persons subject to Section 16 of the Securities Exchange Act of 1934,
in absence of an opinion of counsel for the Company that such cashless
exercise transaction will not result in such person's violation of the
rule against realization of short-swing profits pursuant to Section
16(b) thereof.
(d) Unless the issuance of the shares upon the exercise of an
option hereunder is registered under federal and state securities
laws, the Optionee upon exercise shall be required to sign and deliver
to the Company and be bound by a customary "investment letter,"
setting forth the Optionee's investment representation and securities
law transfer restrictions consistent with federal and state securities
law exemptions from registration for issuance of the shares on
exercise and consistent with Rule 144 under the Securities Act of
1933, and requisite legends and stop transfer orders shall be placed
upon or against the certificates for the shares by the Company's
Transfer Agent and Registrar. Without regard to registration or
exemption therefrom on exercise, if the Optionee is then an officer or
other "affiliate" of the Company with the meaning of said Rule 144,
securities law transfer restrictions consistent with said Rule 144
shall in any event be applicable and requisite legends and stop
transfer orders shall be placed upon or against the certificates for
the shares by the Company's Transfer Agent
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and Registrar. The Company shall not be obligated for but does currently
anticipate registration of the shares issued under the Plan under federal
and certain state securities laws.
(e) If the Optionee, until such time continuously employed by
the Company or its subsidiaries, is terminated by reason of death or
disability or retires at or after age 57 or resigns as an employee of
the Company within one year of a "Change of Control", the option, to
the extent not previously exercised, may be exercised in whole or in
part during the balance of the stated term of the option without
regard to the annual exercise vesting provisions of subsection (a)
above, except that no option shall be exercisable for a period of six
(6) months after the date of grant, and except that an incentive stock
option may be exercised only within three (3) months after termination
of employment by reason of such event and shall thereupon expire,
unless the Optionee shall die during such period or while employed in
which case the option may be exercised within twelve (12) months after
the death of the Optionee. The Committee may by prior approval also
permit an Optionee to retire to the same effect or on any less
favorable basis prior to age 57. The Committee may grant, withhold or
condition its approval for any reason it deems to be in the best
interests of the Company. In the event of the Optionee's death, the
option may be exercised by the personal representative of the
Optionee's estate and/or by the Optionee's heirs, as the case may be.
If the Optionee's employment terminates for any other reason, the
option shall expire on the date the Optionee's employment terminates.
Notwithstanding anything herein to the contrary, unless expiring
earlier in accordance with another express
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provision of this Plan or the Option Agreement, all options granted under
the Plan shall terminate and expire ten (10) years after the date of grant.
As used herein, a "Change of Control" shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) other than such Optionee becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power (with respect to the
election of directors) of the Company's then outstanding securities; (ii)
at any time after the adoption of this Plan, individuals who as of the date
of adoption of this Plan constitute the Board (and any new director whose
election to the Board or nomination for election to the Board by the
Company's stockholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office) cease for any reason to constitute a
majority of the Board; (iii) the consummation of a merger or consolidation
of the Company with or into any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 70% of the combined voting power (with respect
to the election of directors) of the securities of the Company or of such
surviving entity outstanding immediately after such merger or
consolidation; or (iv) the consummation of a plan of complete liquidation
of the Company or of an agreement for the sale or disposition by the
Company of all or substantially all of the Company's business or assets.
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<PAGE>
(f) The incentive stock options hereunder shall not be
transferable, in whole or in part, by the Optionee except by will or
the laws of descent and distribution. During the Optionee's lifetime,
the incentive stock options granted hereunder shall be exercisable
only by the Optionee, and only while and if continuously employed by
the Company or a subsidiary of the Company, except as provided in
Section 6(e) above. The nonstatutory stock options granted hereunder
shall be subject to such restrictions on transfer (if any) imposed by
the Committee.
(g) An incentive stock option hereunder shall not contain terms
pursuant to which the exercise of the option would affect the
Optionee's right to exercise a nonstatutory option hereunder, or vice
versa, such that the incentive stock option would be deemed a
prohibited "tandem stock option" within the meaning of Section 422 of
the Code and the regulations thereunder.
(h) If the Optionee sells, exchanges or otherwise disposes of
shares acquired upon exercise of an incentive stock option within two
(2) years of the date of grant, or one (1) year after the date of
exercise, the Optionee shall be required to notify the Company
promptly in writing and disclose the amount of gain or loss resulting
from the sale, exchange or other disposition of his or her shares.
(i) If the Optionee's employment is terminated for any reason,
except by reason of the Optionee's death, disability or retirement at
or after the age of 57 or by the Optionee for "Good Reason" as defined
below, within one year of such Optionee's exercise of all or any part
of an option hereunder, then the amount of "Option Gain" as defined
below realized upon such exercise shall be paid by such
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Optionee to the Company within twenty (20) days of the Optionee's date of
termination. As used herein, "Option Gain" shall mean the excess of the
fair market value of the shares of Common Stock received upon exercise of
the option as of the date of exercise over the exercise price, multiplied
by the number of shares of Common Stock purchased upon such exercise,
without regard to any subsequent market price decrease or increase in
shares of Common Stock. Fair market value shall be deemed to be the last
sale price of the Common Stock in the NASDAQ for National Market Issues or,
as applicable, Small-Cap Issues, as reported by the National Association of
Securities Dealers for the last business trading date preceding the date of
exercise. As used herein "Good Reason" shall be defined as (i) a material
diminishment of the responsibilities, duties and authority of such
Optionee's immediately prior position in the Company or under any written
employment agreement between such Optionee and the Company, (ii) a material
reduction in such Optionee's salary and bonus, if any, unless such
reduction is reasonably related to the financial condition of the Company,
(iii) the failure of the Company to provide such Optionee with all plans,
programs and other benefits of the Company in accordance with the terms of
any written employment agreement between such Optionee and the Company,
(iv) the failure of any successors, assigns, or surviving corporation or
entity to assume and faithfully perform the material obligations of the
Company under any written employment agreement between the Optionee and the
Company, or (v) the Company's commission of any material breach of any
written employment agreement between the Optionee and the Company, which is
not remedied by the
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Company in a reasonable period (but not less than ninety (90) days) after
receipt of written notice thereof from such Optionee.
(j) If any time within (i) the term of the Optionee's option
hereunder, or (ii) three years after the Optionee's employment with
the Company is terminated or (iii) three years after the Optionee's
exercise of any portion of an option hereunder, the Optionee (iv)
violates the terms of any noncompete or confidentiality provision set
forth in an employment agreement between the Optionee and the Company,
(v) discloses without the prior written consent of the Company (which
consent may be withheld at the discretion of the Company)
"Confidential Information" as defined below to any person not employed
by the Company or authorized by the Company to receive such
Confidential Information, (vi) solicits or assists anyone else in the
solicitation of any of the Company's then current employees to
terminate their employment with the Company and to become employed by
any other business enterprise, (vii) directly or indirectly, alone or
as a partner, consultant, advisor, employee or in any other capacity,
engages in any commercial activity in competition with any part of the
Company's business (which currently involves videotape duplication,
compact disc replication and duplication and diskette duplication
services to corporations, publishers, religious and educational
companies and other institutional entities and the manufacture and
sale of gift products and collectibles to retailers) in those states
in which the Company conducted business during the term of the option
or as of the date of termination of employment, (viii) engages in any
activity which has a material and adverse effect upon the business or
reputation of the Company, (ix)
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<PAGE>
violates any of the Company's policies or (x) participates, directly or
indirectly, in a hostile takeover attempt of the Company, then, and in such
event, (xi) any and all options granted hereunder to such Optionee shall
automatically terminate as of the date such Optionee first engages in any
such prohibited activity, unless such options have previously terminated by
operation of another term or condition of this Plan or the Option Agreement
governing such option(s) and (xii) the Option Gain realized by such
Optionee upon the exercise of all or any portion of such options shall be
paid over to the Company within twenty (20) days of the date the Optionee
first engages in such prohibited activity. As used herein, "Confidential
Information" means information that is proprietary to the Company or
proprietary to others and entrusted to the Company. Confidential
Information also includes, but is not limited to, customer lists;
information relating to business plans and to business that is conducted or
anticipated to be conducted; past, current or anticipated products; and
information concerning research, development, purchasing, accounting,
computer software, selling and services.
(k) The Committee may release the Optionee from all or any part
of the terms of Subscctions 6(i) and 6(j) in its sole discretion;
provided, however, that such release is in the best interests of the
Company.
(l) The Plan and the options granted hereunder and all
determinations made and actions taken pursuant to this Plan, to the
extent not otherwise governed by the laws of the United States, shall
be governed by the laws of the State of Minnesota and construed
accordingly without giving effect to principles of conflicts of laws.
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<PAGE>
7. TERMINATION
Unless extended or sooner terminated by action of the Company's Board of
Directors, the Plan shall terminate ten (10) years from its effective date.
Options outstanding under the Plan at the time of termination shall remain in
effect until exercise or expiration.
8. EFFECTIVE DATE
The effective date of the Plan shall be May 5, 1998, the date of adoption
by the Company's Board of Directors.
9. ADJUSTMENT OF SHARES
In the event of a recapitalization, merger, consolidation, reorganization,
stock dividend, stock split or other change in capitalization affecting the
Common Stock of the Company, appropriate equitable share and per share option
exercise price adjustments in outstanding options, and appropriate equitable
share adjustments in the shares then reserved for issuance under the Plan, shall
be made by the Company's Board of Directors or by the President or Secretary of
the Company acting as the Board's designated representative to prevent dilution
or enlargement of rights.
10. AMENDMENT
The Company's Board of Directors may amend the Plan at any time as
determined to be in the best interests of the Company, including any amendment
to extend or terminate the Plan. The Board shall not, however, without
shareholder approval, increase the maximum number of shares subject to the Plan
or restrict the class of persons eligible to be granted options under the Plan.
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VAUGHN COMMUNICATIONS, INC.
NONSTATUTORY OPTION AGREEMENT
(1998 Sock Option Plan)
VAUGHN COMMUNICATIONS, INC., a Minnesota corporation (the "Company"),
pursuant to the 1998 Stock Option Plan previously adopted by the Board of
Directors of the Company (the "Plan"), and in consideration of services to be
rendered to the Company or its subsidiary by
_____________________________ as _____________________________
(Name) (Title or Job Description)
(the "Optionee"), hereby grants to the Optionee a nonstatutory stock option (the
"Option") not in accordance with Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to purchase __________ shares of the Company's
Common Stock (the "Shares") at a price of $__________ per share (the "Purchase
Price"), equal to ____% (must be 85% or more) of the fair market value of the
Common Stock on the date of grant. This grant is made on the following terms
and conditions.
NONSTATUTORY STOCK OPTION
1. The Optionee may exercise the Option on a cumulative basis at any time
six (6) months after the date hereof and on or before _______________, _____,
subject to prior termination or modification as herein provided, in whole or in
part with respect to each of five (5) year to year cumulative annual
installments, beginning on the first day of each of the first five years during
the aforesaid term hereof as follows:
(a) ten percent (10%) of such Shares during the first year of
the Option term;
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(b) plus an additional fifteen percent (15%) of such Shares
during the second year of the Option term;
(c) plus an additional twenty-five percent (25%) of such Shares
during the third year of the Option term;
(d) plus an additional twenty-five percent (25%) of such shares
during the fourth year of the Option term; and
(e) plus an additional twenty-five percent (25%) of such Shares
during the fifth and remaining years of the Option term.
2. The Option shall not be transferable by the Optionee, except by will
or the laws of descent and distribution. During the Optionee's life, the Option
shall be exercisable only by the Optionee and only while and if the Optionee is
continuously employed by the Company or a subsidiary of the Company as described
in the Plan, except as provided in Section 4 of this Agreement. If the Option
shall not have terminated prior to the death of the Optionee, it may be
exercised at any time during the balance of the term of the Option by the
personal representative of the Optionee's estate and/or by the Optionee's heirs,
as the case may be, subject to prior expiration on the date specified in Section
4 of this Agreement.
3. The Option may be exercised in whole or in part, from time to time, by
delivery to the Secretary of the Company of a written notice specifying the
number of Shares desired to be purchased and accompanied by full payment of the
Purchase Price, at the election of the Optionee, in cash and/or by delivery of
certificate(s) duly endorsed for transfer, in shares of the Company's Common
Stock already owned by the Optionee. Any shares endorsed and delivered to the
Company in payment of the Purchase Price shall be valued at the fair market
value of the shares on the date of exercise, as determined by the Compensation
Committee of the Company's Board
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<PAGE>
of Directors (the "Committee") in accordance with the Plan or by the President
or Secretary of the Company acting as the Committee's designated representative.
Any fractional share not required for payment of the Purchase Price shall be
paid for by the Company in cash on the basis of the same value utilized for such
exercise. If at the time of exercise the Committee, in its sole discretion,
shall permit utilization of a so-called "cashless exercise" procedure to
exercise the Option, the Optionee may apply to the Company's President or
Secretary to utilize the same, and if approved thereby, the Optionee shall
follow the "cashless exercise" procedures specified in the Plan and in
accordance with such rules therefor as the Committee may from time to time
establish.
4. All unexercised rights under the Option shall expire at the end of the
term specified in Section 1 above or on an earlier date, in the event of prior
termination of employment by the Company or its subsidiary of the Optionee, as
follows:
(a) Upon termination of employment of the Optionee by retirement
of Optionee at or after age 57 or by disability or death or by the
Optionee's resignation within one year of a "Change of Control" (as
defined below), the Option may be exercised during the balance of its
term notwithstanding such termination of employment and, in the case
of death, as provided in Section 2 above; provided, however, that the
percentage limitations set forth in Section 1(a) through (e) above
shall not apply; and provided, further, that the Committee may (but
without any obligation therefor) by prior approval, which approval the
Committee may grant, withhold or condition for any reason it deems to
be in the best interest of the Company, also permit the Optionee to
retire to the same effect or on any less favorable basis prior to age
57; or
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(b) Upon termination of employment of the Optionee for any other
reason, the Option shall expire on the date the Optionee's employment
terminates.
As used herein, "Change of Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934) other than such
Optionee becomes a "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power (with respect to the election of directors) of the
Company's then outstanding securities; (ii) at any time after the
adoption of the Plan, individuals who as of the date of adoption of
the Plan constitute the Board of Directors (and any new director whose
election to the Board of Directors or nomination for election to the
Board of Directors by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in
office) cease for any reason to constitute a majority of the Board of
Directors; (iii) the consummation of a merger or consolidation of the
Company with or into any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 70% of the combined
voting power (with respect to the election of directors) of the
securities of the Company or of such surviving entity outstanding
immediately after such merger or consolidation; or (iv) the
consummation of a plan of complete liquidation of the Company or of
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an agreement for the sale or disposition by the Company of all or
substantially all of the Company's business or assets.
5. Unless the issuance of the Shares purchased upon the exercise of the
Option is registered with federal and state securities authorities (which is
anticipated but for which the Company has no obligation), or is determined by
counsel for the Company to be exempt from such registration without need
therefor, the Optionee shall be required to sign, deliver to the Company and be
bound by a customary "investment letter," setting forth the Optionee's
investment representation and securities law transfer restrictions consistent
with federal and state securities law exemptions from registration for issuance
of the Shares on exercise and consistent with Rule 144 under the Securities Act
of 1933, and requisite legends and stop transfer orders shall be placed upon or
against the certificate for the Shares. Without regard to registration or
exemption therefrom on exercise, if the Optionee is an officer or other
"affiliate" of the Company within the meaning of said Rule 144, the securities
law transfer restrictions consistent with said Rule 144 shall in any event be
applicable and requisite legends in the form attached as Exhibit A hereto and
stop transfer orders shall be placed upon or against the certificate for the
Shares.
6. If prior to the expiration of the Option, the Shares then subject to
the Option shall be affected by any recapitalization, merger, consolidation,
reorganization, stock dividend, stock split, or other change in capitalization
affecting the present Common Stock of the Company, then the number and kind of
Shares covered by this Agreement, and the Purchase Price per share, shall be
appropriately adjusted in accordance with the Plan by the Committee or by the
President or Secretary of the Company acting as the Committee's designated
representative, all as may be deemed necessary to prevent dilution or
enlargement of rights which might otherwise result.
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7. If the Optionee's employment with the Company is terminated for any
reason, except by reason of the Optionee's death, disability or retirement at or
after the age of 57 or by the Optionee for "Good Reason" (as defined below),
within one year of the Optionee's exercise of all or part of the Option, then
the amount of "Option Gain" (as defined below) realized upon such exercise shall
be paid by the Optionee to the Company within twenty (20) days of the Optionee's
date of termination. As used herein, "Option Gain" shall mean the excess of the
fair market value of the shares of Common Stock received upon exercise of the
Option as of the date of exercise over the exercise price, multiplied by the
number of shares of Common Stock purchased upon such exercise, without regard to
any subsequent market price decrease or increase in shares of Common Stock.
Fair market value shall be deemed to be the last sale price of the Common Stock
in the National Association of Securities Dealers Automated Quotation System for
National Market Issues or, as applicable, Small-Cap Issues, as reported by the
National Association of Securities Dealers, Inc. for the last business trading
date preceding the date of exercise. As used herein, "Good Reason" shall be
defined as (i) a material diminishment of the responsibilities, duties and
authority of the Optionee's immediately prior position in the Company or under
any written employment agreement between the Optionee and the Company, (ii) a
material reduction in the Optionee's salary and bonus, if any, unless such
reduction is reasonably related to the financial condition of the Company, (iii)
the failure of the Company to provide the Optionee with all plans, programs and
other benefits of the Company in accordance with the terms of any written
employment agreement between the Optionee and the Company, (iv) the failure of
any successors, assigns, or surviving corporation or entity to assume and
faithfully perform the material obligations of the Company under any written
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employment agreement between the Optionee and the Company, or (v) the Company's
commission of any material breach of any written employment agreement between
the Optionee and the Company, which is not remedied by the Company in a
reasonable period (but not less than ninety (90) days) after receipt of written
notice thereof from the Optionee.
8. If any time within (i) the term of the Option, or (ii) three years
after the Optionee's employment with the Company is terminated or (iii) three
years after the Optionee's exercise of any portion of the Option, the Optionee
(iv) violates the terms of any noncompete or confidentiality provision set forth
in an employment agreement between the Optionee and the Company, (v) discloses
without the prior written consent of the Company (which consent may be withheld
at the discretion of the Company) "Confidential Information" (as defined below)
to any person not employed by the Company or authorized by the Company to
receive such Confidential Information, (vi) solicits or assists anyone else in
the solicitation of any of the Company's then current employees to terminate
their employment with the Company and to become employed by any other business
enterprise, (vii) directly or indirectly, alone or as a partner, consultant,
advisor, employee or in any other capacity, engages in any commercial activity
in competition with any part of the Company's business (which currently involves
videotape duplication, compact disc replication and duplication and diskette
duplication services to corporations, publishers, religious and educational
companies and other institutional entities and the manufacture and sale of gift
products and collectibles to retailers) in those states in which the Company
conducted business during the term of the Option or as of the date of
termination of employment, (viii) engages in any activity which has a material
and adverse effect upon the business or reputation of the Company, (ix) violates
any of the Company's policies or (x) participates, directly or indirectly, in a
hostile takeover attempt of the Company, then, and in such event, (xi) the
Option shall automatically terminate as of the date the Optionee first engages
in any such prohibited activity, unless the
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Option has previously terminated by operation of another term or condition of
the Plan or this Agreement and (xii) the Option Gain realized by the Optionee
upon the exercise of all or any portion of the Option shall be paid over to the
Company within twenty (20) days of the date the Optionee first engages in such
prohibited activity. As used herein, "Confidential Information" means
information that is proprietary to the Company or proprietary to others and
entrusted to the Company. Confidential Information also includes, but is not
limited to, customer lists; information relating to business plans and to
business that is conducted or anticipated to be conducted; past, current or
anticipated products; and information concerning research, development,
purchasing, accounting, computer software, selling and services.
9. It is intended that those terms of the Plan and this Agreement which
refer or apply to nonstatutory options comply and be interpreted in accordance
with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended. The provisions of the Plan pertaining to Options, to the extent not
set forth in this Agreement, are incorporated by reference.
ADDITIONAL PRECONDITIONS TO EXERCISE.
10. A "Statement of Additional Terms and Conditions," determined by the
Committee and not inconsistent with the Plan, may be attached hereto as part
hereof. Satisfaction of the additional terms and conditions set forth in such
attached Statement, if any, shall be additional preconditions to vesting and
exercise of the Option, or so much thereof as shall correspond to the extent
such terms and conditions are ultimately satisfied. If attached, such Statement
shall be separately acknowledged by the signatures of the Optionee and an
appropriate officer of the Company.
IN WITNESS WHEREOF, this Nonstatutory Option Agreement is hereby executed
as of ____________________ (date of grant).
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VAUGHN COMMUNICATIONS, INC.
By
--------------------------------
Its
----------------------------
-----------------------------------
Optionee
______Check if a Statement of Additional Terms and Conditions is attached. If
attached, such Statement must be signed by both the Optionee and an appropriate
officer of the Company.
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EXHIBIT A
OFFICER/AFFILIATE
TRANSFER RESTRICTION LEGEND
The registered holder of the within certificate may be an "affiliate" of
the Company on the date of issue of this certificate within the meaning of Rule
144 promulgated under the Securities Act of 1933, as amended. Accordingly, the
securities represented by the within certificate may not be sold, transferred,
pledged or otherwise disposed of, except pursuant to registration or
notification under such laws, exemption from such registration as evidenced by
an opinion of counsel satisfactory to the Company, or operation of law.
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VAUGHN COMMUNICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
(1998 STOCK OPTION PLAN)
VAUGHN COMMUNICATIONS, INC., a Minnesota corporation (the "Company"),
pursuant to the 1998 Stock Option Plan previously adopted by the Board of
Directors of the Company (the "Plan"), and in consideration of services
to be rendered to the Company or its subsidiary by
______________________________ as ______________________________ (the
(Name) (Title or Job Description)
"Optionee"), hereby grants to the Optionee an incentive stock option (the
"Option") in accordance with Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), to purchase __________ shares of the Company's Common
Stock (the "Shares") at a price of $__________ per share (the "Purchase Price"),
equal to [Check One] ____100% or ____110% of the fair market value of the Common
Stock on the date of grant. This grant is made on the following terms and
conditions.
INCENTIVE STOCK OPTION
1. The Optionee may exercise the Option on a cumulative basis at any time
six (6) months after the date hereof and on or before _______________, _____
[Check One] (seven) (7) years after such date of grant) or __________ (five (5)
years after the date of grant if the 110% Purchase Price provision is checked
above), subject to prior termination or modification as herein provided, in
whole or in part with respect to each of five (5) year to year cumulative annual
installments, beginning on the first day of each of the first five years during
the aforesaid term hereof, as follows:
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<PAGE>
(a) ten percent (10%) of such Shares during the first year of
the Option term;
(b) plus an additional fifteen percent (15%) of such Shares
during the second year of the Option term;
(c) plus an additional twenty-five percent (25%) of such Shares
during the third year of the Option term;
(d) plus an additional twenty-five percent (25%) of such Shares
during the fourth year of the Option term; and
(e) plus an additional twenty-five percent (25%) of such Shares
during the fifth and, if any, remaining years of the Option term.
2. The Option shall not be transferable by the Optionee, except by will
or the laws of descent and distribution. During the Optionee's life, the Option
shall be exercisable only by the Optionee and only while and if the Optionee is
continuously employed by the Company or a subsidiary of the Company as described
in the Plan, except as provided in Section 4 of this Agreement. If the Option
shall not have terminated prior to the death of the Optionee, it may be
exercised at any time within twelve (12) months after death by the personal
representative of the Optionee's estate and/or by the Optionee's heirs, as the
case may be, subject to prior expiration on the date specified in Section 4 of
this Agreement.
3. The Option may be exercised in whole or in part, from time to time, by
delivery to the Secretary of the Company of a written notice specifying the
number of Shares desired to be purchased and accompanied by full payment of the
Purchase Price, at the election of the Optionee, in cash and/or by delivery of
certificate(s) duly endorsed for transfer, in shares of the Company's Common
Stock already owned by the Optionee. Any shares endorsed and delivered to the
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<PAGE>
Company in payment of the Purchase Price shall be valued at the fair market
value of the shares on the date of exercise, as determined by the Compensation
Committee of the Company's Board of Directors (the "Committee") in accordance
with the Plan or by the President or Secretary of the Company acting as the
Committee's designated representative. Any fractional share not required for
payment of the Purchase Price shall be paid for by the Company in cash on the
basis of the same value utilized for such exercise. If at the time of exercise
the Committee, in its sole discretion, shall permit utilization of a so-called
"cashless exercise" procedure to exercise the Option, the Optionee may apply to
the Company's President or Secretary to utilize the same, and if approved
thereby, the Optionee shall follow the "cashless exercise" procedures specified
in the Plan and in accordance with such rules therefor as the Committee may from
time to time establish.
4. All unexercised rights under the Option shall expire at the end of the
term specified in Section 1 above or on an earlier date, in the event of prior
termination of employment by the Company or its subsidiary of the Optionee, as
follows:
(a) Upon termination of employment of the Optionee by retirement
of Optionee at or after age 57 or by disability or by the Optionee's
resignation within one year of a "Change of Control" (as defined
below), the Option may be exercised within three (3) months after the
date of termination and shall thereupon expire; provided, however,
that the percentage limitations set forth in Section 1(a) through (e)
above shall not apply; and provided, further, that the Committee may
(but without any obligation therefor) by prior approval, which
approval the Committee may grant, withhold or condition for any reason
it deems to be in the best interests of the Company, also permit the
Optionee to retire to the same effect or on any less favorable basis
prior to age 57; or
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<PAGE>
(b) Upon death of the Optionee while employed or during the
three-month period described in Section 4(a) above, the Option may be
exercised within twelve (12) months after the date of death as
provided in Section 2 above and shall thereupon expire; provided,
however, that the percentage limitations set forth in Section 1(a)
through (e) shall not apply; or
(c) Upon such termination of employment of the Optionee for any
other reason, the Option shall expire on the date the Optionee's
employment terminates.
As used herein, "Change of Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934) other than such
Optionee becomes a "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power (with respect to the election of directors) of the
Company's then outstanding securities; (ii) at any time after the
adoption of the Plan, individuals who as of the date of adoption of
the Plan constitute the Board of Directors (and any new director whose
election to the Board of Directors or nomination for election to the
Board of Directors by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in
office) cease for any reason to constitute a majority of the Board of
Directors; (iii) the consummation of a merger or consolidation of the
Company with or into any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
-28-
<PAGE>
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 70% of the combined
voting power (with respect to the election of directors) of the securities
of the Company or of such surviving entity outstanding immediately after
such merger or consolidation; or (iv) the consummation of a plan of
complete liquidation of the Company or of an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
business or assets.
5. Unless the issuance of the Shares purchased upon the exercise of the
Option is registered with federal and state securities authorities (which is
anticipated but for which the Company has no obligation), or is determined by
counsel for the Company to be exempt from such registration without need
therefor, the Optionee shall be required to sign, deliver to the Company and be
bound by a customary "investment letter," setting forth the Optionee's
investment representation and securities law transfer restrictions consistent
with federal and state securities law exemptions from registration for issuance
of the Shares on exercise and consistent with Rule 144 under the Securities Act
of 1933, and requisite legends and stop transfer orders shall be placed upon or
against the certificates for the Shares. Without regard to registration or
exemption therefrom on exercise, if the Optionee is an officer or other
"affiliate" of the Company within the meaning of said Rule 144, the securities
law transfer restrictions consistent with said Rule 144 shall in any event be
applicable and requisite legends in the form attached as Exhibit A hereto and
stop transfer orders shall be placed upon or against the certificate for the
Shares.
6. If prior to the expiration of the Option, the Shares then subject to
the Option shall be affected by any recapitalization, merger, consolidation,
reorganization, stock dividend, stock split, or other change in capitalization
affecting the present Common Stock of the Company, then
-29-
<PAGE>
the number and kind of Shares covered by this Agreement, and the Purchase Price
per share, shall be appropriately adjusted in accordance with the Plan by the
Committee or by the President or Secretary of the Company acting as the
Committee's designated representative, all as may be deemed necessary to prevent
dilution or enlargement of rights which might otherwise result.
7. If the Optionee sells, exchanges or otherwise disposes of any of the
Shares acquired upon exercise of the Option within two (2) years after the date
of this Agreement or one (1) year after the date of exercise of the Option with
respect to such Shares, the Optionee agrees to promptly notify the Company in
writing and disclose the number of Shares disposed of and the amount of
resulting gain or loss. The Optionee acknowledges that any such disposition
will be a "disqualifying disposition" of the Shares within the meaning of
Section 422 of the Code which may subject the Optionee to federal income tax
consequences less favorable than if the two holding periods described above are
satisfied prior to any disposition of the Shares.
8. If the Optionee's employment with the Company is terminated for any
reason, except by reason of the Optionee's death, disability or retirement at or
after the age of 57 or by the Optionee for "Good Reason" (as defined below),
within one year of the Optionee's exercise of all or part of the Option, then
the amount of "Option Gain" (as defined below) realized upon such exercise shall
be paid by the Optionee to the Company within twenty (20) days of the Optionee's
date of termination. As used herein, "Option Gain" shall mean the excess of the
fair market value of the shares of Common Stock received upon exercise of the
Option as of the date of exercise over the exercise price, multiplied by the
number of shares of Common Stock purchased upon such exercise, without regard to
any subsequent market price decrease or increase in shares of Common Stock.
Fair market value shall be deemed to be the last sale price of the Common Stock
in the National Association of Securities Dealers Automated Quotation System for
National
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<PAGE>
Market Issues or, as applicable, Small-Cap Issues, as reported by the National
Association of Securities Dealers, Inc. for the last business trading date
preceding the date of exercise. As used herein, "Good Reason" shall be defined
as (i) a material diminishment of the responsibilities, duties and authority of
the Optionee's immediately prior position in the Company or under any written
employment agreement between the Optionee and the Company, (ii) a material
reduction in the Optionee's salary and bonus, if any, unless such reduction is
reasonably related to the financial condition of the Company, (iii) the failure
of the Company to provide the Optionee with all plans, programs and other
benefits of the Company in accordance with the terms of any written employment
agreement between the Optionee and the Company, (iv) the failure of any
successors, assigns, or surviving corporation or entity to assume and faithfully
perform the material obligations of the Company under any written employment
agreement between the Optionee and the Company, or (v) the Company's commission
of any material breach of any written employment agreement between the Optionee
and the Company, which is not remedied by the Company in a reasonable period
(but not less than ninety (90) days) after receipt of written notice thereof
from the Optionee.
9. If any time within (i) the term of the Option, or (ii) three years
after the Optionee's employment with the Company is terminated or (iii) three
years after the Optionee's exercise of any portion of the Option, the Optionee
(iv) violates the terms of any noncompete or confidentiality provision set forth
in an employment agreement between the Optionee and the Company, (v) discloses
without the prior written consent of the Company (which consent may be withheld
at the discretion of the Company) "Confidential Information" (as defined below)
to any person not employed by the Company or authorized by the Company to
receive such Confidential Information, (vi) solicits or assists anyone else in
the solicitation of any of the Company's then
-31-
<PAGE>
current employees to terminate their employment with the Company and to become
employed by any other business enterprise, (vii) directly or indirectly, alone
or as a partner, consultant, advisor, employee or in any other capacity, engages
in any commercial activity in competition with any part of the Company's
business (which currently involves videotape duplication, compact disc
replication and duplication and diskette duplication services to corporations,
publishers, religious and educational companies and other institutional entities
and the manufacture and sale of gift products and collectibles to retailers) in
those states in which the Company conducted business during the term of the
Option or as of the date of termination of employment, (viii) engages in any
activity which has a material and adverse effect upon the business or reputation
of the Company, (ix) violates any of the Company's policies or (x) participates,
directly or indirectly, in a hostile takeover attempt of the Company, then, and
in such event, (xi) the Option shall automatically terminate as of the date the
Optionee first engages in any such prohibited activity, unless the Option has
previously terminated by operation of another term or condition of the Plan or
this Agreement and (xii) the Option Gain realized by the Optionee upon the
exercise of all or any portion of the Option shall be paid over to the Company
within twenty (20) days of the date the Optionee first engages in such
prohibited activity. As used herein, "Confidential Information" means
information that is proprietary to the Company or proprietary to others and
entrusted to the Company. Confidential Information also includes, but is not
limited to, customer lists; information relating to business plans and to
business that is conducted or anticipated to be conducted; past, current or
anticipated products; and information concerning research, development,
purchasing, accounting, computer software, selling and services.
10. It is intended that those terms of the Plan and this Agreement which
refer or apply to incentive stock options comply and be interpreted in
accordance with the provisions of Section
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<PAGE>
422 of the Code and Rule 16b-3 under the Securities Exchange Act of 1934, as
amended. The provisions of the Plan pertaining to Options, to the extent not
set forth in this Agreement, are incorporated by reference.
ADDITIONAL PRECONDITIONS TO EXERCISE.
11. A "Statement of Additional Terms and Conditions," determined by the
Committee and not inconsistent with the Plan, may be attached hereto as part
hereof. Satisfaction of the additional terms and conditions set forth in such
attached Statement, if any, shall be additional preconditions to vesting and
exercise of the Option, or so much thereof as shall correspond to the extent
such terms and conditions are ultimately satisfied. If attached, such Statement
shall be separately acknowledged by the signatures of the Optionee and an
appropriate officer of the Company.
IN WITNESS WHEREOF, this Incentive Stock Option Agreement is hereby
executed as of _______________, _____ (date of grant).
VAUGHN COMMUNICATIONS, INC.
By
--------------------------------
Its
-----------------------------
-----------------------------------
Optionee
_____ Check if a Statement of Additional Terms and Conditions is attached. If
attached, such Statement must be signed by both the Optionee and an appropriate
officer of the Company.
-33-
<PAGE>
EXHIBIT A
OFFICER/AFFILIATE
TRANSFER RESTRICTION LEGEND
The registered holder of the within certificate may be an "affiliate" of
the Company on the date of issue of this certificate within the meaning of Rule
144 promulgated under the Securities Act of 1933, as amended. Accordingly, the
securities represented by the within certificate may not be sold, transferred,
pledged or otherwise disposed of except pursuant to registration or notification
under such laws, exemption from such registration as evidenced by an opinion of
counsel satisfactory to the Company, or operation of law.
-34-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 19,358,091
<ALLOWANCES> 1,408,000
<INVENTORY> 8,985,636
<CURRENT-ASSETS> 27,918,380
<PP&E> 35,600,183
<DEPRECIATION> 22,020,460
<TOTAL-ASSETS> 51,582,564
<CURRENT-LIABILITIES> 20,513,925
<BONDS> 9,085,059
0
0
<COMMON> 408,205
<OTHER-SE> 21,521,049
<TOTAL-LIABILITY-AND-EQUITY> 51,582,564
<SALES> 47,414,650
<TOTAL-REVENUES> 47,414,650
<CGS> 31,918,461
<TOTAL-COSTS> 31,918,461
<OTHER-EXPENSES> 11,661,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 904,200
<INCOME-PRETAX> 2,930,500
<INCOME-TAX> 1,230,000
<INCOME-CONTINUING> 1,700,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,700,500
<EPS-PRIMARY> .42
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