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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 0-15424
VAUGHN COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0626191
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State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
5050 W. 78th Street, Minneapolis, Minnesota 55435
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 832-3200
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Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
Exhibit Index appears on Page 29.
Page 1 of 29 Pages.
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The aggregate market value of the registrant's voting shares held by
non-affiliates (based upon the closing sale price therefor on the NASDAQ
National Market System on April 9, 1998) was approximately $29,642,220. As
of April 9, 1998, 4,088,582 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
1. The financial information set forth in the sections captioned
"SELECTED FINANCIAL DATA from Continuing Operations (in Thousands, Except Per
Share Amounts)" to be included in the Registrant's Annual Report to Shareholders
for the Year Ended January 31, 1998 (the "1998 Shareholder Report") are
incorporated herein by reference in response to Item 6 of Part II hereof.
2. The discussion under the section captioned "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in
the 1998 Shareholder Report is incorporated herein by reference in response to
Item 7 of Part II hereof.
3. The Registrant's audited financial statements to be included in the
1998 Shareholder Report are incorporated herein by reference in response to Item
8 of Part II hereof.
4. The discussions under the sections captioned "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and delivered
to the Registrant's shareholders pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of the
Shareholders to be held on June 23, 1998 (the "1998 Proxy Statement") are
incorporated herein by reference in response to Item 10 of Part III hereof.
5. The discussions under the sections captioned "COMPENSATION OF
DIRECTORS" and "EXECUTIVE COMPENSATION" but excluding the discussions included
under the subsections captioned "EXECUTIVE COMPENSATION - "Compensation
Committee Report on Executive Compensation" and "EXECUTIVE COMPENSATION -
Comparative Stock Performance" to be included in the 1998 Proxy Statement are
incorporated herein by reference in response to Item 11 of Part III hereof.
6. The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and "TRANSACTIONS
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1998 Proxy Statement are
incorporated herein by reference in response to Item 12 of Part III hereof.
7. The discussion under the section captioned "TRANSACTIONS WITH
MANAGEMENT" to be included in the 1998 Proxy Statement is incorporated herein by
reference in response to Item 13 of Part III hereof.
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VAUGHN COMMUNICATIONS, INC.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
and
Cross Reference Sheet
PART 1
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . .17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . .18
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk . . . . .18
Item 8. Consolidated Financial Statements and Supplementary Data . . . . . .18
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . .18
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . .18
Items 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .18
3
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Item 12. Security Ownership of Certain Beneficial Owners and Management . . .19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . .19
PART IV
Item 14. Exhibit, Financial Statement Schedule and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
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PART 1
ITEM 1. BUSINESS
GENERAL
The Company was founded under the name Vaughn Displays, Inc. in 1943 and
changed its name to VAUGHN COMMUNICATIONS, INC. in 1987. The Company is engaged
in two business segments. The Vaughn Communications Division is a multimedia
business services provider providing high volume video tape duplication and
digital media (compact disc and magnetic floppy disk) replication for the
corporate, educational and institutional user, accounting for approximately 84%
of the Company's sales in fiscal 1998. The Vaughn Products Division is a
manufacturer and distributor of gift, leather products, and custom designed soft
goods sold by gift shops and western stores, accounting for approximately 16% of
the Company's sales in fiscal 1998.
During the fiscal years ended January 31, 1998, 1997 and 1996, the
percentage of sales of the Communications Division and the Products Division as
compared to total sales of the Company were as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
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Division 1998 1997 1996
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<S> <C> <C> <C>
Communications Division 84% 80% 88%
Products Division 16% 20% 12%
</TABLE>
The Company's strategic objective is to grow and expand its two
businesses through internal growth and acquisitions. (See "Former
Businesses" and "Recent Acquisitions" below.) The term "Company" herein
refers to the registrant (VAUGHN COMMUNICATIONS, INC.), including its two
operating divisions. The Company's principal executive offices are located
at 5050 West 78th Street, Minneapolis, Minnesota 55435, and its telephone
number is (612) 832-3200.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments for the years ended
January 31, 1998, 1997 and 1996 included in the notes to the Registrant's
audited consolidated financial statements to be included in the 1998
Shareholder Report are incorporated herein by reference.
VAUGHN COMMUNICATIONS DIVISION
The Company's operations in the multimedia business services industry
are conducted through its Communications Division. The Communications
Division currently has video tape duplication facilities in Minneapolis,
Milwaukee, Phoenix, Tampa, Portland, Atlanta, Dallas, Houston, Raleigh,
Chicago, Denver and Seattle and has a facility in Fremont, California, which
replicates compact discs ("CD"s) and "floppy" discs. Additional sales
offices are located in St. Louis, New York City, Irvine, Orlando, Knoxville,
Baltimore and Ft. Lauderdale. It serves markets that are principally located
in the United States.
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PRIMARY PRODUCTS AND SERVICES OF THE COMMUNICATIONS DIVISION
GENERAL - The Division is a major provider of multimedia related
business services for corporate, educational, and institutional customers.
The Company believes it is the second largest provider of videotape
duplication services for the business-to-business market. In addition to
videotape duplication, the Company provides digital media services through
the replication of compact discs ("CD's") and magnetic disks ("floppys") for
software developers and computer equipment manufacturers. As part of its
business, the Company also provides various related services such as order
fulfillment, video editing, graphics design, international standards
conversion, MPEG compression, and the rental of video production and editing
equipment on a short-term basis.
VIDEO TAPE DUPLICATION SERVICES - The Company offers its videotape
duplication services to corporations that utilize videotape to promote their
products or instruct their customers on the use of their products;
additionally, companies use videotape to train their sales force on new
products or to communicate with their employees. The Company has continued
to expand its facilities for videotape duplication. On July 31, 1997 the
Company acquired certain assets of Dub South Acquisition, LLC ("Dub South"),
a videotape duplicator located in Atlanta, Georgia. The operations of Dub
South were merged with those of the Company's existing facility in Atlanta.
In addition to acquisitions, the Company spent approximately $1,900,000 to
expand production facilities. Expansion has been financed by cash flow
generated from operations, equipment leasing and bank financing.
DIGITAL MEDIA SERVICES - In order to better meet the current and
long-term needs of its business customers, the Company entered the digital
media replication business with the acquisition of Certified Media
Corporation ("Certified") in July 1997. Certified, which commenced
operations in 1986, was a diskette duplicator in the California market
serving the computer-based entertainment market. In 1996, Certified entered
the CD replication business. In February 1998, the Company acquired a second
Fremont based digital media duplicator, Copywise, Inc. The Company is
currently in the final stages of integrating these two businesses.
The Company's digital media services are primarily focused on CD-ROM
products used to transfer data. The Company's digital media services are
currently sold to business customers which include: (i) computer equipment
manufacturers (e.g. modems, printers, scanners, etc.) that distribute driver
software programs to consumers; and (ii) software developers, such as game
authors.
Going forward, the Company will focus its marketing efforts on existing
corporate customers that do, or could, utilize digital based media to
distribute information to customers and internal representatives. Examples
include aircraft manufacturers and industrial supply houses that distribute
parts catalogs to customers and insurance companies that distribute policy
information to agents on CD or floppy disks. As part of its overall digital
media services, the Company also provides a complete range of custom
packaging, fulfillment and design services.
The Company intends to continue to invest in additional capacity for CD
replication as the demand warrants. In fiscal 1998, approximately $2,400,000
was invested in expanding production capabilities.
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MANUFACTURING
VIDEOTAPE DUPLICATION - The Company's videotape duplication facilities
are geographically distributed throughout the United States so that high
volume duplication can be accomplished at four facilities: Minneapolis (MN);
Milwaukee (WI); Atlanta (GA); and Tampa (FL). The Company also has eight
other facilities for smaller volume video manufacturing: Chicago (IL);
Raleigh (NC); Dallas (TX); Houston (TX); Phoenix (AZ); Denver (CO); Portland
(OR); and Seattle (WA).
The manufacturing process for videocassettes generally utilizes
duplicating machines that copy from a master in "real time" speed, i.e., the
regular speed of the videocassette being duplicated. In this process, high
speed tape winders are used to wind blank tape loaded to specific program
lengths into video shells. The video shells are then loaded into the
duplicating machines which receive the program being copied from a master
transport. In addition, the Company utilizes high speed machines, which
allow it to duplicate a master 150 times faster than in "real time" speed.
Real time duplicating machines are used to duplicate videocassettes in
standard play mode. High speed duplicating machines are capable of
duplicating videocassettes in either the extended play mode or the standard
play mode. The extended play format utilizes less tape than regular speed
machines require for the same program content.
The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process.
Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by the Company and the industry. The videocassettes
are then released to the packaging department where they are labeled,
inserted into sleeves or boxes and processed through high speed
shrink-wrapping machines for distribution to the Company's customers.
DIGITAL MEDIA SERVICES - The Company's production of CD products in
Fremont (CA) utilizes an injection molding process using high grade, optical
quality polycarbonate. The polycarbonate is pressed against a metal stamper
to create a replica of the CD Master at a rate of approximately one every
four seconds. The clear polycarbonate disc containing all of the data is
then covered with a metallic coating to provide for reflection of the reading
laser beam in the CD player. A thin layer of lacquer is applied over the
metal to protect it and to serve as a base for printing on the disc.
As a result of a recent expansion, the Company has increased its annual
capacity to approximately 30 million units.
LICENSES
CD PRODUCTS - The Company, like most other CD manufacturers, uses
patented technology primarily under nonexclusive licenses from the holders of
patents which generally provide for the payment of royalties based upon the
number of CD units sold. On March 1, 1998, the Company signed a license
agreement with U.S. Philips Corporation.
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SIGNIFICANT CUSTOMERS
The Communications Division sells to more than 6,500 accounts in any
given year. Approximately 13% of its sales come from ten customers, none of
which amount to more than 3% of net sales.
Illustrative of the Communications Division's video duplication
customers are companies that use videotape to promote their products or
instruct their customers on the use of their products, financial service
companies which produce videotapes to present new financial products to sales
personnel and customers, high technology companies which use videotapes to
train sales and service personnel and corporations with many employees or
locations that wish to communicate a significant Company development to all
employees simultaneously. Such high volume customers are generally those who
need 100 or more duplicate videotapes reproduced, addressed to individual
locations and forwarded for delivery, often within a few hours or on an
overnight basis.
Illustrative of the Company's CD replication customers are software
developers and computer hardware manufacturers.
MARKETING
The Communications Division markets its products nationally through the
use of 45 field sales personnel who operate throughout the United States. To
a lesser degree, the Company also uses advertising in trade publications and
participation in trade shows.
SEASONALITY
The Communications Division's products are used consistently throughout
the year except for a slight rise in demand in September, October, and
November to supply extra requirements to customers for the holiday selling
season.
COMPETITION
Though it is not possible to reliably state the Communications
Division's relative position in the absence of published statistics, based
upon data generated by its own management, the Company believes it is one of
the largest duplicators of video tape for the non-theatrical, non-music video
segment of the U.S. market. This market is comprised of exercise,
educational, corporate, promotional and instructional videos, etc. The
Company does not hold a dominant position in the CD replication industry.
The primary competitive factors in the video tape duplication and CD
replication business are price, quality of service and range of products.
The Communications Division attempts to compete by offering high volume
videotape duplication services, at a competitive price, emphasizing service
and customer support.
The Company's principal competitors are HHG Digital Technologies
(formerly Allied Film and Video Company) and The Duplication Factory. The
video duplication business is highly competitive, not only with these
competitors, but also with many smaller duplicators.
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The Company believes that its regional locations, its wide range of
product offerings, and national marketing capabilities are competitive
advantages over many others in the industry. While selling prices have been
declining in recent years as competitors continue to seek market share by
lowering prices, the Company has been reasonably successful in maintaining
its margins by lowering its material costs and achieving unit volume
increases.
VAUGHN PRODUCTS DIVISION
The Products Division is engaged in the manufacture and sale of a line
of soft goods, including custom-designed, silk-screened T-shirts and
sweatshirts, souvenir leather products, and gift items sold primarily to
retail merchants located in the United States and Canada. The Products
Division's manufacturing facilities are located in the Company's Minneapolis,
Minnesota plant where it produces a line of over 200 leather items such as
billfolds, purses, and personal accessory items, and in Seattle, Washington,
where it designs and produces its soft goods products. The Products Division
corporate headquarters are also located in Seattle. The gift products are
sold at wholesale prices for resale, primarily by gift shops, and are
marketed under the "Bloom Brothers" and "Indian Arts and Crafts" names.
SALES AND DISTRIBUTION
Sales of the Products Division's products are made throughout the United
States and Canada by in-house sales people and independent manufacturer's
representatives. The Products Division employs two sales manager and four
sales people, and retains 35 manufacturer's representatives. The products
are included in a Company catalog, periodically sent to prospective and known
customers and made available for use by the sales organization. The Company
also participates in trade shows.
The principal markets for the Products Division's products are gift and
souvenir shops that serve the tourist industry.
The Products Division sells to over 3,000 customers, none of which
account for more than 5% of its net sales.
MANUFACTURING AND RAW MATERIALS
The Products Division's manufacturing operations consists primarily of
assembly, fabricating and converting leather to finished products and silk
screening of T-shirts. Numerous subcontractors are utilized to furnish
components and subassembly. Materials utilized in these products are
standard and readily available from multiple sources at competitive prices.
SEASONAL OPERATIONS
The operations of the Company's Products Division are seasonal in
nature. Approximately half of the production and sale of its products are
delivered to customers from March through June.
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COMPETITION
The primary competitive factors in the Products Division line of
business are price, product offering, quality and meeting delivery times.
The Company believes that the Products Division is competitive in each of
these areas. The Company does not have a significant share of the overall
gift market and competes for sales with many national and regional companies
throughout the United States and Canada. Many of such competitors have
significantly greater resources than the Company.
FORMER BUSINESSES
The Company originally operated as a manufacturer and distributor of
flags and banners, Christmas and seasonal decorative displays and parade and
float materials. In addition to these businesses and its two current
business segments, in 1986 the Company also entered radio broadcasting. The
radio broadcast business was not profitable for the Company and the Company's
original businesses did not always operate at predictable or acceptable
levels of profitability.
Consequently, in 1990 the Company began to redeploy its corporate and
personnel resources to the more firmly profitable current businesses operated
by the Vaughn Communications and Vaughn Products Divisions. In 1990 and
1991, the Company sold its radio station interests and its audio and video
equipment sales and engineering businesses. In February 1992, the Company
also withdrew from the Christmas display business.
On March 1, 1994, the Company completed this redeployment by selling its
flag, banner, seasonal decorative display and parade and float products
operations and assets to Chromatic Concepts Co., a Minneapolis, Minnesota
based corporation ("Buyer"). These businesses previously occupied
approximately 5,000 square feet of the Company's principal manufacturing
plant in Minneapolis, Minnesota and its 12,000 square foot manufacturing
plant in Tampa, Florida, and employed 21 manufacturing, sales and
administrative personnel. The Buyer reemployed substantially all of these
employees. The Company retained its Tampa plant, subject to a short-term
lease to the Buyer which expired October 31, 1994, after which this facility
was sold to an unrelated party. The portion of the Minneapolis plant
previously used by these businesses has been rededicated to use by the
Company's Communications and Products Divisions (see "Item 2. Properties"
below).
The Purchase and Sale Agreement with the Buyer provided for a purchase
price of $1,500,000, with $800,000 cash paid at closing, plus a $700,000
promissory note payable in installments over seven years with variable
interest at .25% per annum over the prime rate. The Company is also entitled
to certain additional payments of up to $250,000 over fifteen years
contingent upon performance of the businesses sold over this period. These
businesses accounted for approximately $2,904,000 of sales and an operating
profit of $145,000 in fiscal 1994.
BACKLOG
Order backlog is not generally a significant factor in the Company's
business. The Company relies primarily on current selling efforts coupled
with near term delivery or performance.
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EMPLOYEES
On February 28, 1998, the Company had 838 employees, including 138 in
sales and marketing, 629 in manufacturing and 71 in executive, finance and
administrative positions. Two hundred twenty-eight of the Company's
manufacturing and clerical employees are part-time employees. The Company's
employees are not represented by a union. The Company considers its employee
relations to be satisfactory.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs associated with the Company's compliance with Federal, state
and local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.
RECENT ACQUISITIONS
PURCHASE OF CERTIFIED MEDIA CORPORATION
On July 31, 1997, the Company completed the acquisition of certain
assets and assumed certain liabilities of Certified Media Corporation
("Certified Media"), a California Sub S Corporation. The Company accounted
for the acquisition as a purchase.
The noncontingent price of $5,500,000 was paid to the four shareholders
of Certified Media. The Company paid $2,800,000 in cash, issued 171,210
shares of the Company's common stock valued at approximately $7.01 per share
($1,200,000 in the aggregate), equal to the average closing sale price on the
NASDAQ for the 10 days prior to July 31, 1997, and issued $1,500,000 of
long-term debt to the Sellers. The long-term debt is payable in five equal
annual installments starting on July 31, 1998. The interest rate is at the
prime rate.
The purchase price may be increased to a maximum of $7,500,000 depending
upon the financial performance of Certified Media through January 31, 1999.
The Company also entered into a five-year consulting and noncompete
agreement with Alan Gill, the former president of Certified Media. The
agreement calls for annual payments of $86,641. In addition, noncompete
agreements were signed with the remaining three shareholders for terms of
three to five years and call for annual payments ranging from $906 to $8,641.
FINANCING THE ACQUISITION
The Company used its revolving credit facility to fund the $2,800,000
cash portion of the purchase price. The credit facility provided a
$2,800,000 term loan due July 31, 2002, payable in consecutive quarterly
principal installments of $140,000 commencing October 31, 1997, plus interest
at the bank's prime rate.
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DESCRIPTION OF CERTIFIED MEDIA'S BUSINESS
Certified Media's business consists primarily of the replication of
compact discs ("CDs") utilizing an injection molding process. Located in
Fremont, California, Certified Media's customers include computer software
developers and computer hardware manufacturers. Certified Media's business
has been merged with the Company's existing Communications Division.
The Company believes that the Certified Media acquisition has assisted
the Company's transformation from a videotape duplication specialist to a
total media solutions provider and that using the Company's existing sales
force will provide significant growth for Certified Media.
For Certified Media's fiscal years ended December 31, 1996 and 1995, it
had annual sales of $4,459,000 and $7,958,000 respectively. Net income
(loss) for the respective periods was ($1,189,000) and $1,047,000. The net
income numbers do not include the effect of any income taxes since Certified
Media was a Sub S Corporation.
PURCHASE OF DUB SOUTH
On July 31, 1997, the Company acquired certain of the assets and assumed
certain of the liabilities of Dub South Acquisition, LLC ("Dub South"), a
Georgia Limited Liability Company. The Company accounted for the acquisition
as a purchase.
The noncontingent purchase price for the assets included approximately
$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 through January 31, 2002.
Dub South is a regional video tape duplicator with its facility in
Atlanta, Georgia. Its business is substantially similar to the video tape
duplication business of the Company's Communications Division, and its
operations have been merged into the Company's preexisting facilities in
Atlanta.
For Dub South's fiscal year ended December 31, 1996, sales were
$1,907,000 and had a net loss of $520,000.
MERGER OF SATASTAR CORPORATE SERVICES, INC.
Pursuant to a Plan and Agreement of Merger dated June 7, 1996, on June
28, 1996 Satastar Corporate Services, Inc. (DBA PVS Corporate Services), an
Illinois corporation, was merged into the Company. The Company accounted
for the transaction as a pooling of interests. The merger was effected by
the issuance of 165,357 shares of the Company's common stock valued at $13.75
per share or approximately $2,274,000 in the aggregate, in exchange for all
the common stock of Satastar.
The Company also entered into employment and noncompete agreements with
the former owners of Satastar. The agreements are for terms ranging from two
to three years and call for compensation of $130,000 to $162,000 per year.
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DESCRIPTION OF SATASTAR'S BUSINESS
Satastar is a regional video tape duplicator whose business, with the
exception of specific customer identity, is substantially similar to the
video tape duplication business of the Company's Communications Division of
which Satastar has become part. Satastar has a videotape duplication
facility in Chicago, Illinois, and the Company merged its pre-existing
facility in Chicago into that of Satastar.
For Satastar's years ended December 31, 1996 and 1995, it had annual
sales of $4,056,000 and $3,868,000, respectively. Net income for the
respective periods was $102,000 and $342,000.
At the time of the merger, Satastar had 39 employees, including 3 in
sales, 10 in administration and support, and 26 in operations. A majority of
these persons are currently employees of Vaughn Communications Division.
These employees are not represented by a union, and the Company considers
Satastar's employee relations to be satisfactory and there have been no work
stoppages.
PURCHASE OF CENTERCOM AND RELATED TRANSACTIONS
On April 4, 1995, the Company completed the acquisition of all of the
capital stock of Centercom, Inc., a Wisconsin corporation, and Centercom
South, Inc., a Florida corporation (collectively "Centercom") pursuant to a
Stock Purchase Agreement of even date (the "Purchase Agreement"). The
effective date of the acquisition is April 1, 1995. The Company accounted
for the acquisition as a purchase.
The purchase price for the capital stock of Centercom was $6,420,000,
which was paid equally to the two equal former shareholders of Centercom,
Jeffrey Johnson and Robert Harmon (the "Sellers"). The Company paid
$5,250,000 in cash and issued 180,000 shares of the Company's common stock,
valued at $6.50 per share ($1,170,000 in the aggregate), equal to the closing
sale price of the stock on NASDAQ on April 3, 1995. Pursuant to the terms of
the Purchase Agreement, the Sellers have been elected as directors of the
Company and appointed as members of the Company's Audit Committee.
The Sellers receive $100,000 each per year for a period of seven years
under consulting and noncompete agreements. In addition, the Company has
entered into two ten-year leases for the video tape duplication facilities
totaling approximately 38,000 square feet owned by a partnership of the
Sellers in Milwaukee, Wisconsin, at an aggregate annual net rent of $186,353
for the first three years and $199,225 for the remaining seven years of the
lease term. Management of the Company believes that the facilities leased
from Sellers are necessary for its video tape duplication business and that
the lease terms and conditions are no less favorable to the Company than
could be obtained from an unrelated third party (see "Description of
Centercom's Business" below).
FINANCING FOR THE ACQUISITION
The Company borrowed the cash consideration for the Centercom
acquisition from a bank, under a Loan Agreement. The Loan Agreement provided
a $5,000,000 term loan due March 31, 2000, payable
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in consecutive quarterly principal installments of $250,000 commencing July
1, 1995, plus interest at one-quarter percent over the bank's prime rate.
The Loan Agreement also provided a revolving credit facility of up to
$8,000,000. On February 1, 1996, the Company entered into an amended
agreement with its bank which reduced the interest rate on the term loans to
the prime rate.
DESCRIPTION OF CENTERCOM'S BUSINESS
Centercom is a national video tape duplicator whose business, with the
exception of specific customer identity and geographic concentration, is
substantially similar to the video tape duplication business of the Company's
Vaughn Communications Division of which Centercom has become a part.
Centercom has video tape duplication facilities in Milwaukee, Wisconsin,
Chicago, Illinois and Tampa, Florida. The Company has merged its preexisting
facilities in Milwaukee, Chicago and Tampa into those of Centercom.
Centercom, Inc. and Centercom South, Inc. have been and will continue as
wholly-owned subsidiaries of the Company for the immediately foreseeable
future.
For Centercom's fiscal years ended June 30, 1994 and 1993, it had annual
sales of $8,700,000 and $7,700,000, respectively. Net income for the same
periods was $645,000 and $412,000.
Centercom's operations involve the use of several hundred real time
video tape duplicating machines and three high-speed (150 times real time
rates) duplicating machines similar to those utilized by the Company.
The Company believes that the Centercom acquisition has enabled the
Company to be a dominant competitor in the Milwaukee market, enhanced the
Company's already dominant position in the Tampa market and increased the
Company's presence in the Chicago market.
PURCHASE OF ADVANCED AUDIO/VIDEO PRODUCTIONS, INC.
Pursuant to a Purchase and Sale Agreement dated December 29, 1995, on
January 1, 1996 the Company acquired substantially all the assets and assumed
substantially all the liabilities of Advanced Audio/Video Productions, Inc.
("Advanced Video"), a Colorado corporation. The Company accounted for the
acquisition as a purchase.
The purchase price for the assets of Advanced Video in the amount of
approximately $282,000 included $182,000 of cash and $100,000 of long-term
debt to the seller. The note is payable in three annual installments of
$33,333.33 starting January 5, 1997, plus interest at the prime rate adjusted
on the anniversary date.
Advanced Video is a regional video tape duplicator with its facility
located in Denver, Colorado. Its business is substantially similar to the
video tape duplication business of the Company's Vaughn Communications
Division of which Advanced Video has become a part.
For Advanced Video's fiscal year ended December 31, 1995, it had annual
sales of $1,204,000 and net income of $60,000.
14
<PAGE>
PURCHASE OF INDIAN ARTS AND CRAFTS, INC.
Pursuant to a Purchase and Sale Agreement dated January 31, 1996 the
Company acquired substantially all the assets and assumed substantially all
the liabilities of Indian Arts and Crafts, Inc. ("IAAC"), a Washington
corporation. The Company accounted for the acquisition as a purchase.
The purchase price of approximately $2,332,000 was paid to the five
shareholders of IAAC (the "Sellers"). The Company paid approximately $82,000
in cash, issued 145,138 shares of the Company's common stock valued at
$8.6125 per share ($1,250,000 in the aggregate), equal to the average closing
sale price of the stock on NASDAQ for the 10 days prior to January 31, 1996,
and issued $1,000,000 of long-term debt to the Sellers. The long-term debt
consists of two promissory notes; one in the principal amount of $250,000
payable in three equal annual installments beginning January 31, 1997, and
the other in the principal amount of $750,000 payable in seven equal annual
installments starting on January 31, 1997. The interest rate on both notes
is 8.5% per annum.
The Company also entered into a three-year employment agreement with
Howard Lowen, the president and largest shareholder of IAAC. In addition,
the Company entered into two leases with the Sellers. One lease is for a
production facility in Seattle totaling approximately 42,300 square feet at
an aggregate annual rent of $250,000. The term of this lease is 44 months
starting February 1, 1996. The second lease is for a sales office in
Anchorage ( 1,400 square feet) at an annual rental of $14,400 and has a
three-year term. Management of the Company believes that the facilities
leased from the Sellers are necessary for the business of the Products
Division and that the terms of the leases are no less favorable to the
Company than could be obtained from an unrelated third party.
FINANCING FOR THE ACQUISITION
The Company used its revolving credit facility to fund the $82,000 cash
portion of the purchase price. To fund the anticipated increase in working
capital needs, the Company entered into an Amended and Restated Loan
Agreement with a bank on February 1, 1996 (the "Amended Agreement"). The
Amended Agreement increases the total credit facility from $13,000,000 to
$17,000,000 and provides for long-term financing to finance acquisitions and
equipment purchases, and a revolving credit facility to finance working
capital. The interest rate on the long-term debt and the revolving debt is
at the prime rate.
DESCRIPTION OF IAAC'S BUSINESS
IAAC's business consists primarily of the manufacture and sale of gift
and souvenir products. Its principal products are custom-designed soft
goods, including T-shirts, sweatshirts and hats sold primarily in Alaska and
the Pacific Northwest. The Company has an art department which develops
custom designs that are silk-screened on apparel and then sold to retailers
by direct salespeople or independent manufacturer's representatives. IAAC
also resells other gift and souvenir products through the same sales
channels. IAAC has been merged into Vaughn Products Division, and the
Company moved the majority of the operations of the Products Division to
Seattle during fiscal 1997.
15
<PAGE>
For IAAC's fiscal years ended December 31, 1995 and 1994, it had annual
sales of $7,543,000 and $7,593,000, respectively. Net income for the same
periods was $227,000 and $360,000, respectively.
ITEM 2. PROPERTIES
The Company owns its executive and administrative offices and principal
manufacturing plant consisting of approximately 67,000 square feet located on
a 4.1 acre site at 5050 West 78th Street, Minneapolis, Minnesota.
Approximately 5,000 square feet is devoted to and equipped for the
fabrication and warehousing of the Vaughn Products Division's products and
raw materials. Approximately 57,600 square feet is used for the Vaughn
Communications Division's separate administrative and sales offices,
showrooms, videotape duplication, shipping, warehouse and handling. The
remaining space of approximately 4,400 square feet houses the Company's
executive and administrative offices. These facilities include a separate
adjacent building of approximately 10,600 square feet. See the Notes to the
audited financial statements of the Company incorporated by reference for a
description of the mortgage term loan to the Company secured by these
facilities.
The Company leases Vaughn Communications Division's facilities in
Fremont, California; Milwaukee, Wisconsin; Phoenix, Arizona; Tampa and
Orlando, Florida; Portland, Oregon; Atlanta, Georgia; Dallas, Texas; Houston,
Texas; Raleigh, North Carolina; Chicago, Illinois; Seattle, Washington; and
Denver, Colorado for sales offices and manufacturing, totaling approximately
280,000 square feet under leases expiring from 1998 through 2003, at a
current total annual rental of approximately $1,560,000.
The Products Division's Seattle facilities leased from the IAAC Sellers
are described under "RECENT ACQUISITIONS - Purchase of Indian Arts and
Crafts, Inc." in Item 1 above. In addition, the Products Division leases
approximately 24,000 square feet of warehousing and office space in an
adjacent building. The lease expires in 1999 and has a current annual rental
of $126,000.
The Company is presently utilizing approximately 75% of its
manufacturing plant capacity measured on a five-day week/three shift per day
basis. Production capacity, however, can be expanded by adding additional
personnel or acquiring additional manufacturing equipment. Management
believes its manufacturing facilities are generally sufficient for the
Company's immediately foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company
or its properties which, in the opinion of management, will have a material
adverse effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended January 31, 1998.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
The Company's Common Stock is traded over-the-counter and has been
included in the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") National Market System since March 26, 1994,
under the symbol VGHN. The information presented is the quarterly high and
low closing sale prices as reported in the NASDAQ's National Market System.
All prices are without retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Price
-----
Calendar Period High Low
--------------- ---- ---
<S> <C> <C> <C>
1998: First Quarter $8.125 $5.50
1997: First Quarter $8.00 $6.00
Second Quarter 7.50 5.25
Third Quarter 8.56 6.75
Fourth Quarter 8.00 5.44
1996: First Quarter $9.375 $8.375
Second Quarter 19.00 9.00
Third Quarter 15.00 9.50
Fourth Quarter 10.50 7.00
</TABLE>
The last sales price for the Company's Common Stock as reported by the
NASDAQ National Market System on April 9, 1998 was $7.25 per share. As of
January 31, 1998, the Company had 310 shareholders of record. The Company
has never paid a cash dividend on its Common Stock. It intends to retain all
earnings to finance the development of its business. The Company's loan
agreement with its bank contains limitations on paying dividends.
Accordingly, no cash dividends are anticipated for the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The Company's sale of unregistered during the fiscal year ended January
31, 1998 was previously reported in its Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth in the sections entitled "SELECTED
FINANCIAL DATA from Continuing Operations (in Thousands, Except Per Share
Amounts)" to be included in the Company's 1998 Shareholder Report is
incorporated herein by reference in response to this Item 6. This section
should be read in conjunction with the Notes to Consolidated Financial
Statements which also appear in the 1998 Shareholder Report and are
incorporated herein by reference.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion under the Section entitled "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in
the 1998 Shareholder Report is incorporated herein by reference in response
to this Item 7.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure requirements of Item 305 of Regulation S-K are not
applicable to the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the
years in the three-year period ended January 31, 1998, together with the
report thereon of Ernst & Young LLP, contained in the 1998 Shareholder
Report, are incorporated herein by reference in response to this Item 8.
The supplementary financial information requirements of Item 302 of
Regulation S-K are not applicable to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The discussions under the sections captioned "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and
delivered to the Registrant's shareholders pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934 with respect to the
Annual Meeting of the Shareholders to be held on June 23, 1998 (the "1998
Proxy Statement") are incorporated herein by reference in response to this
Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The discussions under the sections captioned "COMPENSATION OF DIRECTORS"
and "EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION - Compensation Committee Report
on Executive Compensation" and "EXECUTIVE COMPENSATION - Comparative Stock
Performance" to be included in the 1998 Proxy Statement are incorporated
herein by reference in response to this Item 11.
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"TRANSACTIONS WITH MANAGEMENT - E. D. Willette Stock Put Redemption
Agreement, Including Change of Control Provision" to be included in the 1998
Proxy Statement are incorporated herein by reference in response to this Item
12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the section captioned "TRANSACTIONS WITH
MANAGEMENT" to be included in the 1998 Proxy Statement is incorporated herein
by reference in response to this Item 13.
PART IV
ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
The consolidated financial statements listed below of the Company for
each of the years in the three-year period ended January 31, 1998,
together with the report thereon of Ernst & Young LLP, contained in
the 1998 Shareholder Report (attached as Exhibit 13) are incorporated
herein by reference in response to this Item 14 (a) (1).
Independent Auditor's Report of Ernst & Young LLP
Consolidated Balance Sheets as of January 31, 1998 and 1997
Consolidated Statements of Income for the years ended January 31,
1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the years ended
January 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the years ended January 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, and the
information specified in Parts II and III, the 1998 Shareholder Report
is not to be deemed filed as part of this Report.
2. FINANCIAL STATEMENT SCHEDULE OF THE COMPANY
<TABLE>
<CAPTION>
Schedule No. Page
------------ ----
<S> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules are omitted, because they are not applicable, or
not required, or because the information is included in the Company's
consolidated financial statements or notes thereto.
19
<PAGE>
(b) REPORTS ON FORM 8-K
No current Reports on Form 8-K were filed by the Company during the
quarter ended January 31, 1998.
(c) EXHIBITS
Exhibit No. Description of Exhibits
----------- -----------------------
(2)(a) Stock Purchase Agreement dated April 4, 1995,
providing for the Company's purchase of all of the
capital stock of Centercom, Inc., a Wisconsin
corporation, and Centercom South, Inc. a Florida
corporation, from Jeffrey Johnson and Robert Harmon
(incorporated herein by reference to Exhibit 2(a)-1
to the Company's Current Report on Form 8-K with a
Date of Report of April 14, 1995).
(2)(b) Escrow Agreement dated April 14, 1995 among the Company,
Jeffrey Johnson, Robert Harmon and Firstar Trust Company
(incorporated herein by reference to Exhibit (2)(a)-2 to
the Company's Current Report on Form 8-K with a Date of
Report of April 14, 1995).
(2)(c) Purchase and Sale Agreement dated January 31, 1996 between the
Company and the Shareholders of Indian Arts and Crafts, Inc.
(without Exhibits, Schedules or Attachments) (incorporated by
reference to Exhibit (2)(c) to the Company's Annual Report on
Form 10-K for the year ended January 31, 1996 (hereinafter
referred to as the "1996 Form 10-K")).
(2)(d) Plan and Agreement of Merger dated June 7, 1996, between the
Company and Satastar Corporate Services, Inc., doing business
as PVS Corporate Services (without Exhibits, Schedules or
Attachments).
(2)(e) Agreement dated July 15, 1997 between Certified Media
Corporation and the Company (incorporated herein by reference
to Exhibit 10 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1997).
(2)(f) Purchase and Sale Agreement dated June 30, 1997 between the
Company and Dub South Acquisition, LLC.
(3)(i)(a) Restated Articles of Incorporation of the Company, and all
amendments filed with the Minnesota Secretary of State
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(a) to the Company's Registration Statement on Form
S-1 No. 33-10918
20
<PAGE>
hereinafter referred to as the "Company's S-1 Registration
Statement").
(3)(i)(b) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of State
on July 16, 1987 (incorporated herein by reference to Exhibit
19 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1987).
(3)(i)(c) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of State
on June 24, 1993 (incorporated herein by reference to
Exhibit 3(a) to the Company's Annual Report on Form 10-K for
the year ended January 31, 1994, (hereinafter referred to as
the "1994 Form 10-K")).
(3)(ii)(a) Restated By-Laws of the Company and all amendments thereto
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(b) to the Company's S-1 Registration Statement).
(3)(ii)(b) Third Amendment to the Company's Restated By-Laws adopted
April 19, 1994 (incorporated herein by reference to
Exhibit 3(b) to the 1994 Form 10-K).
(10)(a) [Intentionally left blank.]
(10)(b) Purchase and Sale Agreement Restated February 17, 1994, dated
as of February 28, 1994, providing for the Company's sale of
its flag, banner and parade and float products, assets and
business to Chromatic Concepts Co. (incorporated herein by
reference to Exhibit (10)(b) to the 1994 Form 10-K).
(10)(c) Purchase Agreement dated as of May 25, 1993, providing for the
Company's purchase from Cranberry Novelty Manufacturing Company
of the "Cranberry Lake" novelty product line (incorporated
herein by reference to Exhibit (10)(c) to the 1994 Form 10-K).
(10)(d) Adoption Agreement dated November 5, 1992 for Vaughn
Communications, Inc. Retirement Savings Plan (the "Plan")
adopting Fidelity Management & Research Co. standard prototype
Profit Sharing/401(K) Plan basic plan document No. 7 and copy
of Retirement Service Agreement dated November 4, 1992 with
Fidelity Management Trust Company, providing for the trust and
administration of the Plan, first effective as of the Plan year
beginning February 1, 1993 (incorporated herein by reference to
Exhibit (10)(d) to the 1994 Form 10-K).
(10)(e) [Intentionally left blank.]
21
<PAGE>
(10)(f) 1990 Company-Wide Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and forms of 1990 Incentive Stock Option and 1990
Non-statutory Stock Option Agreements (incorporated herein by
reference to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the year ended January 31, 1991), and copy of
amendment to such Plan adopted by the Board June 24, 1992
(incorporated herein by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1993, (hereinafter referred to as the "1993
Form 10-K")).
(10)(g) 1988 Stock Option Plan adopted by the Company's Board of
Directors on December 20, 1988, and forms of 1988 Incentive
Stock Option and 1988 Nonstatutory Stock Option Agreements
(incorporated herein by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1989), and copies of amendments to such Plan
adopted by the Board June 24, 1992 (incorporated herein
by reference to Exhibit 10(g) to the 1993 Form 10-K).
(10)(h) Amended and Restated Stock Put Redemption Agreement dated
June 24, 1992, between the Company and E. David Willette
(incorporated herein by reference to Exhibit 10(h) to the
1993 Form 10-K).
(10)(i) 1983 Incentive Stock Option Plan and form of 1983 Incentive
Stock Option Agreement (incorporated by reference to
Exhibit 10(1) to the Company's S-1 Registration Statement),
and copy of amendment to such Plan adopted by the Board
June 24, 1992 (incorporated herein by reference to
Exhibit 10(i) to the 1993 Form 10-K).
(10)(j) 1985 Stock Option Plan (incorporated by reference to
Exhibit 10(m) to the Company's S-1 Registration Statement),
copy of Amendment to the 1985 Stock Option Plan adopted by
the Company's Board of Directors on December 10, 1987, and
corresponding revised forms of 1985 Incentive Stock Option
Agreement and 1985 Nonstatutory Option Agreement
(incorporated by reference to Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the year ended January 31,
1988), and copy of amendment to such Plan adopted by the Board
June 24, 1992 (incorporated herein by reference to Exhibit
10(j) to the 1993 Form 10-K).
(10)(k) 1990 Non-Employee Directors Stock Option Plan adopted by the
Company's Board of Directors June 26, 1990, as amended
December 17, 1990, and form of 1990 Non-Employee Directors
Stock Option Agreement (non-statutory) (incorporated herein by
reference to Exhibit 10(k) to the 1993 Form 10-K).
22
<PAGE>
(10)(l) Mortgage and Security Agreement and Fixture Financing
Statement and Promissory Note, dated February 26, 1988,
between the Company (as mortgagor and borrower) and The
Canada Life Assurance Company (as mortgagee and lender),
providing for a three year $1,600,000 mortgage loan to
the Company with three year renewal options secured by the
Company's Minneapolis, Minnesota headquarters and adjacent
plant and office facilities (incorporated by reference to
Exhibit 10(1) to the Company's Annual Report on Form 10-K
for the year ended January 31, 1988).
(10)(m) 1990 Discounted Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and form of 1990 Discounted Stock Option Agreement
(nonstatutory) (incorporated herein by reference to Exhibit
10(m) to the Company's Annual Report on Form 10-K for the
year ended January 31, 1991), and copy of amendment to such
Plan adopted by the Board June 24, 1992 (incorporated herein
by reference to Exhibit 10(m) to the 1993 Form 10-K).
(10)(n) Leases each dated April 4, 1995, between Centercom, Inc.,
the Company's wholly-owned subsidiary, as Lessee, and
Centercom Partnership, a partnership owned by Jeffrey
Johnson and Robert Harmon, the former owners of all of the
capital stock of Centercom, Inc., as Lessor, and Specialty
Services, Inc., a real estate holding corporation owned by
Messrs. Johnson and Harmon, as Lessor, respectively
providing for the lease and rental from and after April 4,
1995, of the real estate and buildings located at 5737 West
Hemlock Street and 5621 West Hemlock Street, Milwaukee,
Wisconsin, from which the Company's wholly-owned subsidiary,
Centercom, Inc., conducts its Milwaukee, Wisconsin based
videotape duplication operations (incorporated herein by
reference to Exhibit (10)(n) to the 1995 Form 10-K).
(10)(o) Consulting and Non-Competition Agreements, each dated April
4, 1995, among the Company, its wholly-owned subsidiary,
Centercom, Inc. and each of Jeffrey Johnson and Robert
Harmon, the prior shareholders of Centercom, Inc., from whom
the Company acquired the capital stock of Centercom, Inc.,
providing for certain covenants of Jeffrey Johnson and
Robert Harmon against competition with the Company and
Centercom, Inc. and for performance of certain consulting
services by said prior shareholders (incorporated herein by
reference to Exhibit (10)(o) to the 1995 Form 10-K).
(10)(p) Shareholder Voting Agreement dated April 4, 1995, among the
Company, E. David Willette and Jeffrey Johnson and Robert
Harmon, providing that E. David Willette will vote his own
shares of the Company's Common Stock for the election
of Jeffrey
23
<PAGE>
Johnson and Robert Harmon as members of the
Company's Board of Directors (incorporated herein by
reference to Exhibit (10)(p) to the 1995 Form 10-K).
(10)(q) Amended and Restated Loan Agreement dated February 1, 1996,
between the Company and American Bank N.A. (incorporated by
reference to Exhibit (10)(q) to the 1996 Form 10-K.)
(10)(r) 1995 Non-Employee Director Stock Option Plan adopted by
the Board of Directors on June 20, 1995 and form of 1995
Non-Employee Director Nonstatutory Stock Option Agreement.
(10)(s) Third Modification Agreement and Amendment to Mortgage dated
January 1, 1997 between the Company and the Canada Life
Assurance Company.
(10)(t) Employment and Noncompetition Agreement dated September 25,
1995 between Donald J. Drapeau and the Company.
(10)(u) Addendum No. 1 to Employment Agreement dated March 13, 1998
between Donald J. Drapeau and the Company (amending Exhibit
(10)(t)).
(10)(v) 1998 Employment and Noncompetition Agreement dated March 13,
1998 between E. David Willette and the Company.
(10)(w) 1998 Employment and Noncompetition Agreement dated March 13,
1998 between M. Charles Reinhart and the Company.
(10)(x) Revolving Credit and Term Loan Agreement dated August 29,
1997 between the Company and Firstar Bank of Minnesota, N.A.
amending an Amended and Restated Loan Agreement dated March
31, 1995.
(13) 1998 Annual Report to Shareholders.
(23) Consent of Independent Auditors
(24) Power of Attorney (see the Signature Page of this
Report)
(27) Financial Data Schedules
(d) Financial Statements required by Regulation S-X which are excluded
from the Annual Report to Shareholders.
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VAUGHN COMMUNICATIONS, INC.
By \s\ E. David Willette
------------------------------------
E. David Willette
Chairman and Chief Executive Officer
(Principal Executive Officer)
By \s\ M. Charles Reinhart
------------------------------------
M. Charles Reinhart
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: April 30, 1998
25
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above or below, constitutes and appoints E. David Willette and M. Charles
Reinhart, or either of them, his true and lawful attorneys-in-fact, and
agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Company in their respective capacities as directors of the Company.
\s\ E. David Willette Director April 30, 1998
-------------------------------
E. David Willette
\s\ Roger F. Heegaard Director April 30, 1998
-------------------------------
Roger F. Heegaard
\s\ Harold G. Wahlquist Director April 30, 1998
-------------------------------
Harold G. Wahlquist
\s\ William D. Smith Director April 30, 1998
-------------------------------
William D. Smith
\s\ Laurence F. LeJeune Director April 30, 1998
-------------------------------
Laurence F. LeJeune
\s\ Michael R. Sill Director April 30, 1998
-------------------------------
Michael R. Sill
26
<PAGE>
\s\ Rodney P. Burwell Director April 30, 1998
-------------------------------
Rodney P. Burwell
\s\ Jeffrey Johnson Director April 30, 1998
-------------------------------
Jeffrey Johnson
\s\ Robert Harmon Director April 30, 1998
-------------------------------
Robert Harmon
\s\ Donald J. Drapeau Director April 30, 1998
-------------------------------
Donald J. Drapeau
27
<PAGE>
VAUGHN COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Additions
---------
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- Deductions End of
Description of Period Expenses Describe Describe Period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended
1/31/98:
Deducted from
asset account:
Allowance for
doubtful accounts $650,000 $1,185,058 $709,058(1) $1,126,000
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Year ended
1/31/97:
Deducted from
asset account:
Allowance for
doubtful accounts $625,600 $396,694 $372,294(1) $650,000
-------- -------- -------- --------
-------- -------- -------- --------
Year ended
1/31/96:
Deducted from
asset account:
Allowance for
doubtful accounts $536,700 $386,160 $297,260(1) $625,600
-------- -------- -------- --------
-------- -------- -------- --------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
S-1
28
<PAGE>
VAUGHN COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
(2)(f) Purchase and Sale Agreement dated June 30, 1997 between
the Company and Dub South Acquisition, LLC.
(10)(t) Employment and Noncompetition Agreement dated September 25,
1995 between Donald J. Drapeau and the Company.
(10)(u) Addendum No. 1 to Employment Agreement dated March 13,
1998 between Donald J. Drapeau and the Company (amending
Exhibit (10)(t).
(10)(v) 1998 Employment and Noncompetition Agreement dated March
13, 1998 between E. David Willette and the Company.
(10)(w) 1998 Employment and Noncompetition Agreement dated March
13, 1998 between M. Charles Reinhart and the Company.
(10)(x) Revolving Credit and Term Loan Agreement dated August 29,
1997 between the Company and Firstar Bank of Minnesota, N.A.
amending an Amended and Restated Loan Agreement dated
March 31, 1995.
(13) 1998 Annual Report to Shareholders
(23) Consent of Independent Auditors
(24) Power of Attorney (see Signature Page of Report)
(27) Financial Data Schedules
29
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Exhibit (2)(f)
PURCHASE AND SALE AGREEMENT
This Agreement is made and entered into as of the 30th day of June, 1997,
by and between Vaughn Communications, Inc. a Minnesota corporation with its
principal offices in Minneapolis, Minnesota ("Buyer"), and Dub South
Acquisition, LLC, and David J. Craver, Martin Richardson, Robert D. Craver, and
Robert T. Craver, Dub South Partners, L.P., (they being all of the shareholders
of Dub South Acquisition LLC) a Georgia Limited Liability Company with its
principal offices in Atlanta, Georgia ("Seller").
WHEREAS, Seller is engaged in the sale and distribution of video and
audio duplication services.
WHEREAS, the Buyer wishes to purchase and the Seller wishes to sell all
or substantially all of the assets of the Seller on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants of Seller and Buyer set forth herein, Buyer and Seller hereby agree as
follows:
1. Purchase and Sale
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, the Seller hereby agrees to sell, assign and transfer to Buyer its
Assets and Liabilities as is set forth on Exhibits C, D, E, F, G, J and Z to
this Agreement, and Buyer hereby agrees to purchase and acquire such assets and
assume certain liabilities related thereto.
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
Fixed Assets, Intangibles, Inventory, and Other Assets, used in Seller's
Business or owned by the Seller, as specifically included herein below,
all of which shall be free and clear of all liens, except Permitted
Liens.
(C) LIABILITIES means only those liabilities which are
identified in writing in this Agreement.
(D) BUSINESS means the sale and distribution of video and audio
duplication services as is presently conducted by Seller.
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(E) CLOSING shall mean the closing of the transactions
contemplated by this Agreement
(F) CLOSING DATE shall mean the effective date of the Closing
of this Agreement as specified in Section 8.2.
(G) (Intentionally left blank)
(H) (Intentionally left blank)
(I) INVENTORY means all finished goods, raw materials, work in
process, supplies and inventory of Seller identified in Exhibit C
attached hereto.
(J) OTHER ASSETS means those assets identified in Exhibit D
attached hereto. including all Personal Property, prepaids, letters of
credit and all other assets used in the business.
(K) INTANGIBLES means all items necessary to the operation of
the business which are not tangible including: noncompete agreements,
licenses, contracts to which the Seller is a party, warranties on
equipment, software programs, business and financial records relating to
the business, computer records and tapes, copyrights, copyright
applications, corporate names, (including Dub South) customer lists and
records, goodwill, patents, patent applications, proprietary information,
trademarks, trademark applications, trade names, trade secrets, and any
and all of Seller's rights to any in the foregoing as are identified in
Exhibit E attached hereto.
(L) FIXED ASSETS means all equipment, accessories, machinery,
computer and office equipment and fixtures used in the business
identified in Exhibit F attached hereto.
(M) (Intentionally left blank)
(N) CURRENT LIABILITIES means current portion of long term debt
and other accruals identified in Exhibit G attached hereto.
(O) NOTES AND CONTRACTS PAYABLE means all debt owed or
contracts to pay by the Seller identified in Exhibit Z attached hereto.
(P) (Intentionally left blank)
(Q) PERMITTED LIENS means those liens, encumbrances, security
interests or other charges shown on Exhibit J attached hereto to which
the Assets will be subject after the Close.
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3. Purchase Price
3.1 Amount and Payment of Purchase Price: The purchase price for the
Assets shall be the sum of the following: (i) $250,000, plus (ii) the
assumption of Liabilities as described in Section 3-1(C) below, plus (iii) a
5-year earnout as described in Section 3.1(B) below, plus (iv) the value of the
Seller's Inventory determined by the procedures in Section 3.1(D) below; such
total being the "Purchase Price." The Purchase Price shall be payable as
follows:
(A) CASH. Buyer shall pay to Seller $250,000 plus difference
in 3.1(C) below by certified or cashier's check, wire transfer or other
immediately available funds, in part payment of the Purchase Price.
(B) EARNOUT. A sum, up to a maximum of $1,200,000, determined
by a royalty rate of 27% (the "Initial Earnout Percent") multiplied by
the Atlanta Department profit as reported on the internal profit and loss
statements reported in fiscal quarters by the Buyer to the Seller and
payable annually on May 1 each year , for sixty (60) months following
Closing as described in the Royalty Agreement attached as Exhibit K. The
Initial Earnout Percent was determined by dividing the [Seller's expected
sales contribution of $1.3 million] by [the Buyer's reported sales
contribution of $3.5 million plus the Seller's expected sales
contribution of $1.3 million]. The Atlanta Department Profit will be
reported in a manner consistent with procedures used in recent years
except that: a) the additional depreciation from the Fixed Assets
acquired from Seller will be reported as an expense ($750,000 over five
years straight line depreciation);b) the interest expense related to the
assumption of the liabilities from the Seller will be reported as an
expense; in the event Lyon Credit is paid in full, interest will then
accrue at the prime rate as reported by Buyer's primary lender; c) the
interest expense (limited to Prime) related to the Buyer's borrowing of
the cash portion of the purchase ($250,000) in Section 3.1(A) will be
reported as an expense each year, d) the total compensation paid to
Christy Bowman will be deducted as a sales expense.
Seller shall have the right to audit, at Seller's expense, Buyer's
accounting and calculations to determine the Atlanta Department Profit.
Such audit may only be performed quarterly following the public release
of Buyer's quarterly earnings.
(C) ASSUMPTION OF LIABILITIES. Buyer shall pay
approximately $500,000 of the Purchase Price by assuming the Liabilities
(the "Assumed Liabilities") pursuant to the terms and provisions of the
Assignment and Assumption Agreement between Seller and Buyer attached
hereto as Exhibit M and incorporated herein by this reference (the
"Assumption Agreement"). With the exception of the Assumed Liabilities
and any leases which the Buyer elects to assume ("Assumed Leases") from
leases listed in Exhibit Z, Buyer will not assume any other obligations,
liabilities or debts of Seller. Should Assumed Liabilities be less than
$500,000, Buyer will pay to Seller at Closing the cash difference between
$500,000 and the total of the Assumed Liabilities.
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(D) INVENTORY VALUATION. Buyer shall cause a physical
inventory of the Inventory to be performed on the Closing Date. Buyer
shall extend the value of the inventory using Buyer's cost of materials
and deliver within 30 days of the physical inventory a check to Seller
for the value of the Inventory. Buyer will have no obligation to
purchase Inventory if it is of no value to Buyer. All Inventory not
purchased by Buyer will be delivered to Seller.
3.2 Adjustment of Purchase Price:
(A) LIABILITIES. Liabilities undisclosed on Exhibits G, M or
Z or arising from any matter described in Section 11.2 which, upon
written notice by Buyer and following Seller's failure to reach a
satisfactory settlement of the liability within 60 days of the written
notice, Buyer, in its sole discretion, elects to pay in order to
preserve title to the Fixed Assets or to preserve the business operations
of the Business, including interest and attorneys' fees, to discharge
such undisclosed liabilities or matters described in Section 11.2 herein
will be set off as described in (D) 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 M or Z, attached hereto or matters described in Section 11.2
herin.
(B) FIXED ASSETS. On July 15, 1997 Buyer shall cause a physical
inventory of the Fixed Assets to be performed , the cost of which
inventory shall be borne by Buyer alone. Buyer shall cause a copy of the
results of the physical inventory to be delivered to Seller promptly
after completion of such physical inventory. Any aggregate difference
resulting from the disappearance of Fixed Assets between the day after
Closing and the physical inventory of the Fixed Assets on the date
above, shall be offset at the Orderly Liquidation value indicated in the
Rabin Brothers appraisal in Exhibit S, against first, the payment for
inventory value in 3.1(D) above, and second, the Earnout Payments in
accordance with (D) below.
(C) PERCENTAGE OF SALES CALCULATION APPLICABLE FOR EARNOUT.
[SECTIONS ii) AND iii) BELOW ARE ONLY APPLICABLE IF CHRISTY BOWMAN DOES
NOT COMPLY WITH HER TWO-YEAR EMPLOYMENT/NONCOMPETE AGREEMENT AS INDICATED
IN SECTION 6.5.] i) Following the six (6) month anniversary of the
closing date, the Earnout percent as defined in Section 3.1(B) will be
adjusted as follows: Sales attributed to Seller's former company over
the six-month period immediately following Closing will be compared to
the expected $1.3 million annual sales used in Section 3.1(B) to
determine the Initial Earnout percent. If the sales over the six-month
time period when annualized differ by more than five percent (5%) from
the $1.3 million annual rate, then a new Earnout percent will be
determined by: [Seller's new six-month sales times 2] divided by [Buyer's
sales at $3.5 million plus Seller's new six-month sales times 2]. This
new Earnout percent will be effective retroactive to the Closing date.
ii) Upon the twelve (12) month anniversary of the Closing date, the
Earnout percent as defined in Section 3.1(B) will be adjusted as follows:
Sales attributed to Christy Bowman's customer list at Closing (see
Exhibit B) over the last twelve months will be compared to the run rate
(see Exhibit B) at time of Closing. If the
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sales differ by more than five percent (5%), then a new Earnout
percent will be determined by: [Last 12 months sales from Exhibit B
customer list] divided by [Exhibit B monthly run rate times 12] times
the Earnout percent as most recently adjusted in Section 3.2(C) i) or
ii) above. Should the other customers of Dub South (those not listed in
Exhibit B) increase their volume (to compensate for the loss of
revenue from Exhibit B accounts) then for every $3 of increased
revenue from these other customers, a $1 credit (addition) will be
given in the above calculation by adding the credit to the numerator
(last 12 months sales from Exhibit B customer list). The maximum this
ratio can be is 1.0. This new Earnout percent will be effective
retroactive to the Closing date. iii) Upon the twenty-four (24)
month anniversary of the Closing date, the Earnout percent as defined
in Section 3.1(B) will be adjusted as follows: Sales attributed to
Christy Bowman's customer list at Closing (see Exhibit B) over the
last twelve months will be compared to the run rate (see Exhibit B) at
time of Closing. If the sales differ by more than five percent (5%),
then a new Earnout percent will be determined by: [Last 12 months sales
from Exhibit B customer list] divided by [Exhibit B monthly run rate
times 12] times the Earnout percent as most recently adjusted in Section
3.2(C) i) or ii) above. Should the other customers of Dub South
(those not listed in Exhibit B) increase their volume (to compensate
for the loss of revenue from Exhibit B accounts) then for every $3 of
increased revenue from these other customers, a $1 credit (addition)
will be given in the above calculation by adding the credit to the
numerator (last 12 months sales from Exhibit B customer list). The
maximum this ratio can be is 1.0. This new Earnout percent will be
effective retroactive to the date of the twelve (12) month anniversary
of the Closing. iv) At any time during the five (5) year Earnout
term, if Buyer acquires or merges with additional companies in the
Atlanta region such that a sales increase results from such
acquisition or merger, then Buyer and Seller will adjust the Earnout
percent by recalculating it as follows: [Seller's sales at $1.3 million
or as subsequently adjusted in 3.2(C) (i) above] divided by [Buyer's
sales at $3.5 million plus new acquisition sales for the trailing 12
months plus Seller's sales at $1.3 million or as subsequently adjusted
in 3.2(C)(i)]. This new Earnout percent will become effective at the
Closing date of the new acquisition merger. iv) Notwithstanding the
above adjustments, the maximum amount of the Earnout will remain as
shown in 3.1(B).
(D) EXCESS COMPENSATION FOR CHRISTY BOWMAN. Buyer agrees to
enter into a two-year employment/noncompetition agreement with Christy
Bowman as indicated in Section 6.5. Seller agrees to deduct from the
Earnout payments over the course of the 60-month payout period the annual
excess of compensation paid to Christy Bowman over an annual base of
$40,000 plus 3% commission on Gross Margin, each year for the two (2)
year term of her contract.
(E) ADJUSTMENT MECHANISMS. The net amount of Earnout payment
from any year may be adjusted: i) as indicated in Section 3.2(C) above,
ii) by offsetting the amount of the Earnout by amounts paid by Buyer on
behalf of Seller as described in Section 3.2(A), iii) by offsetting the
amount of the Earnout by the value of any Fixed Assets which
disappeared as described in Section 3.2(B), iv) by offsetting the excess
compensation paid to Christy Bowman as described in Section 3.2 (D).
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3.3 Prorations: All sales tax, personal property taxes and
assessments which are past due or have become due upon any of the Assets on or
before the Closing Date will be paid by Seller at the Closing, together with any
penalty or interest thereron. Current personal property taxes will be prorated
and adjusted between Buyer and Seller as of the Closing Date on a due date
basis. If current tax bills are unavailable at the Closing, the prior year's
tax bills will be used for proration purposes and taxes will be re-prorated
between Buyer and Seller when the current year's tax bills are received. Any
amounts owed by either party with respect to such re-proration will be paid to
the other party within ten (10) days of the determination of such re-proration.
All operating expenses of the Business for the month of Closing will be prorated
and adjusted between Buyer and Seller as of the Closing Date based on a 30-day
month.
3.4 Allocation: It is agreed that the purchase price to be paid by
Buyer under the terms of this Agreement shall be allocated among the Assets to
be purchased as will be set forth in Exhibit O prepared by Buyer and Seller 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 O as of the
Date of Closing.
4. Conduct of the Business
4.1 The Seller covenants and agrees that, except as otherwise
expressly provided herein or upon the written consent of Buyer, which consent
will not be unreasonably withheld, between the date hereof and the Closing Date,
the Seller will:
(A) conduct its business and affairs only in the ordinary
course and consistent with its prior practices;
(B) maintain, keep and preserve the Assets in the same
condition as the date hereof, ordinary wear and tear excepted;
(C) to the extent within Seller's reasonable control, preserve
intact the Seller's business and organization;
(D) to the extent within Seller's reasonable control preserve
current relationships with present employees and other outside parties
(including suppliers, customers and others having business relations with
Seller);
(E) pay and perform all of the Seller's liabilities in the
ordinary course and consistent with its prior practices;
(F) give Buyer prompt written notice of any material change in
the representations and warranties made in Section 5 hereof or the
Exhibits referred to herein which occurs prior to the Closing Date;
provided that such notification shall not relieve Seller of any of its
obligations hereunder;
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(G) not enter into any contract, agreement, commitment,
understanding or arrangement outside of the ordinary course of business,
and it will not cancel, modify, renew or amend any contract or lease
other than in the ordinary course of business;
(H) not perform, take any action or incur or, permit to exist
any change, event or condition which has a material and adverse effect on
the condition (financial or otherwise), properties, assets, liabilities,
or prospects of the Seller, including but not limited to the contracting
for or incurring of any expense in connection with opening any additional
facility of Seller;
(I) (Intentionally left blank.)
(J) not sell or dispose of any of the Assets (except for the
use of inventory and replacement of damaged or defective equipment or
materials in the ordinary course of business), or permit the creation of
any mortgage, pledge, lien or other encumbrance, security interest, or
imperfection of title thereon or with respect thereto, except for liens
for taxes not yet due and payable;
(K) not take any action or permit to exist any condition which
would cause any of the representations and warranties of Seller contained
in the Agreement to be untrue in any material respect as of the Closing
Date;
(L) maintain its books and records in accordance with prior
practices;
(M) not cancel, compromise, excuse, forgive, postpone or apply
any portion of a customer deposit to any Account Receivable, except in
the ordinary course of business consistent with its prior practices;
(N) not offer or provide special incentives to induce customers
to purchase goods from the Seller, except in the ordinary course of
business consistent with its prior practices.
(O) (Intentionally left blank)
(P) (Intentionally left blank)
(Q) (Intentionally left blank)
(R) (Intentionally left blank)
(S) not make any increase in the compensation payable to the
Seller's employees, officers, directors, consultants or agents;
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(T) not terminate any employee of the Seller except for "for
cause", and promptly notify Buyer in writing of any employee of the
Seller terminated for cause or voluntarily terminating his or her
employment;
(U) not make any Lease payments in excess of amounts
historically paid by Seller; or
(V) not discharge, remove, suspend or terminate any officer of
Seller except "for cause", with notice in writing to Buyer, not hire any
person as an officer or to serve in an executive capacity on behalf of
Seller.
4.2 (Intentionally left blank)
4.3 Access to Books, Records and Premises: From the date of this
Agreement through the Closing Date, Seller shall allow Buyer and its authorized
representatives full access to the properties, books and records, premises,
employees, distributors, customers and auditors of the Seller during reasonable
business hours for purposes of enabling Buyer to fully investigate the business
of the Seller. Any information obtained by Buyer in connection with this
Agreement (i) shall be maintained by Buyer on a confidential basis (subject only
to review by Buyer's counsel and accountants), and (ii) shall not be disclosed
to any other person or used by Buyer in any manner in the event that the
transactions contemplated by this Agreement are not consummated, and (iii) shall
be promptly returned to Seller, together with any copies, notes and abstracts
thereof, in the event the transactions contemplated by this agreement do not
close.
4.4 Risk of Loss: Until the Closing Date, 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
Seller's Business and Assets.
4.5 Additional Schedules: Within twenty (20) days after the date of
this Agreement, Seller shall prepare and to deliver 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 Seller and that are being
used by the Seller in connection with the Business conducted by it.
Schedule 4B: (Intentionally left blank)
Schedule 4C: This schedule lists all Intangibles used by Seller
in the conduct of its Business, including without limitation, software,
computer systems, all trademarks, trade names, service names, service
marks, copyrights, patents, patent licenses, applications for any and all
of the foregoing and registrations thereof owned by the Seller or used in
its operations.
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Schedule 4D: This schedule lists each policy of fire, liability
and other forms of insurance maintained by Seller, the amount of premium
thereon and the expiration date thereof. Also listed are the policy
numbers and dates and insurer's name and address for each policy owned in
all prior years (to the extent reasonably available).
Schedule 4E: This schedule lists all permits, licenses and other
approvals and authorizations which are necessary to conduct Seller's
Business 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 Seller.
Schedule 4F: This schedule lists all personal property owned by
any third parties (whether a customer, supplier or other person) in the
possession of Seller or for which Seller is responsible, other than
leased property set forth on schedule 4K or 4L.
Schedule 4G: (Intentionally left blank)
Schedule 4H: This schedule lists each employee of Seller and the
position, title, remuneration (including any scheduled salary and
remuneration increases), the date of employment and accrued vacation pay
of each such employee and the date and amount of last salary review and
increase.
Schedule 4I: This schedule lists the amount of sales made during
fiscal years ending 1995, 1996, and year-to-date 1997 (to the extent
reasonably available), to the Seller's fifteen (15) largest accounts, the
principal contact at each such account and the Seller's responsible sales
employee for each such account.
Schedule 4K: This schedule lists and describes each lease for
real property, whether written or oral, to which Seller is a party,
together with the term, rental and other material provisions thereof, and
any other instrument under which Seller 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. Buyer and Seller acknowledgethat real property leases will not
be assigned.
Schedule 4L: This schedule lists and describes each lease for, or
license for the use of equipment or personal property, whether written or
oral, to which Seller is a party, together with the term, rental,
security agreements, and other material provisions thereof (ref. Exhibit
Z). Furnish copies of all such leases or licenses.
Schedule 4M: This schedule lists the Accounts Receivable aged as
of the most recent month-end.
Schedule 4N: This schedule lists the following material
agreements, whether oral or written, to which Seller 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.
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a) Each contract, agreement or arrangement made in the
course of ordinary business by Seller, not
terminable by the Seller 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 Seller 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.
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 Seller and any officer, consultant,
director or employee, including any bonus, incentive
or deferred compensation plans, any confidentiality
or non-compete agreements, and any arrangements
which encourage or compensate Seller's employees to
stay with Seller following the Closing Date.
g) Each plan or contract or arrangement of Seller,
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
Seller's business.
j) Each contract between Seller and any dealer,
distributor, broker, agent or sales representative.
k) Each contract or agreement relating to Intangibles.
l) Each agreement not otherwise listed in this Section
4.5 to which Seller is a party or which has, or may
have, a material effect on the Seller or its future
business prospects.
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True and correct copies of all documents listed in any schedule delivered
pursuant to this section 4.5 have heretofore been delivered or made available to
Buyer or will be made available prior to closing.
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.
4.7 Contractual Obligations: Buyer agrees to assume only the
obligations identified in Exhibits G, and Z. 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 material
writing evidencing such obligation.
5. Representations and Warranties of Seller
Seller hereby represents and warrants to Buyer that:
5.1 General: The statements set forth in Sections 4 and 5 of this
Agreement are, in all material respects, 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 limited liability company duly organized,
validly existing, and in good standing under the laws of the State of Georgia.
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 managers and by all
requisite member action.
5.4 Material Change: Except as specifically disclosed herein or on
the monthly financial statements of Seller (or notes thereto) to be delivered to
Buyer by Seller pursuant to Section 4.3, since December 31, 1996 Seller has not:
(A) sold, transferred, leased to others or otherwise disposed
of any assets, except for (i) inventory and/or services sold in the
ordinary course of business, and (ii) assets which are not material to
the operation of Seller's business; canceled or compromised any material
debt or claim; or waived, compromised or released any right, except for
rights which are not material to the operation of Seller's business;
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(B) suffered any damage, destruction or loss (whether or not
covered by insurance) that has materially and adversely affected the
Assets, Seller or the Seller's Business or prospects;
(C) encountered any labor union organizing activity or had any
actual or, to the best of Seller's knowledge, threatened employee strike,
work stoppage, slowdown or lockout;
(D) transferred or granted any right under, or entered into any
settlement regarding the breach or infringement of, any license, patent,
copyright, trademark, trade name, invention, franchise or similar rights,
or modified any existing right with respect thereto;
(E) instituted, to the best of Seller's knowledge, been named
as a party, settled or agreed to settle any litigation, action or
proceeding before any court or governmental body;
(F) failed to replenish Seller's inventories and supplies in a
manner consistent with Seller's prior business practices, nor made any
purchase commitments in excess of the normal, ordinary and usual
requirements of the Seller'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
Seller's business, nor made any material changes in the Seller's
marketing, selling, pricing, advertising, or personnel practices;
(G) failed to pay its liabilities consistent with prior
practices and in the ordinary course of business;
(H) suffered any change, event or condition which has
materially and adversely affected Seller's condition (financial or
otherwise), properties, assets, liabilities, Business or prospects;
(I) failed to maintain its facilities and equipment in a
commercially prudent and reasonable manner consistent with Seller's prior
practices;
(J) entered into any transaction, contract or commitment other
than in the ordinary course of Seller's business, except for
transactions, contracts or commitments not in the ordinary course of
Seller's business for which the Seller's total obligation does not exceed
in the aggregate $10,000;
(K) incurred any obligation or liability, absolute, contingent
or otherwise, whether due or to become due, except liabilities for trade
or business obligations incurred in the ordinary course of the Seller's
business, and except for obligations or liabilities not in the ordinary
course of Seller's business for which the Seller's total obligation does
not exceed in the aggregate $10,000;
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(L) created or assumed any mortgage, pledge, lien or
encumbrance upon any of the Assets that will survive the Closing;
(M) made any material writedown of the value of any of the
Assets;
(N) made any increase in the compensation of the employees of
Seller, or any increase in compensation payable to any officer or
director of the Seller, or except as indicated on Exhibit 4H, any
increase in compensation payable to any employee, consultant or agent of
Seller;
(O) canceled, compromised, excused, forgiven, postponed or
applied any portion of a customer deposit to any Account Receivable,
except in the ordinary course of Seller's business consistent with its
prior practices; or
(P) to the best of Seller's knowledge, suffered other events or
conditions that have or might have a material adverse affect on the
Business.
5.5 No Liens or Encumbrances: Seller has good and marketable title to
all of the Assets, free of any mortgages, liens, claims, charges, leases,
security interests, pledges, easements, encumbrances and title retention
agreements of any kind whatsoever (collectively "Encumbrances"), except such
Encumbrances described on Schedules 4K, 4L (Leases) on Exhibit Z (pledges and
security interests).
5.6 Liabilities: To the best of Seller's knowledge, there are no
material liabilities, responsibilities, debts, claims or obligations, 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, M and Z. All other liabilities shall be retained by Seller and
are expressly not assumed by Buyer
5.7 Financial Statements: Unaudited financial statements of Seller
(including a balance sheet and related statements of net income; collectively,
"Financial Statements") for the twelve month period ending December 31, 1996
and for the 3 months period ending 3/31/97 are attached to this Agreement as
Exhibit P.
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 by Seller on a basis consistent with past
practices and consistent with GAAP and include all adjustments (consisting
only of normal recurring accruals) that are necessary for a fair presentation
of the financial condition of the Seller and the results of the Seller's
Business Operations for the period covered by such statements.
5.8 No Defaults: Schedules 4K, 4L, and 4N accurately and
completely list all Contracts or Leases collectively ("Contracts") to which
Seller 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
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in accordance with their respective terms, subject to the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance or other similar laws affecting creditors generally and in full
force and effect. Except as noted on Exhibit V, there is not under any
Contract any default by Seller, 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, Seller does not 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. Other
than the Contracts, the Seller 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. Except as
expressly set forth on Exhibit V 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 (Intentionally left blank)
5.10 (Intentionally left blank)
5.11 Taxes: Seller 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 Seller 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 Seller 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 Seller. The most recent tax year for which
Seller's federal income tax returns have been audited by the Internal Revenue
Service is its tax year ending N/A .
5.12 Lawsuits, Proceedings, etc.: Except as described on Exhibit Q
there is no action or proceeding (whether or not purportedly on behalf of
Seller) pending or, to the best knowledge of Seller, threatened against Seller,
nor, to the best knowledge of Seller, does there exist any basis therefor, which
might result in any material adverse change in the condition, financial or
otherwise, of Seller'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 material adverse change in Seller's Assets or
properties or in the financial condition of Seller or its Business. To the best
of Seller's knowledge, Seller is not liable for damages to any employee or
former employee of Seller as a result of any violation by Seller of any state or
federal laws directly or indirectly relating to such employee or former
employee.
5.13 Regulatory Violations:
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(A) Seller 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 Seller has not
received written notice of any violation by Seller 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 Purchased Assets by Seller, or to the Seller's knowledge, by any
other owner of the Purchased Assets; (iii) no asbestos,
asbestos-containing materials, polychlorinated biphenyls (PCBs), PCB
compounds, or other pollutants, contaminants, hazardous or toxic wastes,
substances or materials have been connected with the Purchased Assets
by the Seller, or to Seller's knowledge, by any other owner of the
Purchased Assets, nor have they been used in the construction, repair, or
alteration of any portion of the Purchased Assets by the Seller, or to
the Seller's knowledge, by any other owner of the Purchased Assets.
5.14 Post Balance Sheet Changes: Except as specifically disclosed
herein or in monthly Financial Statements deliver to Buyer pursuant to Section
5.7, Seller has not, since December 31, 1996, (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) to the best of Seller's knowledge, suffered any damage,
destruction or loss, whether or not covered by insurance, materially adversely
affecting its assets or its business; (c) to the best of Seller's knowledge,
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; or (e)
entered into any material 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 Seller. Except for
such non-compliance which could not have a materially adverse effect upon the
Assets or the operation of Seller's business, Seller 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
Seller's properties nor the conduct of its business conflicts in any material
respect with the rights of any other person, firm or corporation. Seller is not
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 Seller's
business. All of the Licenses listed
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on Schedule 4E are valid and binding and in full force and effect without
conditions. To the best of Seller's knowledge, there is not under any
License listed on Schedule 4E any default by Seller 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. Seller 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 Seller to municipal authorities are true
in all material respects and have been duly filed. To the best of Seller's
knowledge, other than the Licenses listed on Schedule 4E, Seller requires no
license, franchise or permit to carry on Seller'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 Seller's Assets: Subject to Section 14.12, to
the best of Seller's knowledge, all of the Seller's tangible Assets are
currently in good and usable condition and are fit for their intended
purposes, ordinary wear and tear excepted. Notwithstanding the foregoing,
Buyer acknowledges and agrees that (i) the Assets have been physically
inspected by Buyer or a representative of the Buyer prior to the date hereof
and (ii) the Assets are being purchased "AS IS" and "WHERE IS;" accordingly,
Buyer agrees that it shall not be entitled to any adjustment in the Initial
Purchase Price (as contemplated by Section 3.2) with respect to the wear,
tear or other decline in value of the Assets associated with the use thereof.
To the best of Seller's knowledge, 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 Seller pursuant to the leases described on schedule 4K, or
4L delivered by Seller pursuant to Section 4.5 constitute all of the
operating Assets being utilized by Seller in the conduct of its Business.
5.17 Real Estate: Seller does not own any Real Property in fee
simple. Schedule 4K contains a complete list and description of all Leases
to which the Seller is a party or of which Seller 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 and, subject to the effect
of bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or other similar laws affecting creditors generally.
5.18 Employees:
(A) To the best of Seller's knowledge, no management or key
employee of Seller intends to terminate his employment with Seller. To
the best of Seller's knowledge there is not pending or threatened any
labor dispute, strike or work stoppage against the Seller. To the best
of Seller's knowledge neither the Seller nor any representative or
employee of the Seller has committed any unfair labor practices in
connection with the operation of Seller's Business, and there is not
pending or, to the best of Seller's knowledge, threatened any charge or
complaint against Seller by the National Labor Relations Board or any
comparable state agency. To the best of Seller's knowledge, Seller is
not, and will not become, liable for any retroactive workers'
compensation insurance premiums or retroactive
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unemployment compensation experience ratings or charges in connection
with the operation of its Business relating to the period of time prior
to the date of this Agreement.
(B) Schedule 4H contains, as of the dates shown on such
Schedule, accurate and complete information as to names and rates of
compensation (whether in the form of salaries, bonuses, commissions or
other supplemental compensation now or hereafter payable) and shows each
such employee's compensation for the two (2) years immediately prior to
the date of this Agreement, including amounts and dates of change in
compensation, of all employees of Seller (grouped by categories as
indicated thereon), together with information as to any employment
contracts or severance arrangements involving the indebtedness of such
employees to Seller and any arrangements involving the indebtedness of
Seller to such employees in any amount.
(C) Seller is not a party to any collective bargaining
agreement or any employment agreement with any employee of Seller, other
than oral employment agreements at the sufferance of Seller. Seller 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
Seller, nor any pending or, to the best of Seller's knowledge, threatened
charges against Seller with respect to any wage and hour, employment
discrimination or other statutory violation by Seller. 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 Seller.
5.19 Changes in Suppliers and Customers: Seller has made Buyer aware
in writing in Exhibit T of any fact which indicates that any of the suppliers
supplying products, components or materials to the Seller intends to cease
selling such products to the Seller or to limit or reduce such sales of products
to the Seller and has made Buyer aware in writing in Exhibit T of any fact
which indicates that any major customer of the Seller intends to terminate,
limit or reduce its business relations with Seller.
5.20 Intangible Property Rights: Schedules 4C and 4E are true and
complete lists of all Intangibles applied for, issued to or owned by Seller or
under which Seller is licensed or franchised. All of the Intangibles required
to be listed on Schedules 4C and 4E are valid and in good standing and, to
Seller's knowledge, uncontested, and the Seller has delivered to Buyer copies of
all documents establishing those Intangibles. The Intangibles listed on
Schedules 4C and 4E are all such property necessary to operate the business of
Seller as now operated. To the best of Seller's knowledge, Seller is not
infringing upon or otherwise acting adversely to any Intangibles owned by any
other person or persons. No employee of Seller has any right in or to the
Seller's proprietary information, including without limitation, computer
programs used in the Seller's business.
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5.21 No Brokers or Finders: No person, firm or corporation has any
right, interest or valid claim against Seller for any commission, fee or other
compensation as a finder or broker in connection with the transactions
contemplated by this Agreement.
5.22 ERISA:
(A) All "employee benefit plans," as defined in Section 3(3) of
ERISA, sponsored, maintained or contributed to by Seller 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), Seller 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, in all
material respects, 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
Seller policies for profit sharing, sick leave, personal leave and
vacation.
(E) Seller 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 Seller has not incurred or does
not reasonably expect to incur any "withdrawal liability" under Section
4201 ET SEQ. of ERISA.
(F) Neither Buyer, Seller, 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 Seller, 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 protection to employees as mandated by
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applicable law or such benefits as Buyer, in its sole discretion, may
determine to provide to the Seller'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
Seller, its business, or any of the Assets, specifying the type and amount of
coverage and expiration dates. All such policies are in full force and effect.
No insurance policy of the Seller has been canceled and no application of the
Seller for an insurance policy has been rejected during the past five years.
5.24 Full Disclosure: There has been 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 Seller. 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 Seller, or
the ability of Seller to operate its Business subsequent to the Closing Date in
the manner in which it has been operated by Seller before the Closing Date, or
which could materially increase the costs incurred by Seller 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 Consents: To the extent that the consents of any third party are
required to consummate the transfer of any of the Purchased Assets from Seller
to Buyer and to the effect that the consent of any third party is required for
Buyer to assume any of the assumed Liabilities, such consents shall be delivered
by Seller to Buyer at Closing in form and substance satisfactory to Buyer.
Except as so delivered to Buyer at Closing, no consents of any third party are
necessary to consummate the assumption of any of the assumed Liabilities to
Buyer or to consummate the conveyance of all Purchased Assets, free of any
mortgages, liens, claims, charges, leases, security interests, pledges,
easements, encumbrances and title retention agreements of any kind whatsoever.
6. Representations and Warranties of Buyer
The Buyer hereby represents and warrants to the Seller as follows:
6.1 General: The statements set forth in Section 6 of this Agreement
are, in all material respects, true, accurate, complete and not misleading in
any respect on the date of this Agreement and will remain so as of the Closing.
6.2 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
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authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement.
6.3 Authority: 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. No approval or consent of any person,
authority or entity is needed by Buyer in connection herewith.
6.4 No Brokers or Finders: No person, firm or corporation has any
right, interest or valid claim against Buyer for any commission, fee or other
compensation as a finder or broker in connection with the transactions
contemplated by this Agreement.
6.5 Personal Service, Non-Competition/Confidentiality, and
Representative Agreements: On the Closing Date, Buyer shall enter into or
receive an assignment of an Employment and Non-competition/Confidentiality
Agreement with Christy Bowman; and a Representative and
Non-competition/Confidentiality Agreement with MediaLink and David J. Craver
and Martin Richardson, and a Non-competition/Confidentiality Agreement with
each of Robert T. Craver, Robert D. Craver, Robert Martin, and Robert
Draughn; which agreements will include covenants not to compete, all of which
will be attached hereto as Exhibit U.
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
Schedule W there is no action or proceeding (whether or not purportedly on
behalf of the Buyer) pending or threatened against the Buyer, nor, to the
best knowledge of Buyer, does there exist any basis therefor, which might
result in any adverse change in the condition, financial or otherwise, of the
Buyer's Business or Assets. No order, writ, or injunction or decree has been
issued by, or requested of, any court or governmental agency which does or
may result in any adverse change in the Buyer's Assets or properties or in
the financial condition of the Buyer or its Business. The Buyer is not
liable for damages to any employee or former employee as a result of any
violation of any state or federal laws directly or indirectly relating to
such employee or former employee.
6.8 No Breaches: The Buyer is not in violation of, and the
execution, delivery and performance of this Agreement will not result in any
breach or acceleration of, any of the terms or conditions of its articles of
incorporation or bylaws or of any mortgage, bond, indenture, agreement,
contract, license or other instrument or obligation to which the Buyer is a
party or by which its Assets are bound, nor will they result in any violation
of any statute, regulation, judgment, writ, injunction or decree of any
court, threatened or entered in a proceeding or action in which the Buyer may
be bound or to which any of its Assets are subject.
6.9 Full Disclosure:. Buyer has not knowingly withheld from Seller
any material fact relating to Buyer or the transaction contemplated hereby.
No representation or warranty in this
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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, Buyer is not aware of any change or occurrence that has taken
place or is pending that could have a material adverse effect on Buyer's
ability to consummate the transaction contemplated hereby.
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 any time by Seller.
7.2 Whether or not Buyer after Closing offers employment to any
employee of Seller, Seller shall remain solely liable for any and all
employment-related 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. The parties will take such other actions and will execute
and deliver such other instruments, documents and certificates as are
required by the terms of this Agreement or any other agreement related hereto
or as may be reasonably requested by any party hereto in connection with the
consummation of the transactions contemplated herein or therein.
8.2 Time and Place: Subject to the terms and conditions of this
Agreement, the Closing of this Agreement and any other agreement or
instrument executed by either party pursuant to this Agreement will occur at
the offices of Cushing & Morris, or at such other place, date and time as is
mutually agreeable to Buyer and Seller. The parties may appear at the
Closing in person, by telephone or by telefacsimile.
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
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as of the Closing Date with the same force and effect as though such
representations and warranties had been made on the Closing Date.
(B) Personal Service Agreements: Christy Bowman and Medialink,
and David Craver and Martin Richardson and Robert T. Craver, Robert D.
Craver, Robert Martin, and Robert Draughn shall have entered into the
agreements described in Section 6.5.
(C) Delivery of Closing Documents: Seller shall have delivered
to Buyer each of the items listed in Section 2.1 (A through Q), Section
4.5 and 4.6 and 5.7, 6.5 and such items shall be satisfactory in form to
Buyer and include:
1) Bill of Sale, General Assignment and
Conveyance With Assumption transferring the assets to Buyer
duly executed by Seller in the form attached as Exhibit M.
2) (Intentionally left blank)
3) Assignments or required consents executed by
Seller or third parties for leases, licenses, contracts or
other agreements listed in Section 4.5 herein and Exhibit
Z.
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) (Intentionally left blank)
(6) Appropriate payoff letters from the Seller's
creditors with respect to all Long-Term Debt and other
indebtedness of the Seller, 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).
(7) A Certificate of Good Standing for the Seller
from the State of Georgia.
(D) All other documents, certificates, instruments and writings
required hereunder to be delivered by the Seller, or that may reasonably
be requested by Buyer at or prior to the Closing Date.
(E) Covenants and Conditions: Seller shall have performed in
all material respects all of his obligations and agreements and complied
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, there shall have been no material
adverse change in the Seller or its condition (financial or otherwise),
operations, business or prospects, and the Seller 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 in all material respects. Additionally, 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.
(G) 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 is subject
to the satisfaction (or waiver by the Seller) of each of the following
conditions:
(A) Accuracy of Representations and Warranties: The
representations and warranties of Buyer in this Agreement shall be
correct in all material respects as of the Closing Date with the same
force and effect as though such representations and warranties had been
made on the Closing Date.
(B) Personal Service Agreements: Christy Bowman and Medialink,
and David Craver and Martin Richardson and Robert T. Craver, Robert D.
Craver, Robert Martin, and Robert Draughn shall have entered into the
agreements described in Section 6.5.
(C) Covenants and Conditions: Buyer shall have performed in
all material respects all of his obligations and agreements and complied
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.
(D) Delivery of Closing Documents: Buyer shall execute and
deliver to Seller the following items and such items shall be reasonably
satisfactory in form to Seller:
(1) (Intentionally left blank)
(2) (Intentionally left blank)
(3) Consents, if any, with respect to Buyer's ability
to consummate the transactions contemplated herein.
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(4) Certified copy of corporate resolutions, and
if required by statute, shareholder approval authorizing
the execution of this Agreement and the consummation by
Buyer of the transactions of this Agreement.
(5) (Intentionally left blank)
(6) The Assignment and Assumption of Leases with
respect to the leases described on Schedule 4L and Exhibit
Z regarding personal property and equipment.
(7) The cash portion of the Purchase Price in
accordance with Section 3.1(A).
(8) (Intentionally left blank)
(9) (Intentionally left blank)
(10) The Assumption Agreement pertaining to the
Assumed Liabilities in the form attached as Exhibit M.
(11) A Certificate of Good Standing for Buyer from
the State of Minnesota.
(12) (Intentionally left blank)
(E) Other Items: All other documents, certificates,
instruments and writings required hereunder to be delivered by the Buyer
or that may reasonably be requested by Seller at or prior to the Closing.
11. Indemnification
11.1 General: The covenants, representations and warranties contained
in this Agreement shall survive the Closing, and shall continue for a period of
3 years after closing, except for issues covered under Section 5.13 which shall
continue for the shorter of 7 years or the applicable statute of limitations.
11.2 Indemnification of 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 with respect to products
sold by Buyer prior to the Closing Date alleging strict liability in tort,
express or implied warranty or contract seeking compensation for property
damage, bodily injury
24
<PAGE>
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 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 (Intentionally left blank)
11.4 Indemnification of Buyer: Buyer shall indemnify and hold
Seller harmless against and from any losses, claims, costs, demands, damages,
suits or liabilities, including, without limitation, in each case the costs,
expenses and attorney's fees reasonably incurred by Seller resulting from,
arising out of or based upon incident to: (i) any breach of any of the
representations, covenants, warranties provided in this Agreement, or any
misrepresentation in any certificate or document delivered to Seller
hereunder; or (ii) Buyer's ownership of the Assets and activities associated
with the conduct of the Business subsequent to Closing (including without
limitation Buyer's use of Seller's corporate names).
11.5 Indemnification Claims - Interest: Interest on any claim for
indemnification pursuant to this Section 11 shall accrue at a rate equal to
the reference rate as publicly announced from time to time by Norwest Bank
National Association, Minneapolis, Minnesota, from the date the claim arose
until the claim is satisfied by payment.
11.6 Matters Involving Third Parties: If any third party shall
notify any party hereto (the "Indemnified Party") with respect to any matter
(a "Third Party Claim") which may give rise to a claim for indemnification
against the other party hereto (the "Indemnifying Party") under this Section
11, then the Indemnified Party shall promptly notify the Indemnifying Party
thereof in writing; provided, however, that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party from any obligation hereunder unless (and then solely to
the extent) the Indemnifying Party thereby is prejudiced. The Indemnifying
Party and its legal representative(s) shall have, at the Indemnifying Party's
election, the right to compromise, defend or cure any such Third Party Claim
through counsel of the Indemnifying Party's own choosing at the Indemnifying
Party's own expense. In the event the Indemnifying Party intends to
compromise, defend or cure any such Third Party Claim, (a) the Indemnifying
Party shall notify the Indemnified Party of such intention within fourteen
(14) days after the Indemnifying Party's receipt of a notice from the
Indemnified Party of a Third Party Claim and (b) the Indemnified Party shall
cooperate in all respects with the Indemnifying Party in the compromise,
defense or cure of any such Third Party Claim.
In the event that the Indemnifying Party does not give notice
to the Indemnified Party hereunder of its intention to compromise, defend or
cure within such 14-day time period or does not in good faith compromise,
defend or cure after such notice is given, thus causing the Indemnified Party
to take action on its behalf to defend, compromise, cure or otherwise resolve
such Third Party Claim, then, in such event, the action taken by the
Indemnified Party shall be conclusively deemed to have, in all respects, been
necessary and reasonable and the Indemnifying
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Party shall be estopped from alleging to the contrary. In the event the
Indemnified Party shall have to take such action on its behalf, the
Indemnified Party may seek and demand from the Indemnifying Party payment of
all costs expended by the Indemnified Party with respect to such Third Party
Claim (including, without limitation, reasonable attorneys' fees and other
costs incurred by the Indemnified Party in defending, settling, compromising
or inquiring as to any such Third Party Claim or course of action). In any
event, all reasonable attorneys' fees and costs incurred by the Indemnified
Party with regard to notifying the Indemnifying Part of such Third Party
Claim shall also be included in this indemnity.
11.7 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 Seller, 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.
12. Remedies.
A. Seller's Remedies: If the transaction contemplated by this
Agreement is not consummated because of a default by Buyer of its
obligations hereunder, Seller shall be entitled, to pursue any and all
remedies which may be available to Seller, including without limitation,
equitable relief and money damages. In the event of any action to
enforce this Agreement, Buyer shall waive the defense that there is an
adequate remedy at law. 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 other remedy, Seller
shall be entitled to reimbursement by Buyer of the reasonable legal fees
and expenses incurred by Buyer.
B. Buyer's Remedies: If the transaction contemplated by this
Agreement is not consummated because of a default by Seller of its
obligations hereunder, Buyer shall be entitled, to pursue any and all
remedies which may be available to Buyer, including without limitation,
equitable relief and money damages. Buyer shall therefore be entitled to
any remedies which may be available, including money damages. In the
event of any action to enforce this Agreement, Seller shall waive the
defense that there is an adequate remedy at law. In the event of a
default by Seller and the filing of a lawsuit which results in a final
judgment not subject to further appeal in favor of Buyer for damages, or
other remedy, Buyer shall be entitled to reimbursement by Seller of the
reasonable legal fees and expenses incurred by Buyer.
12.1 Buyer shall not acquire any title to or right in the Assets until
Closing, and accordingly, all risk of loss with respect to the Assets shall be
borne by Seller prior to the Closing and thereafter by Buyer.
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12.2 At Closing, the assets shall be in substantially the same
condition as of the date of this Agreement except as otherwise provided herein,
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 which is mutually agreeable
to the Buyer and Seller, 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 Seller's Right to Terminate: If Seller is not obligated at or
prior to Closing to perform pursuant to this Agreement because of the failure of
any condition specified in Section 10, in addition to other rights it may have
at law or in equity, Seller may terminate this Agreement by delivery to Buyer of
a written notice of such termination.
13.3 Buyer's Right to Terminate: If Buyer is not obligated at or prior
to Closing to perform pursuant to his Agreement because of an event specified in
Section 4, or because of the failure of any condition specified in Section 9, in
addition to any other right it may have at law or in equity, Buyer may terminate
this Agreement by delivery to the Seller of written notice of such termination
at or prior to Closing.
13.4 Effect of Termination: With the exception of Sections 11.2 and
11.4 (Indemnities) and Section 14.11 and 4.3 (Confidentiality/Return of
Information), if this Agreement terminates in accordance with this Section 13,
it will have no further force or effect.
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 Minnesota.
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:
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If to Seller: K. Robert Draughn
Fuqua Capital Corporation
1201 W. Peachtree Street, N.W.
Suite 5000
Atlanta, GA 30309
With a copy to: Roy M. Jones
Fuqua Capital Corporation
1201 W. Peachtree Street, N.W.
Suite 5000
Atlanta, GA 30309
Robert M. Martin
2930 Westminster Circle
Atlanta, GA 30327
If to Buyer: Donald J. Drapeau
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
Phone: (612) 832-3165
Fax: (612) 832-3179
With a copy to: Rider, Bennett, Egan & Arundel
Attn: Barry Clegg
2000 Lincoln Center
333 South Seventh Street
Minneapolis, Minnesota 55402
M. Charles Reinhart
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
14.4 Entire Agreement and Counterparts: This Agreement, the exhibits
attached hereto, and schedules delivered pursuant to the provisions hereof, set
forth the entire agreement between Seller and Buyer relating to the transaction
contemplated herein, superseding any prior oral or written agreement or
understanding between them. This Agreement shall be amended or modified only by
written instrument signed by both parties.
14.5 Assignment: Seller hereby agrees that Buyer may assign its
rights, and delegate its responsibilities, under this Agreement, including to a
wholly-owned subsidiary corporation, in
28
<PAGE>
which case the Buyer shall remain obligated to 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 of 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. Notwithstanding the foregoing,
Buyer shall be responsible for payment of all sales and use taxes, if any,
resulting from the consummation of the transactions contemplated hereby.
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 Seller's assets
or the Shares.
14.9 Exhibits: The Exhibits and Schedules shall be deemed to be
incorporated by reference in this Agreement as if fully set forth herein.
14.10 Arbitration: Any dispute arising out of this Agreement shall be
resolved through binding arbitration pursuant to the Commercial Rules of the
American Arbitration Association. This provision is intended to be interpreted
broadly and any and all disputes related to this Agreement, whether pertaining
to the formation of, the interpretation of or the enforcement of this Agreement
shall be subject to arbitration. Any such arbitration shall be venued in
Minneapolis, Minnesota, and shall be governed by the laws of the State of
Minnesota. The prevailing party will be entitled to recover its reasonable
attorneys' fees and costs and the non-prevailing party will be responsible for
the costs of arbitration, including the fees of the arbitrator.
14.11. Confidentiality/Return of Information: Each party hereto agrees,
prior to and following the Closing or the event that the transaction herein
fails to close for any reason, to keep all non-public information ("Confidential
Information") regarding the other party strictly confidential, except as may be
required by law or in connection with any lawsuit between the parties.
14.12 No Warranties: Except for representations concerning Seller's
inventory as set forth in Section 5.9, all Assets purchased hereunder (whether
tangible or intangible) are purchased by Buyer "AS IS" and "WHERE IS".
14.14 Counterparts: This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which,
when taken together, shall constitute one and the same document.
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<PAGE>
14.15 Telefacsimile Signature: This Agreement may be executed by
telefacsimile signature and a telefacsimile signature shall constitute an
original signature for all purposes.
14.16 Removal of Assets. From and after the Closing Date, Buyer shall
pick up and remove the Purchased Assets from Seller's place of business as soon
as practicable. Seller shall preserve and maintain the purchased assets at
their locations as of the Closing Date for the benefit of Buyer for a period not
to exceed 60 days.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement
as of the date set forth in the first paragraph.
DUB SOUTH ACQUISITION, LLC VAUGHN COMMUNICATIONS, INC.
By \s\ K Robert Draughon By \s\ Donald J. Drapeau
----------------------------- ---------------------------------
Donald J. Drapeau
President
(Printed) K. Robert Draughon
----------------------
Its Chairman
----------------------------
Title Chairman
Address 1201 W. Peachtree St., NW
Suite 5000
Atlanta, GA 30309
Phone 404-815-4500
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Exhibit (10)(t)
EMPLOYMENT AND NONCOMPETITION AGREEMENT
This Employment and Noncompetition Agreement ("the Agreement") is made this 26th
day of September, 1995 by and among VAUGHN COMMUNICATIONS, INC., a Minnesota
corporation, its heirs, assigns, successors, or surviving corporation that
results from a merger ("Company") and DONALD J. DRAPEAU, an individual who
currently resides in Hopkins, Minnesota (hereinafter referred to as the
"Employee").
RECITALS
WHEREAS, the Employee has served as a key employee of the Company for many
years and on the date hereof holds the position of President/Chief Operating
Officer, and has been selected by the Board of Directors of the Company to
receive the title and responsibility of Chief Executive Officer subject to a
successful transition; and
WHEREAS, the Company desires to retain the services of the Employee in
order to assure continuity of management and to assist the Company in operating
the business, and the Employee desires to be retained by the Company for such
purposes upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the promises and
mutual covenants set forth in this Agreement, the Company and the Employee agree
and contract as follows:
1. EMPLOYMENT SERVICES. The Company hereby employs the Employee to serve as
President with responsibility for managing the Company's businesses of the Video
Tape Duplication Division (currently at approximately $55 million in revenue and
500 employees) and its national (currently 18 location) scope, the Broadcast
Rental Division (currently at approximately $1.2 million in revenue and 12
employees), (the "Services"). It is understood that regardless of
<PAGE>
whether the Company shall continue as a separate corporate entity or through
acquisition, merger or other transaction no longer be a separate legal
entity, that Employee as to these businesses, shall have the duties,
responsibilities and authority substantially the same as those of a
President/Chief Operating Officer of a business corporation pursuant to the
Minnesota Business Corporations Act except as may be determined by provisions
of this Agreement. It is further understood that the particular businesses
of the Company managed by Employee as President/Chief Operating Officer may
change from time to time, and Company and Employee agree that such changes
may occur, as long as the duties, responsibilities and authority are
substantially equivalent to those described herein, or Employee consents in
writing to such new duties, responsibilities and authority, which consent
Employee will not unreasonably withhold. Employee hereby agrees to provide,
and to hold himself available to provide the Services as his full-time
occupation to the exclusion of other full or part time services to any other
party during the term of this Agreement, except such other part-time services
rendered by Employee during nonworking hours, including during nights and
weekends, or while on personal leaves or vacation. The Employee hereby
accepts such employment and shall in good faith perform, for and on behalf
and in the best interests of the Company, the Services during the term of
this Agreement.
2. TERM. Except as provided in Section 4 hereof the initial term of this
Agreement shall be three (3) years commencing on the Effective Date hereof
September 26, 1995, and thereafter beginning with the third anniversary of the
Effective Date, September 26, 1998, will automatically renew each year on the
anniversary of that date for additional one (1) year terms, unless 90 days
preceding such third anniversary date and each subsequent anniversary date for
successive one-year terms, either party gives written notice to the other of
nonrenewal, in which case no further automatic extensions shall occur.
2
<PAGE>
3. COMPENSATION/BENEFITS. During the initial and subsequent renewal terms of
this Agreement, the Employee shall receive compensation from the Company for the
Services set forth in Section 1 as follows:
(a) BASE SALARY COMPENSATION. In consideration of Employee's services,
Employee will be paid, during the initial term of this Agreement, no less than
the following: $120,000 for calendar year 1996; (the "Salary"). The Salary
will be payable in accordance with the Company's customary payroll practices for
its executive officers, but not less than monthly. The Employee's Salary shall
be reviewed by the Company and the Employee at least annually for increase
consistently with general compensation changes Company-wide and applicable to
the executive officers as a group.
(b) CAR ALLOWANCE. The Company agrees to pay the Employee a car allowance
of no less than $4,800 annually, payable in accordance with the Company's
payroll practices but not less than monthly.
(c) BONUS. The Company will continue to offer Employee a bonus
compensation program substantially in parity with that offered to all other
senior executives of the Company, and including the use of substantially similar
percentage of salary, minimum, target and maximum bonus amounts, or performance,
achievement, and other standards.
(d) STOCK OPTIONS. The Employee shall be entitled to receive such stock
options as are available and offered from time to time to other senior
executives of the Company consistent with Company Policy.
(e) EXPENSE REIMBURSEMENT. The Company agrees to reimburse the Employee
for all reasonable and necessary business expenses incurred by the Employee
during the performance of his Services pursuant to this Agreement. The Employee
agrees to provide to the Company
3
<PAGE>
reasonable and customary documentation of any expenses for which the Employee
seeks reimbursement from the Company pursuant to this Agreement.
(f) OTHER Benefits. The Employee shall be entitled to participate in such
compensation and retirement plans and receive such insurance, vacation, profit
sharing, retirement, and other benefits ("Other Benefits") as are available to
senior executives of the Company consistent with Company policy, provided
however, during Employee's employment under this Agreement, Employee shall be
provided and receive at least such other benefits as he is provided and receives
as of the Effective Date of this Agreement, or in lieu thereof such substitute
plans and benefits as provide him with substantially equivalent Other Benefits.
4. TERMINATION. This Agreement may be terminated only on the terms and
conditions specified in this Section upon the prior written notice to the other
party as specified below. In the event of the termination of this Agreement,
the Employee shall be entitled to compensation in accordance with the following
provisions.
(a) TERMINATION BY COMPANY FOR CAUSE. The Company may terminate this
Agreement for "Cause," as defined below, immediately upon written notice to
Employee, and upon such termination for Cause, Employee shall cease to provide
Services hereunder as directed by the Chairman of the Board of Directors upon
receipt of notice of termination, provided that Employee may not be required to
continue Services without compensation or for more than 60 days following such
notice of termination, without his written consent thereto, provided further
that if the matter must first be determined by arbitration or is subject to cure
by the Employee compensation will be continued until such determination or
failure to cure takes effect as termination. "Cause" shall be defined as (i) a
breach by the Employee of the noncompetition provisions set forth in Section 5
hereof or the restrictions on use of Confidential Information set
4
<PAGE>
forth in Section 6 hereof or substandard performance of a material part of
the Services as required in Section 1 hereof as determined by a panel of
three arbitrators of the American Arbitration Association in Minneapolis,
Minnesota mutually chosen by Employee and Company and after written notice of
such alleged breach by Company to Employee and Employee's failure to cure
such alleged substandard performance or such alleged breach within 30 days
thereof (if such alleged breach is subject to cure), or (ii) willful and
gross theft by the Employee from the Company, or (iii) conviction of the
Employee of any crime punishable as a felony.
(b) TERMINATION BY COMPANY OTHER THAN FOR CAUSE OR NON-RENEWAL BY THE
COMPANY. In the event the Company terminates this Agreement other than for
Cause or the Company elects to not renew the term of this Agreement pursuant to
Section 2 hereof the Company will pay as a severance consideration payable
monthly at the rate in effect prior to termination all of the following: (i)
all Salary for the unexpired term of the Agreement in accordance with the
provisions of Section 3(a) above; (ii) all car allowance for the unexpired term
of the Agreement in accordance with the provisions of Section 3(b) above; (iii)
a bonus equal to one-fortyeighth (1/48) of the sum of the bonus payouts made in
the preceding three (3) years plus bonus due at the end of the year in which
termination occurs, estimated during the year and adjusted at year end, times
the number of months remaining in the unexpired term of the Agreement; (iv) as a
lump sum, all expense reimbursements due the Employee or submitted by the
Employee to the Company within 15 days after the notice of termination in
accordance with the provisions of Section 3(e) above; and (v) a severance
payment which, when added to 4(b) (i), 4(b)(ii), and 4(b)(iii) above, will equal
one year's compensation amounting to the sum of the annualized amounts of items
4(b)(i), plus 4(b)(ii), plus 4(b)(iii) above.
5
<PAGE>
(c) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate
this Agreement for "Good Reasons," as defined below, upon ninety (90) days'
written notice to the Company. In the event Employee terminates this Agreement
for "Good Reason," the Company will pay monthly at the rate paid prior to
termination all of the following: (i) all Salary for the unexpired term of the
Agreement in accordance with the provisions of Section 3(a) above; (ii) all car
allowance for the unexpired term of the Agreement in accordance with the
provisions of Section 3(b) above, (iii) a bonus equal to one-fortyeighth (1/48)
of the sum of the bonus payouts made in the preceding three (3) years plus bonus
due at the end of the year in which termination occurs, estimated during the
year and adjusted at year end times the number of months remaining in the
unexpired term of the Agreement; (iv) all expense reimbursements due the
Employee or submitted by the Employee to the Company within 15 days after the
notice of termination in accordance with the provisions of Section 3(e) above;
and (v) a severance payment which, when added to 4(b) (i) 4(b)(ii), and
4(b)(iii) above, will equal one year's compensation amounting to the sum of the
annualized amounts of items 4(b)(i), plus 4(b)(ii), plus 4(b)(iii) above. As
used herein, "Good Reason" shall be defined as: (i) a diminishment of
Employee's responsibilities, duties and authority as provided in this Agreement;
(ii) a reduction in the Employee's Salary or Bonus as provided this Agreement;
(iii) the failure by the Company to provide Employee with all plans, programs or
other benefits of the Company in accordance with Section 3(b), (d), (e) and (f);
(iv) relocation of Employee's office outside of the seven (7) county
Minneapolis/St. Paul metropolitan area; (v) failure of any successors, assigns,
or surviving corporation or entity to assume and faithfully perform all of the
obligations of the Company under this Agreement as provided in Section 7(h)
hereof; or (vi) the Company commission of any other material breach of
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<PAGE>
this Agreement, which is not remedied by the Company in a reasonable period
(but not less than ninety (90) days) after its receipt of written notice
thereof from Employee.
(d) TERMINATION FOR DISABILITY OF EMPLOYEE. In the event that the
Employee becomes totally disabled, the Company may terminate the Agreement, and
the Employee shall receive all of the Compensation and Benefits described in
Section 3 hereof for one hundred eighty (180) days after notice of termination
is delivered to Employee.
(e) TERMINATION FOR DEATH OF EMPLOYEE. In the event of the death of the
Employee, the Agreement will automatically terminate and no compensation will be
paid from the date of death except that expense reimbursements and earned but
unpaid bonus compensation will be paid to the Employee's estate.
(f) TERMINATION BY EMPLOYEE OTHER THAN FOR GOOD REASON. The Employee may
terminate this Agreement upon sixty (60) days written notice to the Company.
Compensation provided under Section 3 above will cease upon such termination.
(g) TERMINATION NOT TO AFFECT NONCOMPETITION PROVISION. The termination
of this Agreement, by either party hereto, shall not affect the prohibition on
competition by Employee set forth in Section 5 hereof.
5. NONCOMPETITION. Employee agrees that, during the term of this Agreement
and the five (5) year period following the termination of this Agreement, the
Employee will not directly or indirectly, alone or as partner, officer,
director, advisor, consultant, or employee of any other company or entity,
engage in any, commercial activity in competition with any part of the Company's
business in those states in which the Company conducted business during the term
of this Agreement or as of the date of such termination of this Agreement, or
with any part of the Company's contemplated business with respect to which the
Employee has Confidential
7
<PAGE>
Information as defined below and governed by Section 6 hereof. In addition,
the Employee recognizes that the Company's work force constitutes an
important and vital aspect of its business. The Employee agrees that during
the term of this Agreement and for the five (5) year period following the
expiration or termination of this Agreement (whether terminated early,
whether for cause or not for cause), he shall not solicit, or assist 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.
6. CONFIDENTIAL INFORMATION. The Employee will not, during or following the
termination of this Agreement, for any reason use or disclose, other than in
connection with rendering of Services hereunder on behalf of the Company, any
Confidential Information to any person not employed by the Company or not
authorized by the Company to receive such Confidential Information, without the
prior written consent of the Company. "Confidential Information" means
information that is proprietary to the Company or proprietary to others and
entrusted to the Company. Confidential Information includes, but is not limited
to, customer lists, information relating to business plans and to business that
is conducted or anticipated to be conducted, and to past or current or
anticipated products. Confidential Information also includes, without
limitation, information concerning research, development, purchasing,
accounting, computer software, selling, and services. The Employee will use
reasonable and prudent care in following written Company procedures or
instructions furnished to Employee to safeguard and protect and prevent the
unauthorized use and disclosure of Confidential Information. The obligations
under this Section 6 will not apply to (i) any Confidential Information that is
now or becomes available to the public through no breach of the Employees'
obligation of confidentiality; or (ii) the Employee's disclosure of any
Confidential Information required by law or judicial or
8
<PAGE>
administrative process. ubject to the requirements of the Securities Exchange
Act of 1934, nothing herein shall create a contractual restriction of
Employee's ability to sell, purchase, or effect transactions in the Company's
securities.
7. MISCELLANEOUS
(a) MODIFICATION. This Agreement supersedes all prior agreements and
understandings between the parties relating to the subject matter herein. No
modification, termination or attempted waiver of any provision of this Agreement
shall be valid unless in writing signed by the party against whom enforcement is
sought.
(b) ENFORCEABILITY AND SEVERABILITY. If any term of this Agreement is
adjudicated to be void, voidable, invalid or unenforceable for any reason, such
term shall be automatically severed from all other terms of this Agreement,
which will continue in full force and effect. In the event any term is
adjudicated to be overbroad as written, such term shall be automatically amended
to narrow its application to the extent necessary to make such term enforceable.
(c) GOVERNING LAW. This Agreement and all remedies at law or in equity
shall be construed and in force in accordance with the laws of the State of
Minnesota.
(d) PREVAILING PARTY. The prevailing party in any suit, proceeding,
hearing or arbitration shall be entitled to recover from the non-prevailing
party all costs that the prevailing party has incurred as a result of the suit,
proceeding, hearing or arbitration, including, without limitation, reasonable
attorneys' fees, filing fees, arbitrator's fees, expert witness fees, travels
costs, and all other reasonable costs and expenses incurred in the enforcement
of this Agreement. In the event that neither party shall prevail on all of its
claims or all of its defenses, then such costs and expenses shall be allocated
and awarded between the parties as determined by the arbitrator or the court.
9
<PAGE>
(e) NOTICES. Any Notice or other communication required or permitted
under this Agreement shall, in order to be effective, be in writing and be given
by personal service or by prepaid, certified United States Mail or Federal
Express Courier, return receipt requested, addressed to the applicable party at
the address for such party set forth on the signature page of this Agreement.
Notice by service is effective upon service and notice by mail or courier is
effective upon mailing. Either party may change the address to which notices
for such party are to be sent by so notifying the other party in the manner set
forth above.
(f) CAPTIONS. The captions and headings contained in this Agreement are
for convenience only and do not define, limit, construe, or give full notice of
the contents of the provisions of this Agreement.
(g) ARBITRATION. Any controversy or claim arising out of this Agreement,
or any breach thereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and
judgment upon the award may be entered in any court having jurisdiction. Any
such arbitration shall be in the State of Minnesota in the seven-county Twin
Cities' metropolitan area. In the event the Company shall dispute and submit to
arbitration hereunder the Employee's claims regarding the renewal of this
Agreement pursuant to Section 2 hereof, or the termination of this Agreement
pursuant to Section 4 hereof, or the amounts to be received by the Employee
under Section 4 hereof, and the Company shall withhold from Employee the
payments or benefits provided under Section 4 hereof, the Company shall continue
to provide Employee with all compensation and benefits, at his then current
level, until an award in arbitration is rendered, and, if requested by the
Chairman of the Board of Directors, the Employee shall be obligated to continue
his employment, perform any services for, and be present at the Company.
10
<PAGE>
(h) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company, its successors and assigns, and any corporation or entity with which
the Company may be merged or by which its assets, stock, operations, business,
ownership or control are acquired, and any such corporation or entity, as a
condition to the completion of such transaction with the Company, shall
absolutely, unconditionally and expressly in writing assume all of the Company's
obligations to faithfully perform this Agreement, and the Employee shall be
provided with a copy of such written assumption agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective as of the date first set forth above.
VAUGHN COMMUNICATIONS, INC. EMPLOYEE
By /S/ E.D. Willette /S/ Donald J. Drapeau
---------------------------- ----------------------------
Its CEO Donald J. Drapeau
----------------------------
5050 West 78th Street 201 Oakwood
Minneapolis, MN 55435 Hopkins, MN 55343
11
<PAGE>
Exhibit (10)(u)
ADDENDUM NO. 1 TO
EMPLOYMENT AGREEMENT
THIS ADDENDUM is made and entered into as of the 13th day of March,
1998, by and between Vaughn Communications, Inc., a Minnesota corporation
(the "Company") and Donald J. Drapeau (the "Employee").
RECITALS
A. The Company and Employee have entered into an Employment Agreement
dated September 26, 1995 (the "Employment Agreement").
B. The Board of Directors of the Company have authorized supplementing
the terms and conditions of the Employment Agreement to authorize the payment
of a change of control bonus to Employee.
C. Section 7(a) of the Employment Agreement reserved the right of the
Company and Employee to modify the terms of the Employment Agreement in a
writing signed by the Company and Employee, and the Company and Employee are
desirous of supplementing the terms of the Employment Agreement as provided
in this Addendum.
D. Capitalized terms used in this Addendum shall have the meanings
assigned to them in the Employment Agreement, unless otherwise defined herein.
AGREEMENT
In consideration of the above recitals and of the mutual agreements set
forth in this Addendum, the parties agree as follows:
1. ADDITION OF SECTION 8. The Employment Agreement is hereby modified to
add the following as Section 8 of the Employment Agreement:
"8. CHANGE OF CONTROL PAYMENT.
(a) PAYMENT. The Company and the Employee recognize that the
possibility of a "Change of Control" of the Company exists and that such
possibility, and the uncertainty and questions which it may raise among
management of the Company, may result in the departure or distraction of
the Employee to the detriment of the Company and its stockholders. In
order to induce the Employee to stay in the employ of the Company in the
event that the Company determines to pursue a Change of Control of the
Company and to use his best efforts to bring about such a Change of
Control, the Company agrees to pay the Employee the following: (i)
$100,000 in one lump sum payment which shall be paid contemporaneously with
the consummation of such Change of Control transaction; provided, however,
the Employee is employed by the
<PAGE>
Company at the time of consummation of such Change of Control and (ii)
an additional $100,000 in one lump sum payment which shall be paid on
the date one year after consummation of such Change of Control;
provided, however, that either (iii) the Employee has been employed by
the Company (or its successor entity) during all of such one year period
or (iv) the Employee's employment with the Company (or its successor
entity) was terminated during such one year period by the Company (or
its successor entity) other than for Cause or due to a nonrenewal of
this Agreement or by the Employee for Good Reasons pursuant to Section
4(c). The amounts payable under this Section 7(a) shall be payable to
the Employee, at the option of the Company, in cash, or by cashier's or
certified check or by wire transfer.
(b) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall mean any one of the following: (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934) is or becomes the "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 execution of this Agreement, the
individuals who as of the date of the execution of this Agreement
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."
2. SCOPE. This Addendum is a supplement to the Employment Agreement, which is
by reference made a part hereof, and all of the terms, conditions and provisions
thereof, unless specifically modified in this Addendum, are in full force and
effect.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Addendum as of
the date first above written, which shall be the effective date of this
Addendum.
EMPLOYEE: VAUGHN COMMUNICATIONS, INC.
/S/ Donald J. Drapeau By /S/ E.D. Willette
- ------------------------ --------------------------
Donald J. Drapeau Its CEO
-----------------------
3
<PAGE>
Exhibit (10)(v)
1998 EMPLOYMENT AND NONCOMPETITION AGREEMENT
This Employment and Noncompetition Agreement (the "Agreement") is made
this 13th ______day of March _____, 1998 by and between VAUGHN
COMMUNICATIONS, INC., a Minnesota corporation, its heirs, assigns,
successors, or surviving corporation that results from a merger ("Company")
and E. DAVID WILLETTE, an individual who currently resides in Seattle,
Washington (hereinafter referred to as the "Employee").
RECITALS
WHEREAS, the Employee is the founder of the present day Company and on
the date hereof holds the position of Chief Executive Officer and Chairman of
the Board of Directors of the Company; and
WHEREAS, the Company desires to retain the services of the Employee in
order to assure continuity of management and to assist the Company in
operating the business, and the Employee desires to be retained by the
Company for such purposes upon the terms and conditions set forth in this
Agreement; and
WHEREAS, in consideration of, and as an inducement to, the Company
agreeing to enter into this Agreement, which the Employee agrees is
beneficial to him as it provides substantial additional rights to the
Employee, including but not limited to, the right to receive severance
payments, the Employee agrees not to compete with the Company in accordance
with the terms and conditions set forth in this Agreement; and
WHEREAS, the Employee acknowledges and agrees that he has been advised
by the Company to have this Agreement reviewed by legal counsel of his own
choosing, and that he has consulted and conferred with such legal counsel to
the extent he deems advisable before signing this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of the promises and
mutual covenants set forth in this Agreement, the Company and the Employee agree
and contract as follows:
1. EMPLOYMENT SERVICES. The Company hereby employs the Employee to serve
as Chief Executive Officer with responsibility for managing all of the Company's
businesses (the "Services"). It is understood that regardless of whether the
Company shall continue as a separate corporate entity or through acquisition,
merger or other transaction no longer be a separate legal entity, that Employee
as to these businesses, shall have the duties, responsibilities and authority
substantially the same as those of a Chief Executive Officer of a business
corporation pursuant to the Minnesota Business Corporations Act except as may be
determined by provisions of this Agreement. It is further understood that the
particular businesses of the Company managed by Employee as Chief Executive
Officer may change from time to time, and Company and Employee agree that such
changes may occur, as long as the duties, responsibilities and authority are
substantially equivalent to those described herein, or Employee consents in
writing to such new duties, responsibilities and authority, which consent
Employee will not unreasonably withhold. Employee hereby agrees to provide, and
to hold himself available to provide the Services as his full-time occupation to
the exclusion of other full or part time services to any other party during the
term of this Agreement. The Employee hereby accepts such employment and shall
in good faith perform, for and on behalf and in the best interests of the
Company, the Services during the term of this Agreement.
2. TERM. Except as provided in Section 4 hereof the initial term of this
Agreement shall be three (3) years commencing on the effective date hereof,
April 1, 1998 (the "Effective Date"), and thereafter beginning with the third
anniversary of the Effective Date, will
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<PAGE>
automatically renew each year on the anniversary of that date for additional
one (1) year terms, unless 90 days preceding such third anniversary date and
each subsequent anniversary date for successive one-year terms, either party
gives written notice to the other of nonrenewal, in which case no further
automatic extensions shall occur.
3. COMPENSATION/BENEFITS. During the initial and subsequent renewal
terms of this Agreement, the Employee shall receive compensation from the
Company for the Services set forth in Section 1 as follows:
(a) BASE SALARY COMPENSATION. In consideration of Employee's
services, Employee will be paid, during the initial term of this Agreement,
no less than the following: $200,000 for calendar year 1998 (the
"Salary"). The Salary will be payable in accordance with the Company's
customary payroll practices for its executive officers, but not less than
monthly. The Employee's Salary shall be reviewed by the Company and the
Employee at least annually for increase in a manner consistent with general
compensation changes Company-wide and applicable to the executive officers
as a group.
(b) CAR. The Company agrees to provide the Employee with and pay the
expense for an appropriate car for his business and other use.
(c) BONUS. The Company will continue to offer Employee a bonus
compensation program substantially in parity with that offered to all other
senior executives of the Company, and including the use of substantially
similar percentage of salary, minimum, target and maximum bonus amounts, or
performance, achievement, and other standards.
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<PAGE>
(d) STOCK OPTIONS. The Employee shall be entitled to receive such
stock options as are available and offered from time to time to other
senior executives of the Company consistent with Company policy.
(e) EXPENSE REIMBURSEMENT. The Company agrees to reimburse the
Employee for all reasonable and necessary business expenses incurred by the
Employee during the performance of his Services pursuant to this Agreement.
The Employee agrees to provide to the Company reasonable and customary
documentation of any expenses for which the Employee seeks reimbursement
from the Company pursuant to this Agreement.
(f) OTHER BENEFITS. The Employee shall be entitled to participate in
such compensation and retirement plans and receive such insurance,
vacation, profit sharing, retirement, and other benefits ("Other Benefits")
as are available to senior executives of the Company consistent with
Company policy, provided however, during Employee's employment under this
Agreement, Employee shall be provided and receive at least such other
benefits as he is provided and receives as of the Effective Date, or in
lieu thereof such substitute plans and benefits as provide him with
substantially equivalent Other Benefits.
4. TERMINATION. This Agreement and the Employee's employment with the
Company may be terminated only on the terms and conditions specified in this
Section upon the prior written notice to the other party as specified below. In
the event of the termination of this Agreement and the Employee's employment
with the Company, the Employee shall be entitled to compensation in accordance
with the following provisions.
(a) TERMINATION BY COMPANY FOR CAUSE. The Company may terminate this
Agreement and the Employee's employment with the Company for "Cause," as
defined
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<PAGE>
below, immediately upon written notice to Employee, and upon such
termination for Cause, Employee shall cease to provide Services hereunder
as directed by the Board of Directors upon receipt of notice of
termination, unless the matter must first be determined by arbitration or
is subject to cure by the Employee. "Cause" shall be defined as (i) a
breach by the Employee of the noncompetition provisions set forth in
Section 5 hereof or the restrictions on use of Confidential Information set
forth in Section 6 hereof or substandard performance of a material part of
the Services as required in Section 1 hereof, as determined by a panel of
three arbitrators of the American Arbitration Association in Minneapolis,
Minnesota mutually chosen by Employee and Company and after written notice
of such alleged breach by Company to Employee and Employee's failure to
cure such alleged breach or alleged substandard performance within 30 days
thereof (if such alleged breach is subject to cure), or (ii) willful and
gross theft by the Employee from the Company, or (iii) conviction of the
Employee of any crime punishable as a felony.
(b) TERMINATION BY COMPANY OTHER THAN FOR CAUSE OR NON-RENEWAL BY THE
COMPANY. The Company may terminate this Agreement and the Employee's
employment with the Company upon ninety (90) days' written notice to the
Employee. In the event the Company terminates this Agreement and the
Employee's employment with the Company under this Section 4(b), or the
Company does not renew this Agreement at the end of its initial term or any
renewal term, the Company will pay as a severance consideration payable
monthly at the rate in effect prior to termination all of the following:
(i) all Salary for the unexpired initial or renewal term of the Agreement,
as the case may be, in accordance with the provisions of Section 3(a)
above; (ii) the expenses for continued use of a car for the unexpired
initial or renewal term of the Agreement, as the case may be, in
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<PAGE>
accordance with the provisions of Section 3(b) above; (iii) a bonus
equal to one-fortyeighth (1/48) of the sum of the bonus payouts made in
the preceding three (3) years plus bonus due at the end of the year in
which termination occurs, estimated during the year and adjusted at year
end, times the number of months remaining between the prior fiscal year
end and the unexpired initial or renewal term of the Agreement, as the
case may be; (iv) as a lump sum, all expense reimbursements due the
Employee or submitted by the Employee to the Company within 45 days
after the notice of termination in accordance with the provisions of
Section 3(e) above; (v) a severance payment which, when added to 4(b)(i)
above, will equal three year's salary at the salary rate in effect on
the date of termination; (vi) continuance of medical insurance coverage
in force on the date of termination (or comparable medical insurance
coverage if the Company is not able to continue the Employee's coverage
under the Company's medical insurance plan in force on the date of
termination) until the later of the date the Employee is provided
medical insurance by a new employer or three years after the date of
termination; and (vii) all granted but unvested stock options shall
immediately become fully vested and exercisable through the expiration
date of such options. The Company agrees to recommend to the
Compensation Committee of the Board of Directors that they take all
appropriate action to amend the terms of stock option agreements with
the Employee to reflect the provisions of Sections 4(b)(vii) and
4(c)(vii). The Company has no reason to believe that its recommendation
will not be followed by the Compensation Committee.
(c) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may
terminate this Agreement and his employment with the Company for "Good
Reasons," as defined below, upon ninety (90) days' written notice to the
Company. In the event Employee
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<PAGE>
terminates this Agreement and his employment with the Company for "Good
Reason," the Company will pay monthly at the rate paid prior to
termination all of the following: (i) all Salary for the unexpired
initial or renewal term of the Agreement, as the case may be, in
accordance with the provisions of Section 3(a) above; (ii) the expenses
for continued use of the car for the unexpired initial or renewal term
of the Agreement, as the case may be, in accordance with the provisions
of Section 3(b) above; (iii) a bonus in accordance with the provisions
of Section 4(b)(iii) above; (iv) all expense reimbursements due the
Employee or submitted by the Employee to the Company within 45 days
after the notice of termination in accordance with the provisions of
Section 3(e) above; (v) a severance payment which, when added to 4(c)(i)
above, will equal three year's salary at the salary rate in effect on
the date of termination; (vi) continuance of medical insurance coverage
in force on the date of termination (or comparable medical insurance
coverage if the Company is not able to continue the Employee's coverage
under the Company's medical insurance plan in force on the date of
termination) until the later of the date the Employee is provided
medical insurance by a new employer or three years after the date of
termination; and (vii) immediate vesting of all stock options in
accordance with the provisions of Section 4(b)(vii) above. As used
herein, "Good Reason" shall be defined as: (vii) a diminishment of
Employee's responsibilities, duties and authority as provided in this
Agreement; (viii) a reduction in the Employee's Salary or Bonus as
provided this Agreement; (ix) the failure by the Company to provide
Employee with all plans, programs or other benefits of the Company in
accordance with Section 3(b), (d), (e) and (f); (x) failure of any
successors, assigns, or surviving corporation or entity to assume and
faithfully perform all of the obligations of the Company under this
Agreement as provided
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<PAGE>
in Section 7(h) hereof; (xi) the Company commission of any other
material breach of this Agreement, which is not remedied by the Company
in a reasonable period (but not less than ninety (90) days) after its
receipt of written notice thereof from Employee; or (xii) Employee's
resignation as an employee of the Company within one year of a "change
of control". As used in this Agreement, a "change of control" shall be
deemed to have occurred if (xiii) any "person" other than the Employee,
(as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934) is or becomes the "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; (ixv) at any time after the
execution of this Agreement, individuals who as of the date of the
execution of this Agreement 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; (xv) 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 (xvi) the
consummation of
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<PAGE>
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.
(d) TERMINATION FOR DISABILITY OF EMPLOYEE. In the event that the
Employee becomes totally disabled, the Company may terminate this Agreement
and the Employee's employment with the Company, and the Employee shall
receive all of the Compensation and Benefits described in Section 3 hereof
for one year after notice of termination is delivered to Employee.
(e) TERMINATION FOR DEATH OF EMPLOYEE. In the event of the death of
the Employee, this Agreement will automatically terminate thirty (30) days'
from the date of death and no compensation will be paid after the date of
termination except that expense reimbursements and earned but unpaid bonus
compensation will be paid to the Employee's estate. Provisions of the
Restated and Amended Stock Put Redemption Agreement dated June 24, 1992
between the Company and the Employee will be determined separately from
this Agreement.
(f) TERMINATION BY EMPLOYEE FOR OTHER THAN GOOD REASON. The Employee
may terminate this Agreement and his employment with the Company upon sixty
(60) days' written notice to the Company. Compensation provided under
Section 3 above will cease upon such termination.
(g) TERMINATION NOT TO AFFECT NONCOMPETITION AND CONFIDENTIALITY
PROVISIONS. The termination of this Agreement and the Employee's
employment with the Company, by either party hereto, shall not affect the
prohibition on competition by Employee set forth in Section 5 hereof or the
confidentiality obligation of Employee set forth in Section 6 hereof.
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<PAGE>
5. NONCOMPETITION.
(a) NONCOMPETE. Employee agrees that, during the term of this
Agreement and his employment with the Company and the five (5) year period
following the termination of this Agreement and his employment with the
Company, the Employee will not directly or indirectly, alone or as partner,
officer, director, advisor, consultant, or employee of any other company or
entity, engage 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 this Agreement or as of the date of such
termination of this Agreement and his employment with the Company, or with
any part of the Company's contemplated business with respect to which the
Employee has Confidential Information as defined below and governed by
Section 6 hereof. In addition, the Employee recognizes that the Company's
work force constitutes an important and vital aspect of its business. The
Employee agrees that during the term of this Agreement and his employment
with the Company and for the five (5) year period following the expiration
or termination of this Agreement and his employment with the Company
(whether terminated early, whether for cause or not for cause), he shall
not solicit, or assist 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.
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<PAGE>
(b) NONCOMPLIANCE. The Company shall not be required to make
payments to the Employee pursuant to Sections 4(b) or 4(c) while the
Company has, in its sole discretion, a good faith basis to believe that the
Employee is competing with the Company in violation of Section 5(a). Any
payments due during the period of competition mentioned above shall be made
to the Company to be held by the Company in a segregated account and not
paid over to the Employee until the earlier of the date the Employee
resumes compliance (whether voluntarily, by court order or otherwise) with
the noncompete provision set forth in Section 5(a) or the expiration date
of the noncompete provision set forth in Section 5(a). No interest shall
accrue on payments held by the Company pursuant to this Section 5(b). Good
faith compliance with the payment provisions of this Section 5(b) by any
party to this Agreement shall not be construed as a breach of this
Agreement by such party.
(c) REMEDIES. It is agreed that it would be difficult or impossible
to ascertain the measure of damages to the Company resulting from any
breach of Section 5(a), and that injury to the Company from any such breach
may be irremediable, and that money damages therefor may be an inadequate
remedy. Notwithstanding anything to the contrary in this Agreement, in the
event of a breach or threatened breach by the Employee of the provisions of
Section 5(a), the Company shall be entitled to specific performance of
Section 5(a) and may seek a temporary or permanent injunction to enjoin the
Employee from breaching Section 5(a), in addition to any other rights or
remedies that the Company may have available under applicable law for such
breach or threatened breach, including the recovery of damages.
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<PAGE>
6. CONFIDENTIAL INFORMATION. The Employee will not, during or following
the termination of this Agreement and his employment with the Company, for any
reason use or disclose, other than in connection with rendering of Services
hereunder on behalf of the Company, any Confidential Information to any person
not employed by the Company or not authorized by the Company to receive such
Confidential Information, without the prior written consent of the Company.
"Confidential Information" means information that is proprietary to the Company
or proprietary to others and entrusted to the Company. Confidential Information
includes, but is not limited to, customer lists, information relating to
business plans and to business that is conducted or anticipated to be conducted,
and to past or current or anticipated products. Confidential Information also
includes, without limitation, information concerning research, development,
purchasing, accounting, computer software, selling, and services. The Employee
will use reasonable and prudent care in following written Company procedures or
instructions furnished to Employee to safeguard and protect and prevent the
unauthorized use and disclosure of Confidential Information. The obligations
under this Section 6 will not apply to (i) any Confidential Information that is
now or becomes available to the public through no breach of the Employees'
obligation of confidentiality; or (ii) the Employee's disclosure of any
Confidential Information required by law or judicial or administrative process.
Subject to the requirements of the Securities Exchange Act of 1934, nothing
herein shall create a contractual restriction of Employee's ability to sell,
purchase, or effect transactions in the Company's securities.
7. MISCELLANEOUS
(a) MODIFICATION. This Agreement supersedes all prior agreements and
understandings between the parties relating to the subject matter herein.
Notwithstanding the foregoing, the Company and the Employee acknowledge and
agree that the Amended
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and Restated Stock Put Redemption Agreement dated June 24, 1992 between
the Company and the Employee remains in full force and effect. No
modification, termination or attempted waiver of any provision of this
Agreement shall be valid unless in writing signed by the party against
whom enforcement is sought.
(b) ENFORCEABILITY AND SEVERABILITY. If any term of this Agreement
is adjudicated to be void, voidable, invalid or unenforceable for any
reason, such term shall be automatically severed from all other terms of
this Agreement, which will continue in full force and effect. In the event
any term is adjudicated to be overbroad as written, such term shall be
automatically amended to narrow its application to the extent necessary to
make such term enforceable, and such term shall be enforced as so amended.
(c) GOVERNING LAW. This Agreement and all remedies at law or in
equity shall be construed and enforced in accordance with the laws of the
State of Minnesota.
(d) PREVAILING PARTY. The prevailing party in any suit, proceeding
or hearing shall be entitled to recover from the non-prevailing party all
costs that the prevailing party has incurred as a result of the suit,
proceeding, or hearing, including, without limitation, reasonable
attorneys' fees, filing fees, arbitrator's fees, expert witness fees,
travels costs, and all other reasonable costs and expenses incurred in the
enforcement of this Agreement. In the event that neither party shall
prevail on all of its claims or all of its defenses, then such costs and
expenses shall be allocated and awarded between the parties as determined
by the arbitrator or the court.
(e) NOTICES. Any Notice or other communication required or permitted
under this Agreement shall, in order to be effective, be in writing and be
given by personal service or by prepaid, certified United States Mail or
Federal Express Courier, return
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receipt requested, addressed to the applicable party at the address for
such party set forth on the signature page of this Agreement. Notice by
service is effective upon service and notice by mail or courier is
effective upon mailing. Either party may change the address to which
notices for such party are to be sent by so notifying the other party in
the manner set forth above.
(f) CAPTIONS. The captions and headings contained in this Agreement
are for convenience only and do not define, limit, construe, or give full
notice of the contents of the provisions of this Agreement.
(g) ARBITRATION. Any controversy or claim arising out of this
Agreement, or any breach thereof shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association and judgment upon the award may be entered in any
court having jurisdiction. Any such arbitration shall be in the State of
Minnesota in the seven-county Twin Cities' metropolitan area. In the event
the Company shall dispute and submit to arbitration hereunder the
Employee's claims regarding the renewal of this Agreement pursuant to
Section 2 hereof or the termination of this Agreement pursuant to Section 4
hereof, or the amounts to be received by the Employee under Section 4
hereof, and the Company shall withhold from Employee the payments or
benefits provided under Section 4 hereof, the Company shall continue to
provide Employee with all compensation and benefits, at his then current
level, until an award in arbitration is rendered, and if requested by the
Board of Directors, the Employee shall be obligated to continue his
employment, perform any services for, and be present at the Company.
Notwithstanding the foregoing, any party to this Agreement may seek and
obtain injunctive or other appropriate equitable relief from a court of
competent
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jurisdiction to prevent or end a violation of this Agreement that would
cause irreparable harm to such party and for which it would be difficult
or impossible to determine damages that would arise from such violation
or the continuance thereof; provided, however, that the substance of any
dispute is to be resolved through arbitration as provided in this
Section 7(g) and that the course of equitable relief may include an
order compelling such arbitration.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company, its successors and assigns, and any corporation or entity with
which the Company may be merged or by which its assets, stock, operations,
business, ownership or control are acquired, and any such corporation or
entity, as a condition to the completion of such transaction with the
Company, shall absolutely, unconditionally and expressly in writing assume
all of the Company's obligations to faithfully perform this Agreement, and
the Employee shall be provided with a copy of such written assumption
agreement. This Agreement shall not be assignable by the Employee without
the prior written consent of the Company All obligations and agreements of
the Employee under this Agreement shall be binding upon and enforceable
against the Employee and his executors, representatives, heirs, successors
or permitted assignees.
(i) ACKNOWLEDGMENT OF REPRESENTATION. The Company and the Employee
hereby acknowledge that Gray, Plant, Mooty, Mooty & Bennett, P.A. ("GPM")
represents the Company only, and no other person or entity a party to this
Agreement. The Company and the Employee hereby acknowledge that the
Employee, as an individual, has chosen either to represent himself, or has
reviewed this Agreement with legal counsel other than GPM.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective as of the date first set forth above.
VAUGHN COMMUNICATIONS, INC. EMPLOYEE
By /S/ M. Charles Reinhart /S/ E/ David Willette
---------------------------- ---------------------------
Its Chief Financial Officer E. David Willette
-------------------------- 1100 Republican Street
5050 West 78th Street Seattle, WA 98109
Minneapolis, MN 55435
-16-
<PAGE>
Exhibit (10)(w)
1998 EMPLOYMENT AND NONCOMPETITION AGREEMENT
This Employment and Noncompetition Agreement ("the Agreement") is made
this 13th day of March, 1998 by and between VAUGHN COMMUNICATIONS, INC., a
Minnesota corporation, its heirs, assigns, successors, or surviving
corporation that results from a merger ("Company") and M. CHARLES REINHART,
an individual who currently resides in Apple Valley, Minnesota (hereinafter
referred to as the "Employee").
RECITALS
WHEREAS, the Employee has served as a key employee of the Company for
many years and on the date hereof holds the position of Chief Financial
Officer and Secretary; and
WHEREAS, the Company desires to retain the services of the Employee in
order to assure continuity of management and to assist the Company in
operating the business, and the Employee desires to be retained by the
Company for such purposes upon the terms and conditions set forth in this
Agreement; and
WHEREAS, in consideration of, and as an inducement to, the Company
agreeing to enter into this Agreement, which the Employee agrees is
beneficial to him as it provides substantial additional rights to the
Employee, including but not limited to, the right to receive severance and
change of control payments, the Employee agrees not to compete with the
Company in accordance with the terms and conditions set forth in this
Agreement; and
WHEREAS, the Employee acknowledges and agrees that he has been advised
by the Company to have this Agreement reviewed by legal counsel of his own
choosing, and that he has consulted and conferred with such legal counsel to
the extent he deems advisable before signing this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of the promises
and mutual covenants set forth in this Agreement, the Company and the
Employee agree and contract as follows:
1. EMPLOYMENT SERVICES. The Company hereby employs the Employee to
serve as Chief Financial Officer with responsibility for financial management
of the Company's businesses (the "Services"). It is understood that
regardless of whether the Company shall continue as a separate corporate
entity or through acquisition, merger or other transaction no longer be a
separate legal entity, that Employee as to these businesses, shall have the
duties, responsibilities and authority substantially the same as those of a
Chief Financial Officer of a business corporation pursuant to the Minnesota
Business Corporations Act except as may be determined by provisions of this
Agreement. It is further understood that the particular businesses of the
Company managed by Employee as Chief Financial Officer may change from time
to time, and Company and Employee agree that such changes may occur, as long
as the duties, responsibilities and authority are substantially equivalent to
those described herein, or Employee consents in writing to such new duties,
responsibilities and authority, which consent Employee will not unreasonably
withhold. Employee hereby agrees to provide, and to hold himself available
to provide the Services as his full-time occupation to the exclusion of other
full or part time services to any other party during the term of this
Agreement. The Employee hereby accepts such employment and shall in good
faith perform, for and on behalf and in the best interests of the Company,
the Services during the term of this Agreement.
2. TERM. Except as provided in Section 4 hereof the initial term of this
Agreement shall be three (3) years commencing on the effective date hereof,
April 1, 1998 (the "Effective Date"), and thereafter beginning with the third
anniversary of the Effective Date, will
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<PAGE>
automatically renew each year on the anniversary of that date for additional
one (1) year terms, unless 90 days preceding such third anniversary date and
each subsequent anniversary date for successive one-year terms, either party
gives written notice to the other of nonrenewal, in which case no further
automatic extensions shall occur.
3. COMPENSATION/BENEFITS. During the initial and subsequent renewal
terms of this Agreement, the Employee shall receive compensation from the
Company for the Services set forth in Section 1 as follows:
(a) BASE SALARY COMPENSATION. In consideration of Employee's
services, Employee will be paid, during the initial term of this Agreement,
no less than the following: $80,000 for calendar year 1998 (the "Salary").
The Salary will be payable in accordance with the Company's customary
payroll practices for its executive officers, but not less than monthly.
The Employee's Salary shall be reviewed by the Company and the Employee at
least annually for increase in a manner consistent with general
compensation changes Company-wide and applicable to the executive officers
as a group.
(b) CAR. The Company agrees to provide the Employee with and pay the
expense for an appropriate car for his business and other use.
(c) BONUS. The Company will continue to offer Employee a bonus
compensation program substantially in parity with that offered to all other
senior executives of the Company, and including the use of substantially
similar percentage of salary, minimum, target and maximum bonus amounts, or
performance, achievement, and other standards.
3
<PAGE>
(d) STOCK OPTIONS. The Employee shall be entitled to receive such
stock options as are available and offered from time to time to other
senior executives of the Company consistent with Company policy.
(e) EXPENSE REIMBURSEMENT. The Company agrees to reimburse the
Employee for all reasonable and necessary business expenses incurred by the
Employee during the performance of his Services pursuant to this Agreement.
The Employee agrees to provide to the Company reasonable and customary
documentation of any expenses for which the Employee seeks reimbursement
from the Company pursuant to this Agreement.
(f) OTHER BENEFITS. The Employee shall be entitled to participate in
such compensation and retirement plans and receive such insurance,
vacation, profit sharing, retirement, and other benefits ("Other Benefits")
as are available to senior executives of the Company consistent with
Company policy, provided however, during Employee's employment under this
Agreement, Employee shall be provided and receive at least such other
benefits as he is provided and receives as of the Effective Date, or in
lieu thereof such substitute plans and benefits as provide him with
substantially equivalent Other Benefits.
4. TERMINATION. This Agreement and the Employee's employment with the
Company may be terminated only on the terms and conditions specified in this
Section upon the prior written notice to the other party as specified below. In
the event of the termination of this Agreement and the Employee's employment
with the Company, the Employee shall be entitled to compensation in accordance
with the following provisions.
(a) TERMINATION BY COMPANY FOR CAUSE. The Company may terminate this
Agreement for "Cause," as defined below, immediately upon written notice to
Employee,
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<PAGE>
and upon such termination for Cause, Employee shall cease to provide
Services hereunder as directed by the Chairman of the Board of Directors
upon receipt of notice of termination, unless the matter must first be
determined by arbitration or is subject to cure by the Employee as
provided in clause (i) hereof. "Cause" shall be defined as (i) a breach
by the Employee of the noncompetition provisions set forth in Section 5
hereof or the restrictions on use of Confidential Information set forth
in Section 6 hereof or substandard performance of a material part of the
Services as required in Section 1 hereof, as determined by a panel of
three arbitrators of the American Arbitration Association in
Minneapolis, Minnesota mutually chosen by Employee and Company and after
written notice of such alleged breach by Company to Employee and
Employee's failure to cure such alleged breach or alleged substandard
performance within 30 days thereof (if such alleged breach is subject to
cure), or (ii) willful and gross theft by the Employee from the Company,
or (iii) conviction of the Employee of any crime punishable as a felony.
(b) TERMINATION BY COMPANY OTHER THAN FOR CAUSE OR NON-RENEWAL BY THE
COMPANY. The Company may terminate this Agreement and the Employee's
employment with the Company upon ninety (90) days' written notice to the
Employee. In the event the Company terminates this Agreement and the
Employee's employment with the Company under this Section 4(b), or the
Company does not renew this Agreement at the end of the initial term or any
renewal term, the Company will pay as a severance consideration payable
monthly at the rate in effect prior to termination all of the following:
(i) all Salary for the unexpired initial or renewal term of the Agreement,
as the case may be, in accordance with the provisions of Section 3(a)
above; (ii) the expenses for continued use of a car for the unexpired
initial or renewal term of the Agreement, as the case may be, in
5
<PAGE>
accordance with the provisions of Section 3(b) above; (iii) a bonus
equal to one-fortyeighth (1/48) of the sum of the bonus payouts made in
the preceding three (3) years plus bonus due at the end of the year in
which termination occurs, estimated during the year and adjusted at year
end, times the number of months remaining in the unexpired initial or
renewal term of the Agreement, as the case may be; (iv) as a lump sum,
all expense reimbursements due the Employee or submitted by the Employee
to the Company within 30 days after the notice of termination in
accordance with the provisions of Section 3(e) above; (v) continuance of
medical insurance coverage in force on the date of termination (or
comparable medical insurance coverage if the Company is not able to
continue the Employee's coverage under the Company's medical insurance
plan in force on the date of termination) until the later of the date
the Employee is provided medical insurance by a new employer, one year
after the date of termination or the unexpired initial or renewal term
of the Agreement, as the case may be; and (vi) in the event the payment
provided in Section 4(b)(i) above is less than one year's salary, a
severance payment which, when added to 4(b)(i) above, will pay out one
year's salary at the salary rate in effect on the date of termination.
(c) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may
terminate this Agreement and his employment with the Company for "Good
Reasons," as defined below, upon ninety (90) days' written notice to the
Company. In the event Employee terminates this Agreement and his
employment with the Company for "Good Reason," the Company will pay monthly
at the rate paid prior to termination all of the following: (i) all Salary
for the unexpired initial or renewal term of the Agreement, as the case may
be, in accordance with the provisions of Section 3(a) above; (ii) the
expenses for continued use
6
<PAGE>
of the car for the unexpired initial or renewal term of the Agreement,
as the case may be, in accordance with the provisions of Section 3(b)
above; (iii) a bonus in accordance with the provisions of Section
4(b)(iii) above; (iv) all expense reimbursements due the Employee or
submitted by the Employee to the Company within 30 days after the notice
of termination in accordance with the provisions of Section 3(e) above;
(v) continuance of medical insurance coverage in accordance with the
provisions of Section 4(b)(v) above; and (vi) a severance payment in
accordance with the provisions of Section 4(b)(vi) above. As used
herein, "Good Reason" shall be defined as: (vi) a diminishment of
Employee's responsibilities, duties and authority as provided in this
Agreement; (vii) a reduction in the Employee's Salary or Bonus as
provided this Agreement; (viii) the failure by the Company to provide
Employee with all plans, programs or other benefits of the Company in
accordance with Section 3(b), (d), (e) and (f); (ix) relocation of
Employee's office outside of the seven (7) county Minneapolis/St. Paul
metropolitan area; (x) failure of any successors, assigns, or surviving
corporation or entity to assume and faithfully perform all of the
obligations of the Company under this Agreement as provided in Section
8(h) hereof; or (xi) the Company commission of any other material breach
of this Agreement, which is not remedied by the Company in a reasonable
period (but not less than ninety (90) days) after its receipt of written
notice thereof from Employee.
(d) TERMINATION FOR DISABILITY OF EMPLOYEE. In the event that the
Employee becomes totally disabled, the Company may terminate this Agreement
and the Employee's employment with the Company, and the Employee shall
receive all of the Compensation and Benefits described in Section 3 hereof
for one hundred eighty (180) days after notice of termination is delivered
to Employee.
7
<PAGE>
(e) TERMINATION FOR DEATH OF EMPLOYEE. In the event of the death of
the Employee, this Agreement will automatically terminate, and no
compensation will be paid from the date of death except that expense
reimbursements and earned but unpaid bonus compensation will be paid to the
Employee's estate.
(f) TERMINATION BY EMPLOYEE FOR OTHER THAN GOOD REASON. The Employee
may terminate this Agreement and his employment with the Company upon
ninety (90) days' written notice to the Company. Compensation provided
under Section 3 above will cease upon such termination.
(g) TERMINATION NOT TO AFFECT NONCOMPETITION AND CONFIDENTIALITY
PROVISIONS. The termination of this Agreement and the Employee's
employment with the Company, by either party hereto, shall not affect the
prohibition on competition by Employee set forth in Section 5 hereof or the
confidentiality obligation of the Employee set forth in Section 6 hereof.
5. NONCOMPETITION.
(a) NONCOMPETE. Employee agrees that, during the term of this
Agreement and his employment with the Company and the five (5) year
period following the termination of this Agreement and his employment
with the Company, the Employee will not directly or indirectly, alone
or as partner, officer, director, advisor, consultant, or employee of
any other company or entity, engage 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
8
<PAGE>
sale of gift products and collectibles to retailers) in those
states in which the Company conducted business during the term of
this Agreement or as of the date of such termination of this
Agreement and his employment with the Company, or with any part of
the Company's contemplated business with respect to which the
Employee has Confidential Information as defined below and governed
by Section 6 hereof. In addition, the Employee recognizes that the
Company's work force constitutes an important and vital aspect of
its business. The Employee agrees that during the term of this
Agreement and his employment with the Company and for the five (5)
year period following the expiration or termination of this
Agreement and his employment with the Company (whether terminated
early, whether for cause or not for cause), he shall not solicit,
or assist 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.
(b) NONCOMPLIANCE. The Company shall not be required to make
payments to the Employee pursuant to Sections 4(b) or 4(c) while the
Company has, in its sole discretion, a good faith basis to believe
that the Employee is competing with the Company in violation of
Section 5(a). Any payments due during the period of competition
mentioned above shall be made to the Company to be held by the Company
in a segregated account and not paid over to the Employee until the
earlier of the date the Employee resumes compliance (whether
voluntarily, by court order or otherwise) with the noncompete
provision set forth in Section 5(a) or the expiration date of the
noncompete provision set forth in Section 5(a). No interest shall
accrue on payments held by the Company pursuant
9
<PAGE>
to this Section 5(b). Good faith compliance with the payment
provisions of this Section 5(b) by any party to this Agreement
shall not be construed as a breach of this Agreement by such party.
(c) REMEDIES. It is agreed that it would be difficult or
impossible to ascertain the measure of damages to the Company
resulting from any breach of Section 5(a), and that injury to the
Company from any such breach may be irremediable, and that money
damages therefor may be an inadequate remedy. Notwithstanding
anything to the contrary in this Agreement, in the event of a breach
or threatened breach by the Employee of the provisions of Section
5(a), the Company shall be entitled to specific performance of Section
5(a) and may seek a temporary or permanent injunction to enjoin the
Employee from breaching Section 5(a), in addition to any other rights
or remedies that the Company may have available under applicable law
for such breach or threatened breach, including the recovery of
damages.
6. CONFIDENTIAL INFORMATION. The Employee will not, during or
following the termination of this Agreement and his employment with the
Company, for any reason use or disclose, other than in connection with
rendering of Services hereunder on behalf of the Company, any Confidential
Information to any person not employed by the Company or not authorized by
the Company to receive such Confidential Information, without the prior
written consent of the Company. "Confidential Information" means
information that is proprietary to the Company or proprietary to others and
entrusted to the Company. Confidential Information includes, but is not
limited to, customer lists, information relating to business plans and to
business that is conducted or anticipated to be conducted, and to
10
<PAGE>
past or current or anticipated products. Confidential Information also
includes, without limitation, information concerning research,
development, purchasing, accounting, computer software, selling, and
services. The Employee will use reasonable and prudent care in
following written Company procedures or instructions furnished to
Employee to safeguard and protect and prevent the unauthorized use and
disclosure of Confidential Information. The obligations under this
Section 6 will not apply to (i) any Confidential Information that is now
or becomes available to the public through no breach of the Employees'
obligation of confidentiality; or (ii) the Employee's disclosure of any
Confidential Information required by law or judicial or administrative
process. Subject to the requirements of the Securities Exchange Act of
1934, nothing herein shall create a contractual restriction of
Employee's ability to sell, purchase, or effect transactions in the
Company's securities.
7. CHANGE OF CONTROL PAYMENT..
(a) PAYMENT. The Company and the Employee recognize that the
possibility of a "Change of Control" of the Company exists and that
such possibility, and the uncertainty and questions which it may raise
among management of the Company, may result in the departure or
distraction of the Employee to the detriment of the Company and its
stockholders. In order to induce the Employee to stay in the employ
of the Company in the event that the Company determines to pursue a
Change of Control of the Company and to use his best efforts to bring
about such a Change of Control, the Company agrees to pay the Employee
the following: (i) $100,000 in one lump sum payment which shall be
paid contemporaneously with the consummation of such Change of
11
<PAGE>
Control transaction; provided, however, the Employee is employed by
the Company at the time of consummation of such Change of Control
and (ii) an additional $100,000 in one lump sum payment which shall
be paid on the date one year after consummation of such Change of
Control; provided, however, that either (iii) the Employee has been
employed by the Company (or its successor entity) during all of
such one year period or (iv) the Employee's employment with the
Company (or its successor entity) was terminated during such one
year period by the Company (or its successor entity) without Cause
pursuant to Section 4(b) or by the Employee for Good Reasons
pursuant to Section 4(c). The amounts payable under this Section
7(a) shall be payable to the Employee, at the option of the
Company, in cash, or by cashier's or certified check or by wire
transfer.
(b) CHANGE OF CONTROL. For purposes of this Agreement, a
"Change of Control" shall mean any one of the following: (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "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 execution of this Agreement, the individuals who as of
the date of the execution of this Agreement 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)
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<PAGE>
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.
8. MISCELLANEOUS
(a) MODIFICATION. This Agreement supersedes all prior agreements and
understandings between the parties relating to the subject matter herein.
No modification, termination or attempted waiver of any provision of this
Agreement shall be valid unless in writing signed by the party against whom
enforcement is sought.
(b) ENFORCEABILITY AND SEVERABILITY. If any term of this Agreement
is adjudicated to be void, voidable, invalid or unenforceable for any
reason, such term shall be automatically severed from all other terms of
this Agreement, which will continue in full force and effect. In the event
any term is adjudicated to be overbroad as written, such term shall be
automatically amended to narrow its application to the extent necessary to
make such term enforceable, and such term shall be enforced as so amended..
(c) GOVERNING LAW. This Agreement and all remedies at law or in
equity shall be construed and enforced in accordance with the laws of the
State of Minnesota.
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<PAGE>
(d) PREVAILING PARTY. The prevailing party in any suit, proceeding
or hearing shall be entitled to recover from the non-prevailing party all
costs that the prevailing party has incurred as a result of the suit,
proceeding, or hearing, including, without limitation, reasonable
attorneys' fees, filing fees, arbitrator's fees, expert witness fees,
travels costs, and all other reasonable costs and expenses incurred in the
enforcement of this Agreement. In the event that neither party shall
prevail on all of its claims or all of its defenses, then such costs and
expenses shall be allocated and awarded between the parties as determined
by the arbitrator or the court.
(e) NOTICES. Any Notice or other communication required or permitted
under this Agreement shall, in order to be effective, be in writing and be
given by personal service or by prepaid, certified United States Mail or
Federal Express Courier, return receipt requested, addressed to the
applicable party at the address for such party set forth on the signature
page of this Agreement. Notice by service is effective upon service and
notice by mail or courier is effective upon mailing. Either party may
change the address to which notices for such party are to be sent by so
notifying the other party in the manner set forth above.
(f) CAPTIONS. The captions and headings contained in this Agreement
are for convenience only and do not define, limit, construe, or give full
notice of the contents of the provisions of this Agreement.
(g) ARBITRATION. Any controversy or claim arising out of this
Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association and judgment upon the award may be entered in any
court having jurisdiction. Any such arbitration shall be in the State
14
<PAGE>
of Minnesota in the seven-county Twin Cities' metropolitan area. In the
event the Company shall dispute and submit to arbitration hereunder the
Employee's claims regarding the renewal of this Agreement pursuant to
Section 2 hereof, or the termination of this Agreement pursuant to Section
4 hereof, or the amounts to be received by the Employee under Section 4
hereof, and the Company shall withhold from Employee the payments or
benefits provided under Section 4 hereof, the Company shall continue to
provide Employee with all compensation and benefits, at his then current
level, until an award in arbitration is rendered, and upon request by the
Chairman of the Board of Directors, the Employee shall be obligated to
continue his employment, perform any services for, and be present at the
Company. Notwithstanding the foregoing, any party to this Agreement may
seek and obtain injunctive or other appropriate equitable relief from a
court of competent jurisdiction to prevent or end a violation of this
Agreement that would cause irreparable harm to such party and for which it
would be difficult or impossible to determine damages that would arise from
such violation or the continuance thereof; provided, however, that the
substance of any dispute is to be resolved through arbitration as provided
in this Section 8(g) and that the course of equitable relief may include an
order compelling such arbitration.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company, its successors and assigns, and any corporation or entity with
which the Company may be merged or by which its assets, stock, operations,
business, ownership or control are acquired, and any such corporation or
entity, as a condition to the completion of such transaction with the
Company, shall absolutely, unconditionally and expressly in writing assume
all of the Company's obligations to faithfully perform this Agreement, and
15
<PAGE>
the Employee shall be provided with a copy of such written assumption
agreement. This Agreement shall not be assignable by the Employee without
the prior written consent of the Company. All obligations and agreements
of the Employee under this Agreement shall be binding upon and enforceable
against the Employee and his executors, representatives, heirs, successors
or permitted assignees.
(i) ACKNOWLEDGMENT OF REPRESENTATION. The Company and the Employee
hereby acknowledge that Gray, Plant, Mooty, Mooty & Bennett, P.A. ("GPM")
represents the Company only, and no other person or entity a party to this
Agreement. The Company and the Employee hereby acknowledge that the
Employee, as an individual, has chosen either to represent himself, or has
reviewed this Agreement with legal counsel other than GPM.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective as of the date first set forth above.
VAUGHN COMMUNICATIONS, INC. EMPLOYEE
By /S/ E.D. Willette /S/ M. Charles Reinhart
-------------------------- ------------------------
Its CEO M. Charles Reinhart
------------------ 8664 - 143 Street Court
5050 West 78th Street Apple Valley, MN 55124
Minneapolis, MN 55435
16
<PAGE>
Exhibit (10)(x)
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This Revolving Credit and Term Loan Agreement (the "Agreement" or the
"Credit Agreement") is made and entered into by and between Vaughn
Communications, Inc., a Minnesota corporation (the "Borrower") and Firstar Bank
of Minnesota, N.A. (the "Bank") as of the date set forth on the last page of
this Agreement. This Agreement amends and replaces in all respects that certain
Amended and Restated Loan Agreement dated as of March 31, 1995, as amended from
time to time by and between the Bank and the Borrower (the "Prior Loan
Agreement").
ARTICLE I. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings (such meanings to be applicable to both the singular and
plural forms of the terms defined):
"ACCOUNT" and "ACCOUNT DEBTOR" shall have the meanings assigned to such
terms under the Uniform Commercial Code in the state where the Bank's main
office is located.
"ACQUISITION TERM LOAN AMOUNT" at any time shall mean the principal
balance of the Acquisition Term Note.
"ACQUISITION TERM NOTE" shall mean that certain term note of even date
herewith made payable jointly and severally by the Borrower to the order of the
Bank in the original principal amount of $2,800,000.00.
"ADVANCES" shall mean loans made by the Bank to the Borrower under this
Agreement, including readvances of funds previously advanced to the Borrower and
repaid to the Bank.
"AFFILIATE" shall include, with respect to any party, any Person which
directly or indirectly controls, is controlled by, or is under common control
with, such party, whether through the ownership of voting securities, by
contract or otherwise, including, without limitation, any Subsidiary, and, in
addition, in the case of the Borrower, each officer, director, shareholder,
joint venturer or partner of such Borrower.
"BORROWING BASE" shall mean an amount equal to the sum of (a) eighty
percent (80%) of all Eligible Accounts, plus (b) the lesser of (i) One Million
Seven Hundred Fifty Thousand Dollars ($1,750,000.00) or (ii) thirty-five percent
(35%) of Eligible Inventory, each as determined for the most recent calendar
month end.
"BORROWING BASE CERTIFICATE" shall mean the certificate in the form of
EXHIBIT A described in Section 7.16 hereof.
"BUSINESS DAY" shall mean any day on which the Bank is open for the
transaction of business of the kind contemplated by this Agreement.
"COMMERCIAL CODE" shall mean the Uniform Commercial Code as enacted in
the State of Minnesota, as amended from time to time.
"CURRENT ASSETS" shall mean the aggregate amount of assets of the
Borrower which in accordance with GAAP may be properly classified as current
assets, after deducting adequate reserves where proper, but in no event
including any real estate.
"CURRENT LIABILITIES" shall mean the amount of all liabilities which
under GAAP would appear as current liabilities on the balance sheet of the
Borrower, including all indebtedness payable on demand or maturing (whether by
reason of specified maturity, fixed prepayment, sinking funds or accruals of any
kind, or otherwise, within 12 months or less from the date of the relevant
statement and including customer advances and progress billings on contracts.
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"CURRENT RATIO" shall mean the relationship, expressed as a numerical
ratio, between (i) Current Assets and (ii) Current Liabilities.
"DEBT COVERAGE RATIO" shall mean, as of the end of each fiscal quarter,
the relationship, expressed as a numerical ratio, between (i) Net Income plus
interest expense plus depreciation expense plus amortization expense, and (ii)
the sum of interest expense plus current maturities on long-term debt of the
Borrower (on a consolidated basis) as determined in accordance with GAAP during
the preceding twelve (12) month period before such month end and which shall
include payments on all capitalized leases.
"DEBT TO WORTH RATIO" shall mean the relationship, expressed as a
numerical ratio, between:
(i) the total of all liabilities of the Borrower that would appear on
a consolidated balance sheet of the Borrower in accordance with
GAAP; and
(ii) Tangible (on a consolidated basis).
"DEFAULT" shall mean any event which, with the giving of notice or
passage of time, or both, would constitute an Event of Default.
"ELIGIBLE ACCOUNTS" shall mean an Account owing to the Borrower that
meets the following requirements at the time it comes into existence and
continues to meet the same until it is collected in full:
(i) it has not been past due and unpaid more than ninety (90) days
past its invoice date, or thirty (30) days past its due date on an
Account with original terms of more than net 30 days (a "Dated
Account");
(ii) it is not a Dated Account with original terms of more than one
hundred eighty (180) days past its invoice date;
(iii) it is not an Account owing by an Affiliate or a Subsidiary of
either Borrower;
(iv) it is not subject to any prior assignment, claim, lien or security
interest whatsoever, other than the security interest of the Bank;
(v) it is a valid, legally enforceable obligation of an Account Debtor
satisfactory to the Bank;
(vi) it is not subject to setoff, counterclaim, credit allowance,
contra account or adjustment by the Account Debtor thereunder, or
to any claim by such Account Debtor denying liability thereunder
in whole or in part, and such Account Debtor has not refused to
accept and has not returned or offered to return any of the goods
which are subject to such Account;
(vii) it arose in the ordinary course of the Borrower's business and no
notice of the bankruptcy, insolvency or any event or circumstance
which could have a material adverse affect on the financial
condition of the Account Debtor thereunder has been received by
either Borrower.
(viii) it is not owing by an Account Debtor whose obligations on other
Accounts in excess of 25% of the total balance due the Borrower
are more than ninety (90) days past its invoice date or thirty
(30) days past due in the case of Dated Accounts; and
(ix) it is not an Account that arises from a sale to a United States
federal government entity or to an Account Debtor outside the
United States, unless the sale is on terms acceptable to the Bank
in its sole discretion.
An Account which is at any time an Eligible Account, but which
subsequently fails to meet any of the foregoing requirements, shall forthwith
cease to be an Eligible Account.
"ELIGIBLE INVENTORY" shall mean Inventory (as defined under the
Commercial Code) of the Borrower which meets the following requirements and
continues to meet the same until it is sold or otherwise disposed of:
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(a) it is not subject to any prior assignment, claim, lien or security
interest whatsoever, other than the interest of the Bank;
(b) it is not obsolete, is in good condition and is either currently
usable or saleable;
(c) it is not consignment inventory, scrap or packaging inventory,
book inventory reserves or work in process inventory.
(d) it is Inventory of the Borrower's Communications Division
comprised of audio and video broadcast equipment and duplication
inventory such as video tapes, shells, cases and cassettes held
for sale or lease;
(e) it is not Inventory of the Borrower's Product Division, including
Inventory of the Borrower doing business as Indian Arts and Crafts
or Bloom Brothers.
Inventory of the Borrower which is at any time Eligible Inventory, but
which subsequently fails to meet any of the foregoing requirements, shall
forthwith cease to be Eligible Inventory.
"ENVIRONMENTAL LAWS" shall have the meaning assigned to such term in
Section 7.5 hereof.
"EQUIPMENT" shall mean all equipment of the Borrower, whether now owned
or hereafter acquired and wherever located, and includes all of Borrower's Goods
(as defined in the Commercial Code) other than Inventory, all replacements and
substitutions therefor and all accessions thereto, and specifically includes,
without limitation, all present and future machinery, equipment, vehicles,
manufacturing equipment, shop Equipment, fixtures, parts, tools and all other
Goods (except Inventory) used or acquired for use by Borrower for any business
or enterprise.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may from time to time be amended, and the rules and regulations
promulgated thereunder by any governmental agency or authority, as from time to
time in effect.
"ERISA AFFILIATE" shall mean any corporation, trade or business that is,
along with the Borrower, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in Sections 414(b) and
414(c), respectively, of the Internal Revenue Code of 1986, as amended.
"EVENT OF DEFAULT" shall mean any one or more of the Events of Default
set forth in Section 9.1 hereof.
"EXISTING TERM NOTES" shall mean those term loans from the Bank to
Borrower existing as of the date hereof.
"FLOATING RATE" shall at any time mean the rate publicly announced by the
Bank as its prime rate. Borrower acknowledges that the Floating Rate may not be
the lowest rate made available by the Bank to its customers and that the Bank
may lend to its customers at rates that are at, above or below the Floating
Rate.
"GAAP" shall mean generally accepted accounting principles (as in effect
from time to time) consistently applied and maintained throughout the period
indicated and consistent with the audited financial statements delivered to the
Bank. Whenever any accounting term is used herein which is not otherwise
defined, it shall be interpreted in accordance with GAAP.
"GUARANTIES" shall mean those certain Continuing Guaranties of even date
herewith executed by the Guarantors and delivered to the Bank, and any other
guaranties previously executed by any Person and delivered to the Bank.
"GUARANTORS" shall mean Centercom, Inc., a Wisconsin corporation and
Centercom-South, Inc., a Florida corporation, and any other Person guarantying
payment of the Obligations hereunder.
"GENERAL INTANGIBLES" shall mean all General Intangibles (as defined in
the Commercial Code) of the Borrower, whether now owned or hereafter acquired,
including (without limitation) all present and future domestic
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and foreign patents, patent applications, trademarks, trademark applications,
copyrights, trade names, trade secrets, patent and trademark licenses (whether
Borrower is licensor or licensee), shop drawings, engineering drawings,
blueprints, specifications, parts lists, manuals, operating instructions,
customer and supplier lists, licenses, permits, franchises, the right to use
each Borrower's corporate name and the goodwill of each Borrower's business.
"GOVERNMENTAL AUTHORITY" shall mean the government of the United States
or any foreign government or any state, province, municipality or other
political subdivision thereof or therein or any court, agency, instrumentality,
regulatory authority or commission of any of the foregoing, including any taxing
authority.
"GOVERNMENTAL REGULATIONS" shall mean any and all laws, statutes,
ordinances, rules, regulations, judgments, writs, injunctions, decrees,
orders, awards and standards, or any similar requirement, of any Governmental
Authority.
"HAZARDOUS SUBSTANCES" shall have the meaning assigned to such term in
Section 7.5 hereof.
"INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" shall mean any firm of
independent certified public accountants which are acceptable to the Bank
including the firm currently retained by the Borrower.
"INVENTORY" shall mean all inventory of the Borrower (valued at the lower
of cost or fair market value), whether now owned or hereafter acquired and
wherever located. "Inventory" includes all Goods (as defined in Article 9 of
the Commercial Code) intended for sale or lease or to be furnished under
contracts of service, all raw materials and work in process therefor, all
finished goods thereof, all materials and supplies of every nature used or
usable or consumed or consumable in connection with the manufacture, packing,
shipping, advertising, selling, leasing or furnishing of such Goods, and all
accessories thereto and all documents of title therefor evidencing the same.
"LETTERS OF CREDIT" shall mean any and all letters of credit issued by
the Bank on behalf of Borrower as customer, now or in the future.
"L/C AMOUNT" shall at any time mean the aggregate of amounts available to
be drawn on the Letters of Credit plus any outstanding and unpaid drafts
presented under the Letters of Credit.
"L/C REIMBURSEMENT AGREEMENT" shall mean a letter of credit application
and reimbursement agreement executed to by the Borrower in a form acceptable to
the Bank in its sole discretion.
"LOAN DOCUMENT(S)" shall mean individually or collectively, as the case
may be, this Agreement, the Revolving Note, the Equipment Term Notes, the
Acquisition Term Note, the Existing Term Notes, the Security Agreements, the
Pledge Agreements, the Guaranties and any and all other documents held,
executed, delivered or referred to herein, as originally executed and as
amended, revised and supplemented from time to time.
"NET INCOME" for any period shall mean after-tax net income for such
period, determined in accordance with GAAP excluding, however, (1) extraordinary
gains, and (2) gains whether or not extraordinary from sales or other
dispositions of assets other than the sale of Inventory in the ordinary course
of Borrower's business.
"NOTES" collectively or individually, as the context shall require, the
Revolving Note, the Equipment Term Notes, the Acquisition Term Note and the
Existing Term Notes.
"OBLIGATIONS" shall mean all present and future sums loaned or advanced
by the Bank to the Borrower and all other obligations now or hereafter
chargeable to the Borrower hereunder or under any L/C Reimbursement Agreement,
and all other obligations and liabilities of any and every kind of the Borrower
to the Bank, due or to become due, direct or indirect, absolute or contingent,
joint or several, howsoever created, arising or evidenced, now existing or
hereafter at any time created, arising or incurred including, without
limitation, amounts owed under the Notes.
"PERSON" shall mean any natural person, corporation, firm, partnership,
association, government, governmental agency or any other entity, whether acting
in an individual, fiduciary or other capacity.
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"PLAN" shall mean each employee benefit plan or other class of benefits
covered by Title I or IV of ERISA, in either case whether now in existence or
hereafter instituted, of Borrower.
"REMEDIAL ACTION" shall have the meaning assigned to such term in Section
7.5 hereof.
"REVOLVING NOTE" shall mean the Revolving Credit Note of even date
herewith made payable by the Borrower to the order of the Bank in the original
principal amount of $17,000,000.
"SECURITY AGREEMENTS" shall mean that certain Business Security
Agreements of even date herewith executed by Borrower, as debtor, in favor of
the Bank, as secured party, those certain Third Party Business Security
Agreements of even date herewith executed by each Guarantor, as debtor, in favor
of the Bank, as secured party, and any security agreements previously entered
into by Borrower or either Guarantor, in favor of the Bank, including without
limitation, Security Agreements dated June 30, 1993 and August 10, 1995.
"SECURITY INTEREST" shall mean any lien, pledge, mortgage, encumbrance,
charge or security interest of any kind whatsoever (including, without
limitation, the lien or retained security title of a conditional vendor) whether
arising under a security instrument or as a matter of law, judicial process or
otherwise or the agreement by either Borrower to grant any lien, security
interest or pledge, mortgage or encumber any asset.
"SUBSIDIARY" OR "SUBSIDIARIES" shall mean, with respect to any Person, a
corporation of which such Person and/or its other Subsidiaries own, directly or
indirectly, such number of outstanding shares of capital stock as have more than
50% of the ordinary voting power for the election of directors.
"TANGIBLE NET WORTH" shall mean the total of all assets properly
appearing on the consolidated balance sheet of Borrower in accordance with GAAP,
less the sum of the following:
(a) the book amount of all such assets which would be treated as
intangibles under GAAP, including, without limitation, all such
items as goodwill, trademark rights, trade names, trade-name
rights, brands, copyrights, patents, patent rights, licenses,
prepaid expenses, deferred charges and unamortized debt discount
and expense:
(b) any write-up in the book value of any such assets resulting from a
revaluation thereof subsequent to January 31, 1997;
(c) all reserves, including reserves for depreciation, obsolescence,
depletion, insurance, and inventory valuation;
(d) the amount, if any, at which any shares of stock of Borrower
appears on the asset side of such balance sheet;
(e) all liabilities of the Borrower shown on such balance sheet; and
(f) all investments in and amounts due from any Affiliates.
"TERM LOAN AMOUNT" at any time shall mean the aggregate principal
balance of the Acquisition Term Note, the Equipment Term Note and the Existing
Term Notes.
ARTICLE II. TERM LOANS
2.1 ACQUISITION TERM LOAN. Subject to the terms and conditions
hereof, the Bank agrees to make a term loan to the Borrower in the amount of
$2,800,000, the proceeds of which shall be applied to repay the principal amount
of the Revolving Advances under the Prior Loan Agreement that was used to enable
Borrower to purchase certain assets and liabilities of Certified Media
Corporation, a California corporation.
(a) The Acquisition Term Loan shall be evidenced by a single
promissory note of the Borrower to the order of the Bank in the
principal amount of $2,800,000 and dated as of the date hereof
(the "Acquisition Term Note").
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(b) The Acquisition Term Loan shall bear interest at either (i) the
Floating Rate, or (ii) at the Borrower's option, a fixed rate of
2.375% per annum plus the highest published "Ask Yield" of any
U.S. Treasury Bond having a maturity date closest to the maturity
date of the Acquisition Term Note, as set forth in the most recent
edition of THE WALL STREET JOURNAL published prior to the date on
which such rate is fixed (the "Fixed Rate"). Upon the occurrence
of an Event of Default, the principal balance of the Acquisition
Term Loan shall bear interest at one percent (1%) in excess of the
otherwise applicable rate.
(c) Interest on the Acquisition Term Loan shall be paid monthly in
arrears on the first day of each month beginning October 1, 1997.
The principal balance of the Acquisition Term Loan shall be paid
quarterly in twenty (20) installments of $140,000 each, commencing
on October 1, 1997 and continuing on the last day of January,
April, July and October.
(d) So long as the Borrower has not fixed the rate of the Acquisition
Term Loan, the Borrower may at any time and from time to time
prepay all or a portion of the Acquisition Term Loan without
premium or penalty. If, however, the Borrower has fixed the rate
of the Acquisition Term Loan, then Borrower shall pay to Bank the
Prepayment Indemnity (as defined below) on the principal to be
prepaid, plus interest accrued under the Note through Bank's
receipt of such Prepayment Indemnity. In the event of a partial
prepayment, the principal component of the Prepayment Indemnity
shall be applied against the scheduled principal payments in the
inverse order of their maturities.
The "PREPAYMENT INDEMNITY" shall be equal to the aggregate of the
principal payments to be prepaid, plus: (a) the sum of the
following: the interest that would have been payable (on the
originally scheduled interest payment dates) with respect to those
principal payments to be prepaid, discounted in each case to its
present value at the applicable Discount Rate; MINUS (b) the sum
of the following: each amount of interest (calculated on the same
dates as in subsection (a) above) that would accrue on the prepaid
principal if such principal were reinvested at the Reinvestment
Rate, discounted in each case to its present value at the
applicable Discount Rate; but in no event shall the Prepayment
Indemnity be less than the principal amount of the Note to be
prepaid.
The terms "DISCOUNT RATE" and "REINVESTMENT RATE" shall mean a
rate per annum equal to: the highest published Ask Yield of any
U.S. Treasury Bond, Note or Bill set forth in THE WALL STREET
JOURNAL, Treasury Bonds, Notes and Bills section, one business day
prior to the date of prepayment, having a maturity closest to the
originally scheduled payment date of the principal or interest (as
applicable) to be prepaid (and if two maturity dates are equally
close to the originally scheduled payment date, the maturity date
having the highest published Ask Yield shall be used).
Borrower agrees (i) the Prepayment Indemnity constitutes
liquidated damages, and is a reasonable method of measuring Bank's
out-of-pocket loss in the event of prepayment of the Note and is
not a penalty; (ii) Bank's reinvestment of the Prepayment
Indemnity in U.S. Treasury Bonds, Notes or Bills is reasonable as
these investments are the only readily available investments to
Bank for the Prepayment Indemnity having a guaranteed rate of
interest over the term of the originally scheduled payment(s)
necessary to liquidate the Bank's future damages for a prepayment;
and (iii) Bank's determination of the Prepayment Indemnity (in the
absence of manifest error) shall be conclusive, final and binding
on Borrower.
2.2 EQUIPMENT TERM LOANS. Subject to the terms and conditions
hereof, and provided no Event of Default has occurred and is continuing, the
Bank agrees to make term loans to the Borrower from the date hereof through May
31, 1998, to enable the Borrower to acquire new equipment acceptable to the Bank
(the "Equipment Term Loans").
(a) The maximum amount of Equipment Term Loans to be made by the Bank
to the Borrower shall be the lesser of (i) $2,000,000 or (ii)
ninety percent (90%) of the original cost of the new equipment
acquired with the proceeds of the Equipment Term Loans. The
Equipment Term Loans shall be evidenced by separate term notes in
a form acceptable to and prepared by the Bank (the "Equipment Term
Notes"). No Equipment Term Loan shall be made in an amount less
than $250,000.
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(b) Each Equipment Term Note shall provide for up to a five-year
straight-line amortization, with equal quarterly principal
payments and interest payments monthly in arrears on the last day
of each calendar month. Each Equipment Term Loan shall bear
interest at the Floating Rate or at the Borrower's option, at a
Fixed Rate calculated in the manner set forth in paragraph 2.1(b),
subject to the Prepayment Indemnity set forth in paragraph 2.1(d).
Upon the occurrence of an Event of Default, the principal balance
of each Equipment Term Loan shall bear interest at one percent
(1%) in excess of the otherwise applicable rate.
(c) Each Equipment Term Loan shall be secured by a first priority
purchase money security interest on the equipment purchased with
the proceeds thereof, in addition to the collateral described in
Section 8.1 hereof. Requests for Equipment Term Loans shall be
made in writing and shall be accompanied by equipment invoices and
executed copies of financing statements and all other documents
reasonably requested by the Bank to perfect the Bank's first
priority purchase money security interest in the equipment.
ARTICLE III. EXISTING TERM LOANS
3.1 EXISTING TERM LOAN. As of the date hereof, Borrower acknowledges
that it is indebted to the Bank under the Existing Term Notes in the principal
amount of $3,216,666.71 and that notwithstanding the execution of this
Agreement, the Existing Term Notes remain in full force and effect according to
their original terms. Borrower acknowledges that no events, conditions or
circumstances have arisen or exist as of the date hereof which would give
Borrower the right to assert a defense, counterclaim and/or setoff to any claim
by Bank for payment of such Borrower's obligations under the Existing Term
Notes, and if any so exist as of the date hereof, whether known or unknown,
absolute or contingent, liquidated or unliquidated, the same are hereby waived.
Borrower further acknowledges the Existing Term Notes constitute Obligations
that are subject to the terms and conditions of this Agreement.
ARTICLE IV. REVOLVING LOAN
4.1 NATURE OF LOAN COMMITMENT/MAXIMUM OF ADVANCES. Subject to the
terms and conditions of this Agreement, the Bank shall make Advances to the
Borrower from time to time in an aggregate principal amount not to exceed at any
time the lesser of (i) Seventeen Million Dollars ($17,000,000) less the sum of
(a) the Term Loan Amount plus (b) the L/C Amount; or (ii) the Borrowing Base
less the sum of (aa) the Acquisition Term Loan Amount plus (bb) the L/C Amount
(the "Revolving Credit Commitment"). All Advances pursuant to the revolving
Credit Commitment shall be evidenced by the Revolving Note; provided that the
Borrower shall be obligated to pay only the amount that is actually disbursed
hereunder, together with accrued interest on the outstanding balance at the
rates provided in Section 4.3 hereof. The Borrower may borrow, prepay and
reborrow within such limit pursuant to this Agreement and the Revolving Note.
4.2 PURPOSE FOR ADVANCES. Except with the prior written consent of
the Bank, all Advances under Article IV shall be used exclusively for the
Borrower's working capital and other general business purposes.
4.3 COMPUTATION OF INTEREST. The Advances under the Revolving Credit
Commitment shall bear interest on the unpaid principal amount thereof at a
fluctuating rate per annum equal to the Floating Rate. All interest payable on
Advances shall be computed on the basis of actual days elapsed and a year of 360
days. Upon the occurrence of an Event of Default, the principal balance of all
Advances shall bear interest at one percent (1%) in excess of the otherwise
applicable rate.
4.4 MATURITY. The Revolving Note shall be expressed to mature on the
earlier of: (i) May 31, 1998 or (ii) upon the occurrence of an Event of
Default. All amounts outstanding under the Revolving Note shall be immediately
due and payable at maturity (whether by acceleration or otherwise).
4.5 RECORDKEEPING. Bank shall record in its records, the date and
amount of each Advance made thereon by Bank, and each repayment thereof. The
aggregate unpaid principal amount so recorded shall be presumptive evidence of
the principal amount of the Advances owing and unpaid by the Borrower thereon.
The failure to so record any such amount or any error in so recording any such
amount shall not, however, limit or otherwise affect
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the Obligations of the Borrower hereunder or under the Revolving Note to repay
the principal amount of the Advances together with all interest accrued thereon.
4.6 NON-USE FEES. The Borrower agrees to pay the Bank a fee equal to
one-quarter percent (1/4%) per annum times the average daily unused portion of
the Revolving Credit Commitment (as reduced by the L/C Amount and the Term Loan
Amount), payable quarterly, in arrears, as of each March 31, June 30, September
30 and December 31, and as of the maturity date of the Revolving Note.
4.7 LETTERS OF CREDIT. The Bank shall not be obligated to issue any
Letters of Credit for the benefit of either Borrower except pursuant to a
separate L/C Reimbursement Agreement in form acceptable to the Bank, and in any
event, the aggregate amount of such Letters of Credit shall not exceed
$1,000,000 and shall reduce dollar for dollar the amount available to Borrower
under the Revolving Loan Commitment by such L/C Amount. All Letters of Credit
shall expire on or before May 31, 1998.
ARTICLE V. DISBURSEMENT OF REVOLVING CREDIT COMMITMENT ADVANCES
5.1 REQUESTS FOR ADVANCES. The Borrower and the Lender have entered
into that certain Loan Sweep Agreement dated August 29,1997 (the "Sweep
Agreement"), pursuant to which Lender may initiate "Loan Transactions" and
"Repayment Transactions" as defined in the Sweep Agreement for the purpose of
Advances and payments. Except as otherwise provided in the Sweep Agreement, the
Borrower shall give notice to the Bank in writing or by telephone of each
proposed Advance under the Revolving Credit Commitment (a "Revolving Advance")
not later than 12:00 p.m., St. Paul time. Subject to the terms and conditions
of this Agreement and the Sweep Agreement, the proceeds of each Advance shall be
made available to the Borrower by delivery of the proceeds thereof, in
immediately available funds, to an account maintained by the Borrower at the
Bank pursuant to written wiring instructions to be delivered by the Borrower to
the Lender.
ARTICLE VI. PAYMENTS AND PREPAYMENTS OF ADVANCES
6.1 PRINCIPAL PAYMENTS UNDER REVOLVING CREDIT COMMITMENT.
(a) OPTIONAL PREPAYMENT. The Borrower may at any time and from
time to time prepay all or a portion of the Revolving Advances without
premium or penalty.
(c) MANDATORY PREPAYMENT; APPLICATION. If at any time the
aggregate outstanding principal amount of the Revolving Note shall exceed
the Revolving Credit Commitment, then the Borrower shall immediately pay
to the Bank an amount not less than the amount of any such excess for
application to the outstanding principal amount of the Revolving Note.
(d) APPLICATION OF PAYMENTS AND PREPAYMENTS. Unless the
Borrower shall direct the Bank in writing to apply any payments or
prepayments of principal in a different manner, all such payments and
prepayments on the Revolving Note shall be applied first to collection
costs and other amounts due under the Loan Documents (excluding payments
of principal and interest) and second against interest and principal of
all Revolving Advances.
(e) INTEREST. The Borrower shall also pay to the Bank,
together with any payments or prepayments of principal, all accrued
interest to the date of payment on any Advances so paid or prepaid.
6.3 PAYMENT METHOD AND RELATED MATTERS.
(a) PAYMENTS BY BORROWER. All payments to be made by the
Borrower hereunder will be made in U.S. Dollars and in immediately
available funds to the Bank not later than 12:00 p.m. St. Paul time on
which such payment shall become due. Payments received after 12:00 p.m.
St. Paul time shall be deemed to be payments made prior to 12:00 p.m. St.
Paul time on the next succeeding Business Day.
(b) AUTHORIZATION OF PAYMENTS/ADVANCES. If the Borrower shall
not otherwise have made payment of any of the Obligations as provided in
this Agreement, the Bank is expressly authorized to
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charge any such Obligations, when due, to either Borrower's demand
deposit account maintained with the Bank or, if any such account shall
not contain sufficient funds, to any other account maintained by either
Borrower with the Bank or any of its affiliates, or in lieu thereof, the
Bank may extend an additional Advance to the Borrower under the Revolving
Credit Commitment without further direction or action by the Borrower.
6.4 NO SETOFF OR DEDUCTION. All payments of principal and interest on
the Advances and other Obligations shall be paid by the Borrower without setoff,
counterclaim or other deduction.
6.5 PAYMENT ON NON-BUSINESS DAY. Except as otherwise provided in this
Agreement, whenever any installment of principal of, or interest on, any Advance
or any other Obligation becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business Day
and, in the case of any installment of principal, interest shall be payable
thereon at the rate per annum determined in accordance with this Agreement
during such extension.
ARTICLE VII. WARRANTIES AND COVENANTS
During the term of this Agreement, and while any part of the credit
granted the Borrower is available or any obligations under any of the Loan
Documents are unpaid or outstanding, Borrower warrants and agrees as follows:
7.1 ACCURACY OF INFORMATION. All information, certificates or
statements given to the Bank pursuant to this Agreement and the other Loan
Documents will be true and complete when given.
7.2 ORGANIZATION AND AUTHORITY; LITIGATION. Borrower is a validly
existing corporation in good standing under the laws of its state of Minnesota,
and has all requisite power and authority, corporate or otherwise, and possesses
all licenses necessary, to conduct its business and own its properties. The
execution, delivery and performance of this Agreement and the other Loan
Documents (i) are within the Borrower's power; (ii) have been duly authorized by
proper corporate action; (iii) do not require the approval of any governmental
agency; and (iv) will not violate any law, agreement or restriction by which
Borrower is bound. This Agreement and the other Loan Documents are the legal,
valid and binding obligations of Borrower, enforceable against Borrower in
accordance with their terms. There is no litigation or administrative
proceeding threatened or pending against either Borrower which would, if
adversely determined, have a material adverse effect on either Borrower's
financial condition or its property. "Material" shall be generally defined as
greater than or equal to 5% of the Borrower's Net Worth.
7.3 CORPORATE EXISTENCE; BUSINESS ACTIVITIES; ASSETS. Borrower will
(i) preserve its corporate or partnership (as applicable) existence, rights and
franchises; (ii) carry on its business activities in substantially the manner
such activities are conducted as of the date of this Agreement; (iii) not
liquidate, dissolve, merge or consolidate with or into another entity (except
that the Borrower agrees to merge with the Guarantors within thirty (30) days
following the date of this Agreement); and (iv) not sell, lease, transfer or
otherwise dispose of any or all of its assets, except for sales of Inventory in
the ordinary course of business.
7.4 USE OF PROCEEDS; MARGIN STOCK; SPECULATION. Advances by the Bank
hereunder shall be used exclusively by the Borrower for working capital and
other regular and valid purposes. The Borrower will not use any of the loan
proceeds to purchase or carry "margin" stock (as defined in Regulation U of the
Board of Governors of the Federal Reserve System). No part of any of the
proceeds shall be used for speculative investment purposes, including, without
limitation, speculating or hedging in the commodities and/or futures market.
7.5 ENVIRONMENTAL MATTERS. Except as disclosed by a schedule attached
to this Agreement as Schedule 7.5, to the Borrower's knowledge there exists no
uncorrected violation by Borrower (which if uncorrected could have a material
adverse effect on either Borrower and for purposes hereof, a violation shall be
deemed to be material if it shall impose a liability on either Borrower in
excess of $50,000) of any federal, state or local laws (including statutes,
regulations, ordinances or other governmental restrictions and requirements)
relating to the discharge of air pollutants, water pollutants or process waste
water or otherwise relating to the environment or Hazardous Substances, whether
currently existing or enacted in the future (collectively "ENVIRONMENTAL LAWS")
(if no such Schedule 7.5 is attached, the Borrower warrants that no such
uncorrected violation exists). The term "HAZARDOUS SUBSTANCES" will mean any
hazardous or toxic wastes, chemicals or other substances, the generation,
possession or
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existence of which is prohibited or governed by any Environmental Laws.
Neither Borrower is subject to any judgment, decree, order or citation, or a
party to (or threatened with) any litigation or administrative proceeding, which
asserts that either Borrower (i) has violated any Environmental Laws; (ii) is
required to clean up, remove or take remedial or other action with respect to
any Hazardous Substances (collectively "REMEDIAL ACTION"); or (iii) is required
to pay all or a portion of the cost of any Remedial Action, as a potentially
responsible party. To the Borrower's knowledge, there are not now, nor have
there ever been during the periods that the Borrower owned or occupied such real
estate, any Hazardous Substances (or tanks or other facilities for the storage
of Hazardous Substances) stored, deposited, recycled or disposed of on, under or
at any real estate owned or occupied by the Borrower which if present on the
property or in soils or ground water, could require Remedial Action except for
Hazardous Substances used in the ordinary course of the Borrower's business in
accordance with applicable Environmental Laws. To the Borrower's knowledge,
there are no proposed or pending changes in Environmental Laws which would
adversely affect the Borrower or its business, and there are no conditions
existing currently or likely to exist while the Loan Documents are in effect
which would subject the Borrower to Remedial Action or other liability. The
Borrower currently complies with and will continue to timely comply with all
applicable Environmental Laws; and will provide the Bank, immediately upon
receipt, copies of any correspondence, notice, complaint, order or other
document from any source asserting or alleging any circumstance or condition
which requires or may require a financial contribution by the Borrower or
Remedial Action or other response by or on the part of the Borrower under
Environmental Laws, or which seek damages or civil, criminal or punitive
penalties from the Borrower for an alleged violation of Environmental Laws.
7.6 ENVIRONMENTAL PERMITS. The Borrower has all permits, licenses
and approvals required under Environmental Laws, all of which are listed in
schedule attached hereto as Schedule 7.6 (if no Schedule 7.6 is attached, the
Borrower warrants that no permits are necessary).
7.7 COMPLIANCE WITH LAWS. The Borrower has complied with all laws
applicable to its business and its properties, and has all permits, licenses and
approvals required by such laws, copies of which have been provided to the Bank.
7.8 PENSION PLANS. Each Plan as to which the Borrower or any ERISA
Affiliate may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event has
occurred with respect to any Plan sponsored by the Borrower or any ERISA
Affiliate which will have the effect of creating a liability of the Borrower or
any ERISA Affiliate which will be material to the Borrower and its Subsidiaries
on a consolidated basis; (ii) neither the Borrower nor any ERISA Affiliate has
withdrawn from or terminated any Plan or initiated steps to do so, except in
accordance with applicable requirements of law and regulations and in a manner
which will not create a liability of the Borrower or any ERISA Affiliate which
would be material to the Borrower and its Subsidiaries on a consolidated basis;
(iii) during the twelve consecutive months prior to any date on which this
representation may be made or remade, no contribution failure has occurred with
respect to any Plan sufficient to give rise to the lien under Section 302(f)(l)
of ERISA, (iv) the assets of each Plan exceed the accrued liability of all
accrued benefits payable under each Plan, and (v) no Plan has been amended so as
to require the Borrower or any ERISA Affiliate to provide security as under 26
U.S.C. Section 401(a)(28). The Borrower has no continued liability with
respect to any post-retirement benefits under a Plan other than liability for
continuance coverage described in Part 6 of Title I of ERISA.
7.9 RESTRICTION ON INDEBTEDNESS. The Borrower will not create,
incur, assume or have outstanding any indebtedness for borrowed money exceeding
$50,000 in the aggregate except (i) any indebtedness owing to the Bank; (ii) a
$1,000,000 line of credit for Vaughn Products Division at Seafirst Bank,
Seattle, Washington, for the purpose of issuing letters of credit; (iii) any
other indebtedness outstanding on the date hereof and shown on the Borrower's
financial statements; or (iv) purchase money indebtedness otherwise permitted
under this Agreement.
7.10 RESTRICTION ON LIENS. The Borrower will not create, incur,
assume or permit to exist any mortgage, pledge, encumbrance or other lien or
levy upon or security interest in any Collateral (as that term is defined in the
Security Agreement) now owned or hereafter acquired, except (i) taxes and
assessments which are either not delinquent or which are being contested in good
faith with adequate reserves provided; (ii) liens in favor of the Bank; (iii)
the security interest of Seafirst Bank, Seattle, Washington, on inventory and
proceeds of inventory purchased using its letter of credit (iv) other liens
disclosed in writing to the Bank prior to the date hereof; and (v) purchase
money liens in connection with the acquisition of equipment provided that no
portion of the purchase price of such equipment has been funded by the trade-in
or available proceeds of any then-owned equipment of the Borrower.
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7.11 RESTRICTION ON CONTINGENT LIABILITIES. The Borrower will not
guarantee or become a surety or otherwise contingently liable for any
obligations of others, except pursuant to the deposit and collection of checks
and similar matters in the ordinary course of business.
7.12 CAPITAL EXPENDITURES. The Borrower shall not pay or incur, or
commit to pay or incur, any capital expenditures (including, without limitation,
capital expenditures permitted under Section 7.21 hereof and any capital lease
obligations) in excess of $3,500,000 in the aggregate during any calendar or
fiscal year.
7.13 STATUS OF GUARANTORS. Borrower owns 100% of the issued and
outstanding capital stock of each Guarantor. Borrower represents that the
operations of each of the Guarantors have been merged into the Borrower's
operations and that neither of the Guarantors operates under its own corporate
name. Borrower further represents that neither Guarantor owns any material
assets. Borrower will not sell, dispose of, transfer or assign any stock of
either Guarantor or any material asset of either Guarantor, except as otherwise
permitted under this Agreement.
7.14 INSURANCE. The Borrower will maintain insurance to such extent,
covering such risks and with such insurers as is usual and customary for
businesses operating similar properties, and as is satisfactory to the Bank,
including insurance for fire and other risks insured against by extended
coverage, public liability insurance and workers' compensation insurance; and
designate the Bank as "Mortgagee" (if applicable) and "Lender's Loss Payee" on
such policies and take such other action as the Bank may reasonably request to
ensure that the Bank will receive (subject to no other interests) the insurance
proceeds on the Bank's collateral.
7.15 TAXES AND OTHER LIABILITIES. Borrower will pay and discharge,
when due, all of its taxes, assessments and other liabilities, except when the
payment thereof is being contested in good faith by appropriate procedures which
will avoid foreclosure of liens securing such items, and with adequate reserves
provided therefor.
7.16 FINANCIAL STATEMENTS AND REPORTING. The financial statements and
other information previously provided to the Bank or provided to the Bank in the
future are or will be complete and accurate and prepared in accordance with
generally accepted accounting principles. There has been no material adverse
change in the Borrower's financial condition since such information was provided
to the Bank. The Borrower will (i) maintain accounting records in accordance
with generally recognized and accepted principles of accounting consistently
applied throughout the accounting periods involved; (ii) provide the Bank with
such information concerning its business affairs and financial condition
(including insurance coverage) as the Bank may reasonably request; and (iii)
without request, provide the Bank with the following:
- annual audited consolidated financial statements of the Borrower
prepared and certified without qualification by an accounting firm
acceptable to the Bank within 90 days after the end of each fiscal
year;
- monthly consolidated management-prepared financial statements of
the Borrower within 30 days after the end of each calendar month;
- all reports and other information filed with or provided to the
Securities and Exchange Commission or any Borrower's shareholders
and such other financial information as the Bank may reasonably
request;
- within 30 days after the end of each calendar month, provide the
Bank with a completed Borrowing Base Certificate in the form of
EXHIBIT A, together with an accounts receivable aging, and a
Covenant Compliance Certificate in the form of EXHIBIT B, each
certified as correct by the Borrower's chief financial officer;
and
- such additional financial information including but not limited to
job status reports and accounts payable agings and inventory
reports, within 10 days after request by the Bank.
7.17 INSPECTION OF PROPERTIES AND RECORDS; FISCAL YEAR. The Borrower
will permit representatives of the Bank to visit and inspect any of the
properties and examine any of the books and records of the Borrower at any
reasonable time and as often as the Bank may reasonably desire. The Borrower
will not change its fiscal year except with the prior written consent of the
Bank, which will not be unreasonably withheld.
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7.18 FINANCIAL STATUS. The Borrower will maintain on a consolidated
basis as of each calendar month-end (unless otherwise provided below):
(i) Debt Coverage Ratio of not less than 1.25 to 1.00.
(ii) Debt to Worth Ratio of not more than 2.50 to 1.00.
(iii) Tangible Net Worth of at least $10,000,000; provided that at each
fiscal year end beginning January 31, 1998, the Tangible Net Worth
requirement shall increase by seventy-five percent (75%) of the
Net Income for that fiscal year.
(iv) Net Income of at least $300,000 for each of the Borrower's fiscal
quarters.
7.19 CAPITAL ADEQUACY.
(a) In the event the Bank shall have determined that the adoption of
any generally applicable law, rule or regulation regarding capital
adequacy, or any generally applicable change therein or in the
interpretation or application thereof or compliance by the Bank with any
requests are directive regarding capital adequacy (whether or not having
the force of law) from any central bank or Governmental Authority, does
or shall have the effect of reducing the rate of return on the Bank's
capital as a consequence of its obligations hereunder to a level below
that which the Bank could have achieved but for such adoption, change or
compliance (taking into consideration the Lender's policies with respect
to capital adequacy) by an amount deemed by the Bank, in its sole
reasonable discretion, to be material, then from time to time, after
submission by the Bank to Borrower of a written demand therefor, the
Borrower shall pay to the Bank such additional amount or amounts as will
compensate the Bank for such reduction.
(b) A certificate of the Bank claiming entitlement to payment as set
forth above shall be conclusive in the absence of manifest error. Such
certificate shall set forth the nature of the occurrence giving right to
such payment, the additional amount or amounts to be paid to the Bank,
and the method by which such amounts were determined. In determining
such amounts, the Bank may use any reasonable averaging and attribution
method.
(c) In no contingency or event whatsoever shall the aggregate of all
amounts payable by Borrower to the Bank pursuant to this Section 7.19
exceed the highest rate of interest permissible under any law which a
court of competent jurisdiction shall, in a final determination, deem to
be applicable hereto. To the full extent permitted under applicable law,
Borrower and the Bank shall characterize any payments made pursuant to
this Section as an expense, fee or premium rather than as interest.
(d) The benefits of this Section shall run in favor of any
Participant.
7.20 REAFFIRMATION WITH ADVANCES. Each representation and warranty
set forth in this Article VII shall be deemed to be restated and reaffirmed by
the Borrower to the Bank on and as of the date of each Advance under this
Agreement, except that (i) any reference to the financial statements referred to
in Subsection 7.16 shall be deemed to refer to the financial statements then
most recently delivered to the Bank pursuant to said Section.
7.21 ACQUISITIONS, LOAN, INVESTMENTS. Without the written consent of
the Bank, the Borrower shall not (i) enter into any new business or joint
venture or purchase substantially all the assets of any other Person; or (ii)
make any loans to any Person, the cost of which, when aggregated with all other
such transactions, would exceed $500,000 during any calendar or fiscal year of
the Borrower. The Borrower shall not purchase any shares of stock of, or make
any capital contribution to or investment in any other Person.
7.22 CHANGE NAME OR OFFICE. The Borrower shall not change their names
(nor use any other name),the location of the Borrower's chief executive office
or the place where it keeps its books and records, without the prior written
consent of the Bank.
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7.23 CHANGE IN NATURE OF BUSINESS. The Borrower shall not make any
material change in the nature of the Borrower's business, taken as a whole, as
carried on as of the date hereof, without the prior written consent of the Bank.
7.24 NOTICE OF MATERIAL EVENTS. The Borrower agrees to immediately
notify the Bank of any material event affecting Borrower, its operations or its
assets, including, without limitation, the loss of any key customer or key
personnel.
7.25 DIVIDENDS. The Borrower shall not declare or pay any dividends
or make any other distributions, whether in cash or in property, with respect to
its capital stock, now or hereafter outstanding, or purchase, redeem retire or
otherwise acquire for value any shares of the Borrower's capital stock, warrants
or options thereof now or hereafter outstanding, except for those distribution
required pursuant to the terms and conditions of that certain Stock Put
Redemption Agreement dated August 27, 1986, between Borrower and E. D. Willette,
as amended on June 24, 1992, copies of which have been delivered to the Bank,
not to exceed $1,500,000.
7.26 BANK ACCOUNTS. Borrower shall maintain each of its primary bank
accounts at the Bank.
ARTICLE VIII. COLLATERAL AND GUARANTIES
8.1 COLLATERAL. This Agreement and the Notes are secured by any and
all security interests, pledges, mortgages or liens now or hereafter in
existence granted to the Bank to secure indebtedness of the Borrower to the
Bank, including without limitation as described in the following documents:
(a) The Security Agreements;
(b) the Pledge Agreements; and
(c) the Guaranties.
8.2 CREDIT BALANCES; SETOFF. As additional security for the payment
of the Obligations, Borrower hereby grants the Bank a security interest in, a
lien on and an express contractual right to set off against all depository
account balances, cash and any other property of the Borrower now or hereafter
in the possession of the Bank. The Bank may, at any time upon the occurrence of
a Default hereunder (notwithstanding any notice requirements or grace/cure
periods under this or other agreements between Borrower and the Bank) set off
against Obligations WHETHER OR NOT THE OBLIGATIONS (INCLUDING FUTURE
INSTALLMENTS) ARE THEN DUE OR HAVE BEEN ACCELERATED, ALL WITHOUT ANY ADVANCE OR
CONTEMPORANEOUS NOTICE OR DEMAND OF ANY KIND TO BORROWER, SUCH NOTICE AND DEMAND
BEING EXPRESSLY WAIVED.
The information in this Article VIII is for information only and the
omission of any reference to an agreement shall not affect the validity or
enforceability thereof. The rights and remedies of the Bank outlined in this
Agreement and the documents identified above are intended to be cumulative.
ARTICLE IX. DEFAULTS
9.1 EVENTS OF DEFAULT. NOTWITHSTANDING ANY CURE PERIODS DESCRIBED
BELOW, THE BORROWER WILL IMMEDIATELY NOTIFY THE BANK IN WRITING WHEN BORROWER
OBTAINS KNOWLEDGE OF THE OCCURRENCE OF ANY EVENT OF DEFAULT SPECIFIED BELOW. It
shall be an Event of Default if:
(a) NONPAYMENT. Borrower shall fail to pay (i) any interest due on
the Notes or under any L/C Reimbursement Agreement, or any fees, charges,
costs, expenses or other amounts under the Loan Document by five (5) days
after the same becomes due; or (ii) any principal amount due on the Notes
when due.
(b) NONPERFORMANCE. Borrower shall fail to perform or observe any
agreement, term, provision, condition, or covenant (other than a default
occurring under (a), (c), (d), (e), (f), (g), (h) or (i) of this Section
9.1) required to be performed or observed by Borrower hereunder or under
any other Loan Document or other agreement with or in favor of the Bank.
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(c) MISREPRESENTATION. Any financial information, statement,
certificate, representation or warranty given to the Bank by Borrower (or
any of their representatives) in connection with entering into this
Agreement or the other Loan Documents and/or any borrowing thereunder, or
required to be furnished under the terms thereof, shall prove untrue or
misleading in any material respect (as determined by the Bank in the
exercise of its reasonable judgment) as of the time when given.
(d) DEFAULT ON OTHER OBLIGATIONS. Borrower shall be in default under
the terms of any loan agreement, promissory note, lease, conditional sale
contract or other agreement, document or instrument evidencing governing
or securing any indebtedness owing by Borrower to the Bank or any
indebtedness in excess of $10,000 owing by Borrower to any third party,
and the period of grace, if any, to cure said default shall have passed.
(e) JUDGMENT. Any judgment shall be obtained against Borrower, which,
together with all other outstanding unsatisfied judgments against
Borrower, shall exceed the sum of $200,000 and shall remain unvacated,
unbonded or unstayed for a period of 30 days following the date of entry
thereof.
(f) INABILITY TO PERFORM; BANKRUPTCY/INSOLVENCY. (i) Borrower shall
cease to exist; or (ii) any Guarantor shall attempt to revoke any
guaranty of the Obligations described herein, or any guaranty becomes
unenforceable in whole or in part for any reason; or (iii) any
bankruptcy, insolvency or receivership proceedings, or an assignment for
the benefit of creditors, shall be commenced under any federal or state
law by or against Borrower or any Guarantor; or (iv) Borrower or any
Guarantor shall become the subject of any out-of-court settlement with
its creditors; or (v) Borrower or any Guarantor is unable or admits in
writing its inability to pay its debts as they mature.
(g) OVERADVANCE. The outstanding balance of the Revolving Note plus
the sum of the L/C Amount and the Acquisition Term Loan Amount shall
exceed the Borrowing Base and the Borrower shall fail promptly (a) to pay
down the balance of the Revolving Note such that it no longer exceeds the
Borrowing Base or (b) with respect to the L/C Amount, to deposit cash or
cash equivalents with the Bank in an amount equal to such excess.
(h) GARNISHMENTS/LEVIES. Any property of Borrower shall be
garnished, levied upon or attached in any proceeding and such garnishment
or attachment shall remain undischarged for a period of ten (10) days
during which execution has not been effectively stayed.
(i) ADVERSE CHANGE; INSECURITY. (i) there is a material adverse
change in the business, properties, financial condition or affairs of the
Borrower or any guarantor, or in any collateral securing the Obligations
(a "Material Adverse Change"); or (ii) the Bank in good faith deems
itself insecure.
9.2 TERMINATION OF LOANS; ADDITIONAL BANK RIGHTS. Upon the
occurrence of any of the events identified in Section 9.1, the Bank may at any
time (notwithstanding any notice requirements or grace/cure periods under this
or other agreements between Borrower and the Bank) (i) immediately terminate its
obligation, if any, to make additional Advances to Borrower; (ii) set off;
and/or (iii) take such other steps to protect or preserve the Bank's interest in
any collateral, including without limitation, notifying account debtors to make
payments directly to the Bank, advancing funds to protect any collateral and
insuring collateral at the Borrower's expense; all without demand or notice of
any kind, all of which are hereby waived.
9.3 ACCELERATION OF OBLIGATIONS. Upon the occurrence of any of the
events identified in Sections 9.1 (excluding Section 9.1(f) and the passage of
any applicable cure period, the Bank may at anytime thereafter, by written
notice to the Borrower, declare the unpaid principal balance of any Obligations,
together with the interest accrued thereon and other amounts accrued hereunder
and under the other Loan Documents, to be immediately due and payable; and the
unpaid balance shall thereupon be due and payable, all without presentation,
demand, protest or further notice of any kind, all of which are hereby waived,
and notwithstanding anything to the contrary contained herein or in any of the
other Loan Documents. Upon the occurrence of any event under Section 9.1(f),
then the unpaid principal balance of any Obligations, together with all interest
accrued thereon and other amounts accrued hereunder and under the other Loan
Documents, shall thereupon be immediately due and payable, all without
presentation, demand, protest or notice of any kind, all of which are hereby
waived, and notwithstanding anything to the contrary contained herein or in any
of the other Loan Documents. NOTHING CONTAINED IN SECTION 9.1, SECTION
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9.2 OR THIS SECTION WILL LIMIT THE BANK'S RIGHT TO SET OFF AS PROVIDED IN
SECTION 8.2 OR OTHERWISE IN THIS AGREEMENT.
9.4 OTHER REMEDIES. Nothing in this Article IX is intended to
restrict the Bank's rights under any of the Loan Documents or at law, and the
Bank may exercise all such rights and remedies as and when they are available.
ARTICLE X. CONDITIONS PRECEDENT TO CLOSING AND BORROWING
10.1 CONDITIONS TO BORROWING. The Bank shall not be obligated to make
(or continue to make) Advances hereunder unless (i) the Bank has received
executed copies of the Notes and Loan Documents, each in form and content
satisfactory to the Bank; (ii) if the loan(s) are secured, the Bank has received
confirmation satisfactory to it that the Bank has a properly perfected security
interest, mortgage and/or lien, with the proper priority; (iii) the Bank has
received certified copies of the Borrower's Articles of Incorporation and
By-Laws, certification of corporate status satisfactory to the Bank and all
other relevant documents; (iv) the Bank has received a certified copy of a
resolution or authorization in form and content satisfactory to the Bank
authorizing the loan and all acts contemplated by this Agreement and all related
documents, and confirmation of proper authorization of all guaranties and other
acts of third parties contemplated hereunder, (v) the Bank has been provided
with an Opinion of the Borrower's counsel in form and content satisfactory to
the Bank confirming the matters outlined in Section 7.2 and such other matters
as the Bank requests; (vi) no Default or Event of Default exists under this
Agreement or under any other Loan Documents, or under any other agreements by
and between Borrower and the Bank; and (vii) all proceedings taken in connection
with the transactions contemplated by this Agreement (including any required
environmental assessments), and all instruments, authorizations and other
documents applicable thereto, shall be satisfactory to the Bank and its counsel.
ARTICLE XI. MISCELLANEOUS
11.1 EXPENSES AND ATTORNEYS' FEES. In addition to any other fees
payable by the Borrower under this Agreement and/or any other Loan Documents,
the Borrower will reimburse the Bank for all attorneys' fees and all other
costs, fees and out-of-pocket disbursements (including fees and disbursements of
both inside counsel and outside counsel) incurred by the Bank in connection with
the preparation, execution, delivery, administration, defense and enforcement of
this Agreement or any of the other Loan Documents (defined below), including
fees and costs related to any waivers or amendments with respect thereto
(examples of costs and fees include but are not limited to fees and costs for:
filing, perfecting or confirming the priority of the Bank's lien, title searches
or insurance, appraisals, environmental audits and other reviews relating to
Borrower, any collateral or the loans, if requested by the Bank). The Borrower
will also reimburse the Bank for all costs of collection before and after
judgment, and the costs of preservation and/or liquidation of any collateral
(including fees and disbursements of both inside and outside counsel).
11.2 DELAY; CUMULATIVE REMEDIES. No delay on the part of the Bank
in exercising any right, power or privilege hereunder or under any of the
other Loan Documents shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, power or privilege hereunder preclude other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein specified are cumulative and are
not exclusive of any rights or remedies which the Bank would otherwise have.
11.3 RELATIONSHIP TO OTHER DOCUMENTS. The warranties, covenants and
other obligations of the Borrower (and the rights and remedies of the Bank) that
are outlined in this Agreement and the other Loan Documents are intended to
supplement each other. In the event of any inconsistencies in any of the terms
in the Loan Documents, all terms shall be cumulative so as to give the Bank the
most favorable rights set forth in the conflicting documents, except that if
there is a direct conflict between any preprinted terms and specifically
negotiated terms (whether included in an addendum or otherwise), the
specifically negotiated terms will control.
11.4 SUCCESSORS. The rights, options, powers and remedies granted in
this Agreement shall extend to the Bank and to its successors and assigns, shall
be binding upon Borrower and its successors and assigns and shall be applicable
hereto and to all renewals and/or extensions hereof.
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11.5 INDEMNIFICATION. Except for harm arising from the Bank's willful
misconduct or gross negligence, Borrower hereby indemnifies and agrees to defend
and hold the Bank harmless from any and all losses, costs, damages, claims and
expenses of any kind suffered by or asserted against the Bank relating to claims
by third parties arising out of the financing provided under the Loan Documents
or related to any collateral (including, without limitation, the Borrower's
failure to perform its obligations relating to Environmental Matters described
in Section 7.5 above). This indemnification and hold harmless provision will
survive the termination of the Loan Documents and the satisfaction of the
Obligations due the Bank.
11.6 NOTICE OF CLAIMS AGAINST BANK; LIMITATION OF CERTAIN DAMAGES. In
order to allow the Bank to mitigate any damages to Borrower from the Bank's
alleged breach of its duties under the Loan Documents or any other duty, if any,
to Borrower, Borrower agrees to give the Bank immediate written notice of any
claim or defense it has against the Bank, whether in tort or contract, relating
to any action or inaction by the Bank under the Loan Documents, or the
transactions related thereto, or of any defense to payment of the Obligations
for any reason. The requirement of providing timely notice to the Bank
represents the parties' agreed-to standard of performance regarding claims
against the Bank. Notwithstanding any claim that Borrower may have against the
Bank, and regardless of any notice Borrower may have given the Bank, THE BANK
WILL NOT BE LIABLE TO BORROWER FOR CONSEQUENTIAL AND/OR SPECIAL DAMAGES ARISING
THEREFROM, EXCEPT THOSE DAMAGES ARISING FROM THE BANK'S WILLFUL MISCONDUCT.
11.7 NOTICES. Although any notice required to be given hereunder or
under any of the other Loan Documents might be accomplished by other means,
notice will always be deemed given when place in the United States Mail, with
postage prepaid, or sent by overnight delivery service, or sent by telex or
facsimile, in each case to the address set forth below or as amended.
11.8 PAYMENTS. Payments due under the Notes and other Loan Documents
shall be made in lawful money of the United States, and the Bank is authorized
to charge payments due under the Loan Documents against any account of Borrower.
11.9 APPLICABLE LAW AND JURISDICTION; INTERPRETATION; JOINT AND SEVERAL
LIABILITY. This Agreement and all other Loan Documents shall be governed by
and interpreted in accordance with the laws of the State of Minnesota, except to
the extent superseded by Federal law. Invalidity of any provision of this
Agreement shall not affect the validity of any other provision. Borrower HEREBY
CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT SITUATED IN
HENNEPIN COUNTY, MINNESOTA AND WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, WITH REGARD TO ANY ACTIONS, CLAIMS, DISPUTES OR PROCEEDINGS RELATING
TO THIS AGREEMENT, THE NOTES, THE COLLATERAL, ANY OTHER LOAN DOCUMENT, OR ANY
TRANSACTIONS ARISING THEREFROM, OR ENFORCEMENT AND/OR INTERPRETATION OF ANY OF
THE FOREGOING. Nothing herein shall affect the Bank's rights to serve process
in any manner permitted by law, or limit the Bank's right to bring proceedings
against the Borrower in the competent courts of any other jurisdiction or
jurisdictions. This Agreement, the other Loan Documents and any amendments
hereto (regardless of when executed) will be deemed effective and accepted only
at the Bank's offices, and only upon the Bank's receipt of the executed
originals thereof. If there is more than one Borrower, the liability of the
Borrower will be joint and several, and the reference to "Borrower" will be
deemed to refer to all Borrowers. Without limitation of the foregoing, Borrower
acknowledges that its obligations to the Bank are primary obligations and that
neither intend merely to be a surety or accommodation party. Borrower expressly
waives all defenses against the Bank for payment of the Obligations except
payment in full, including any anti-deficiency defense, single action rule or
procedural limitation on the rights of the Bank against Borrower.
11.10 COPIES; ENTIRE AGREEMENT; MODIFICATION. Borrower hereby
acknowledges the receipt of a copy of this Agreement and all other Loan
Documents. The provisions of the Loan Documents shall not be altered, amended
or waived without the express written consent of the Bank (and the Borrower,
when appropriate).
11.11 WAIVER OF JURY TRIAL. BORROWER AND THE BANK HEREBY JOINTLY AND
SEVERALLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
RELATING TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS THEREUNDER, AND
COLLATERAL SECURING THE OBLIGATIONS OR ANY TRANSACTION ARISING THEREFROM OR
CONNECTED THERETO. THE BORROWER AND THE BANK EACH REPRESENTS TO THE OTHER THAT
THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY GIVEN.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this REVOLVING CREDIT
AND TERM LOAN AGREEMENT as of August 29, 1997.
VAUGHN COMMUNICATIONS, INC.
By: \s\ M. Charles Reinhart
------------------------------
Its: Secretary
-----------------------------
FIRSTAR BANK OF MINNESOTA, N.A.
By:
------------------------------
Its:
------------------------------
17
<PAGE>
EXHIBIT 13
1998 ANNUAL REPORT TO SHAREHOLDERS
THE COMPANY
Vaughn Communications, Inc., through its VAUGHN COMMUNICATIONS DIVISION, is a
multimedia business services provider providing high volume video tape
duplication and digital media (compact disc and magnetic floppy disk)
replication for the corporate, educational, and institutional user. The
Communications Division has video tape duplication facilities in Minneapolis,
Milwaukee, Phoenix, Tampa, Portland, Atlanta, Dallas, Houston, Raleigh, Chicago,
Denver and Seattle, and its facility in Fremont, California provides digital
media replication services. Sales offices are located in St. Louis, New York
City, Irvine, Orlando, Knoxville, Baltimore and Ft. Lauderdale.
In addition to its multimedia services, the Company receives sixteen percent of
its total revenue from the VAUGHN PRODUCTS DIVISION which manufactures and sells
gift products and collectibles to retailers in growing niche markets.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
%
F'98 F'97 Change
------- ---------- ---------
<S> <C> <C> <C>
Revenue. . . . . . . . . $74,488,000 $68,798,000 8%
Pretax Income. . . . . . 3,338,000 3,475,000 (4)%
Net Income . . . . . . . 1,938,000 2,015,000 (4)%
--------- --------- ----
--------- --------- ----
Net Income per common
share . . . . . . . . . $.48 $.51 (6)%
---- ---- ---
---- ---- ---
</TABLE>
1
<PAGE>
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS
Last year's challenge was to exploit new technological opportunities and
still deliver excellent financial results. Here is how we did:
- Communication Division's sales increased 13% in fiscal 1998, from
$55,000,000 to $62,300,000.
- Acquisition of CD replication facility and customer base capable of
producing over $20 million annually.
- Improved gross margins from 32.9% to 33.5% in the Communications
Division.
- Pretax income increased 15% in the Communications Division excluding
results of the CD acquisition.
Consolidated net sales, including acquisitions, increased 8% in fiscal
1998. The increase was attributable to a 13% increase in the Communications
Division, but was offset by an 11% decrease in sales from the Products
Division. The Products Division manufactures and sells gift products
throughout the United States. A change in senior management at midyear and
continued difficulties in consolidating our operations in Seattle all
contributed to the disappointing results. We are investigating options to
ensure that we get an adequate return out of the resources allocated to this
division.
The Company continues to focus its investment efforts on the Communications
Division. We are transforming this division into a national multimedia business
services company providing media duplication (videotape, compact disc, floppy
disk, etc.) and related services throughout our 21 locations in the United
States. The market for software duplication (CD and floppy) is growing rapidly
(15-25%+) as more businesses convert to using interactive laptops and more
computers penetrate the home market. During fiscal 1998 we continued to seek
out strategic acquisitions. On July 31, 1997, Certified Media Corporation, a
compact disc replicator located in Fremont, California was acquired. On
February 1, 1998, Copywise, Inc., a software duplicator and assembly company,
also located in Fremont, was acquired. We have combined the operations of these
two companies and expect ongoing consolidated savings in overheads. We are now
rolling out the product and service offerings of these combined companies to our
existing national video sales force who are currently calling on 6,500 active
business customers. We believe that we are well positioned for strong sales
growth and market penetration.
A new initiative for us this year is to focus more resources on our direct
mail video business opportunity. Fiscal 1998 yielded impressive revenue in this
area. We expect to see significant revenue growth as we place more emphasis on
this area. This past year we opened a Direct Mail Media office and selected a
dedicated staff of product manager, sales, and customer service to focus on this
business. Businesses spend from $20-$40 billion annually on direct mail and
this business is growing at 15% a year). Due to newer technologies in desktop
editing, lower videotape material costs, improved manufacturing economics and a
cooperative postal climate, video direct mail is now comparably affordable with
print direct mail. We intend to be a major provider to this fast-growing
marketplace.
In conclusion, we look forward to an exciting new year. We have five areas
in which we expect to grow. First, we plan to roll out our new CD and software
replication services to our existing 6,500 active video customers. Second, we
plan to significantly increase the sales of our related business services such
as graphic design, video compression, digital translation, and fulfillment to
both our video and software customer base. Third, we plan to continue to seek
acquisitions as the video market consolidates its suppliers and as the software
market continues to expand rapidly in the business sector. Fourth, we plan to
add market share by expanding into new geographic areas with sales offices and
by adding software replication equipment to some of our existing video
facilities where overheads are already paid for. Fifth, and finally, we plan to
be a major provider of video direct mail services to the direct mail industry.
As a final note, I would like to talk about our most important asset. I am
proud of the hard work of our employee-owners. Their continued commitment to
helping the Company achieve its objectives has been a key factor in our
2
<PAGE>
historical success. As we look to the future, I am confident that we will reach
our goals because of the dedication of our employees.
/s/ E. D. Willette
- -------------------------------------
E. D. Willette
Chairman and Chief Executive Officer
/s/ Donald J. Drapeau
- -------------------------------------
Donald J. Drapeau
President and Chief Operating Officer
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Vaughn Communications, Inc.'s consolidated financial statements represent
the combined results of the Company's magnetic and optical media replication
business (Communications Division), which represents 84% of the Company's sales,
and the gift products business (Products Division). Management's Discussion is
presented in three parts: Consolidated, Communications Division and Products
Division.
COMPARISON OF FISCAL 1998 AND 1997 OPERATING RESULTS
CONSOLIDATED:
The Company's net sales, including net sales provided by acquired business
from the date of acquisition, increased 8% in fiscal 1998 to approximately
$74,488,000. The increase was attributable to a 13% increase in net sales from
the Communications Division which offset an 11% decrease in net sales from the
Products Division. Gross margins increased slightly in fiscal 1998, from 31.5%
to 31.9%. Selling, general and administrative expenses were approximately
$19,093,000, a 12% increase over the previous year, and represent 25.6% of net
sales, compared to 24.7% the previous year. Net interest expense increased
slightly from approximately $1,237,000 in fiscal 1997 to $1,295,000 in fiscal
1998. Pretax income in fiscal 1998 was approximately $3,338,000, a 4% decrease
from the prior year. The decrease was due to a $532,000 decrease in pretax
income from the Products Division (pretax income of $161,000 in fiscal 1997
compared to a pretax loss of $371,000 in fiscal 1998). This decrease was
partially offset by a 12% increase in pretax income from the Communications
Division. The Company's effective tax rate remained at approximately 42%.
Consolidated net income declined 4%, from approximately $2,015,000 in fiscal
1997 to approximately $1,938,000 in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
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 fiscal 1998, cash flow from
operations was $4,668,000, a 17% increase over the previous year. This cash, in
addition to borrowings from third parties, was used to fund capital expenditures
of $4,891,000 and to partially fund the $4,611,000 invested in the acquisitions
of Certified Media and Dub South. In addition to the above mentioned sources of
cash, the Company also issued common stock valued at $1,200,000 to fund the
acquisition of Certified Media.
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
$1,640,000 is available at January 31, 1998), are adequate to meet the operating
requirements of the Company for the next twelve months. The Company continues
to explore strategic acquisitions, and depending on the size and terms of the
potential transaction, additional financing may be required. Expenditures for
new equipment are expected to be approximately $6,000,000 in fiscal 1999 and
will be funded by leasing arrangements with third parties and cash from
operations. As part of the Company's strategic planning process, it continues
to explore alternative funding proposals.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report and other written reports and oral statements made from
time to time by the Company may contain so-called "forward-looking statements,"
all of which are subject to risks and uncertainties. One can identify these
forward-looking statements by their use of words such as "expects," plans,"
"will," "estimates," and other words of similar meaning. One can also identify
them by the fact that they do not relate strictly to historical or current
facts. These statements are likely to address the Company's growth strategy,
financial results, or acquisition strategies. One must carefully consider any
such statement and should understand that many factors could cause actual
results to differ from the Company's forward-looking statements. These factors
include inaccurate
4
<PAGE>
assumptions and a broad variety of other risks and uncertainties, including some
that are known and some that are not. No forward-looking statement can be
guaranteed and actual results may vary materially.
YEAR 2000 COMPLIANCE
Computer programs which were written using two digits (rather than four) to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000, a result commonly referred to as the "Year 2000"
problem. This could result in a system failure, or miscalculation.
In 1997 Vaughn initiated a program to evaluate whether internally developed
and purchased computer programs may experience operational problems when the
year 2000 is reached. The scope of this effort included internal computer
systems and supplier capabilities. The Company is completing this review to
determine whether its computer programs are Year 2000 compliant, as well as
determining what remedial action is required, and the costs associated with
required modification or replacements. A significant amount of information has
been collected and analyzed, however, the process will not be completed until
calendar year 1998. The Company plans to complete all remediation efforts for
its systems prior to the year 2000. Based on its evaluation to date, management
believes that, while the Company will incur internal and possibly external costs
to address the Year 2000 problem, such costs will not have a material impact on
the operations, cash flows, or financial condition of Vaughn Communications,
Inc.
COMMUNICATIONS DIVISION:
The Communications Division is a national multimedia business services
company providing videotape duplication and digital media (compact disc and
magnetic floppy disk) replication and related services throughout the United
States. Its strategy is to grow through internally generated growth and through
strategic acquisitions. The Company continued to implement this strategy in
fiscal 1998 with two strategic acquisitions. In order to better meet the
current and long-term needs of its business customers, the Company entered the
digital media replication business with the acquisition, on July 31, 1997, of
Certified Media Corporation, a compact disc ("CD") replicator located in
Fremont, California. The noncontingent purchase price of $5,500,000 included
$2,800,000 of cash, 171,210 shares of the Company's common stock valued at
$1,200,000 and a $1,500,000 note to the sellers. The purchase price may be
increased an additional $2,000,000 based upon Certified Media attaining certain
financial objectives. The Company believes it is well positioned for strong
sales growth and market penetration in this business as it intends to capitalize
on its existing sales force to sell this new product offering. Also on July 31,
1997, the Company acquired certain of the assets of Dub South, a videotape
duplicator located in Atlanta, Georgia. The operations of Dub South were merged
into the Company's pre-existing facility in Atlanta. The noncontingent purchase
price of $750,000 included approximately $311,000 of cash and the assumption of
$439,000 of liabilities. The purchase price may be increased by an additional
$1,200,000 depending on the financial performance of Dub South. Both
acquisitions have been accounted for as purchases and their operating results
are included in the Company's results for the period subsequent to their
acquisition date.
The Communications Division's net sales increased 13% in fiscal 1998, from
approximately $55,000,000 in fiscal 1997 to approximately $62,300,000. The net
sales generated due to the acquisition of Certified Media and a 3% increase in
the sales from pre-existing facilities contributed to the sales growth. The
Company believes that although the growth of videotape duplicators has slowed,
there continues to be opportunities for growth in this market and there are
significant growth opportunities in the CD replication market, although there
can be no assurances that such growth will be experienced by the Company.
The gross profit margins increased from 32.9% in fiscal 1997 to 33.5% in
fiscal 1998. The improvement was the result of cost control measures instituted
at the beginning of the year and continued leveraging of fixed expenses. The
Company expects to be able to maintain its profit margins by continuing to
improve efficiencies, the continued leveraging of fixed costs with increased
volume, and continuing to utilize low cost providers of raw materials.
Selling, general and administrative expenses in fiscal 1998 were up 16.7%
over fiscal 1997 and represented 26% of net sales in fiscal 1998 compared to
25.2% in fiscal 1997. The increase in selling, general and
5
<PAGE>
administrative expenses reflects additional expenses associated with the
acquisitions previously discussed, including goodwill amortization and
noncompete payments.
Net interest increased to approximately $999,000 in fiscal 1998, an
increase of approximately $104,000 from the previous year. The increase was due
to interest associated with additional acquisition debt.
Pretax income for the Communications Division was $3,709,000, a 12%
increase over the previous year. Excluding the results of the acquisition of
Certified Media, pretax income increased by 15% in fiscal 1998. Certified
Media's operating profit after adding back amortization expense and interest on
the acquisition debt was approximately $260,000.
The Company invested approximately $4,432,000 on equipment and facilities
to expand its production capacity. This investment included approximately
$2,400,000 spent to expand the CD replication capacity. The investment in
capital equipment was funded by long-term financing and internally generated
funds.
PRODUCTS DIVISION:
The Products Division, which manufactures and sells gift products
throughout the United States, struggled during fiscal year 1998. A decrease in
sales from the prior year, a change in senior management at mid-year, and
continuing difficulties in consolidating its operations in Seattle all
contributed to the disappointing results. The Company is investigating options
which will ensure that the resources allocated to the Products Division will
generate an adequate return on its investment.
Net sales of approximately $12,196,000 were an 11% decrease from the prior
year. The decrease in sales also resulted in a decrease in the leveraging of
fixed costs, resulting in a reduction in gross margins from 26% in fiscal 1997
to 23% in fiscal 1998. Although selling, general and administrative expenses
decreased from approximately $3,273,000 in fiscal 1997 to approximately
$3,035,000, it was not enough to offset the decrease in net sales and gross
margins, and pretax income declined from $161,000 in fiscal 1997 to a pretax
loss of $371,000 in fiscal 1998.
COMPARISON OF FISCAL 1997 AND 1996 OPERATING RESULTS
The Company's strategy is to increase revenue and profitability through
growth in existing channels, through acquisitions, and through improvement in
efficiencies. In fiscal 1997 the Company was partially successful in
implementing this strategy. The Company merged with Satastar Corporate
Services, Inc., a videotape duplicator located in Chicago, expanded the Seattle
operation from a sales office to a full service duplication facility, and
completed the integration of Indian Arts and Crafts, Inc. (acquired January 31,
1996) into the Products Division by consolidating the Division's operations in
Seattle. In spite of these accomplishments, the financial results for fiscal
1997 did not meet the Company's expectations. Lower than expected sales,
coupled with increased costs associated with expanding the business, resulted in
a decrease in net income from the previous year. In response to these results,
the Company implemented cost containment measures during the year and expects
these measures to have a positive impact on next year's results.
The Company's net sales increased from $59,569,000 in fiscal 1996 to
$68,798,000 in fiscal 1997, a 15% increase, while gross margins remained at
32%. Selling, general and administrative expenses for fiscal 1997 were up 21%
over the previous year and represented 25% of net sales, up one percentage
point from last year. Operating profit decreased 7% from last year to
approximately $4,712,000. Interest expense was down slightly from the
previous year. The Company's effective tax rate in fiscal 1997 was 42%. Net
income decreased 10% from $2,247,000 in fiscal 1996 to $2,015,000 in fiscal
1997.
The net contribution each division made to these results is discussed
below.
COMMUNICATIONS DIVISION:
On June 28, 1996, the Company acquired Satastar Corporate Services, Inc. by
issuing 165,357 shares of common stock in exchange for all the outstanding
capital stock of Satastar. The business combination has been
6
<PAGE>
accounted for as a pooling of interest, and, accordingly, the financial
statements and analysis include the combined results of operations from the date
Satastar commenced operations.
The Communications Division's sales of $55,040,000 in fiscal 1997 were a 5%
increase from the previous year's sales of $52,365,000. The slowdown in sales
growth in fiscal 1997 is attributed in part to a decrease in sales to the
Company's largest customers. While the Company added more new customers in
fiscal 1997 than in fiscal 1996, it was unable to offset the reduced sales to
its largest accounts. The Company believes that by refocusing its sales
efforts, the growth in sales will continue. There can be no assurance, however,
that such growth will be at or near historical levels, particularly since the
growth of the videotape duplication market may not be as great as historical
levels.
The gross profit margin increased slightly to 32.9% in fiscal 1997 from
32.7% in fiscal 1996. Although the selling price of videotape duplication
continues to decline, the Company expects to maintain its profit margins by
improving efficiencies, leveraging fixed costs with increased volume, and
continuing to utilize low cost providers of raw materials.
Selling, general and administrative expenses in fiscal 1997 increased 12%
from $12,384,000 in fiscal 1996 to $13,872,000 in fiscal 1997, and represented
25% of net sales in fiscal 1997 compared to 24% of net sales in fiscal 1996.
The increase in selling, general and administrative expenses can be attributed
in part to additional costs associated with the acquisition of Satastar, and
expenses incurred during the consolidation of the Company's existing facility in
Chicago with the facility used by Satastar.
Net interest expense decreased 14% in fiscal 1997 due to lower levels of
borrowing.
Pre-tax profit for the Communications Division was $3,314,000, a 11%
decrease from the previous year's pre-tax profit of $3,707,000. The decrease
was attributable primarily to the higher levels of operating expenses.
The Company spent approximately $2,750,000 on equipment and facilities to
expand its production capacity. The investment was funded by long-term
financing and internally generated funds. The Communications Division expects
to spend approximately $1,400,000 for equipment in fiscal 1998.
PRODUCTS DIVISION:
The Products Division's sales of $13,758,000 in fiscal 1997 were up 91%
from the previous year. The increase was due entirely to the acquisition of
Indian Arts and Crafts, Inc. on January 31, 1996. The sales from the newly
acquired product line offset a slight decrease in sales of the pre-existing
product line.
The fiscal 1997 gross profit margin of 26% remained approximately the same
as the previous year. A slight decrease in raw material costs was offset by
higher labor costs. The higher labor costs were associated with operating two
facilities prior to consolidating operations in Seattle in September, 1996. The
company expects that the combined operations will result in improved
efficiencies next year.
Operating expenses for fiscal 1997 increased 85% to $3,270,000 due to the
acquisition of Indian Arts and Crafts, Inc. As a percentage of sales, operating
expenses decreased from 24.5% in fiscal 1996 to 23.8% in fiscal 1997.
Interest expense increased from $75,000 in fiscal 1996 to $195,000 in
fiscal 1997 due primarily to higher debt associated with the acquisition.
Pre-tax income increased 100% in fiscal 1997, from $80,000 to $161,000.
7
<PAGE>
SELECTED FINANCIAL DATA FROM CONTINUING OPERATIONS (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended January 31
1998 1997 1996 1995 1994
------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . $ 74,488 $ 68,798 $ 59,569 $ 45,471 $ 35,014
Cost of goods sold . . . . . . . 50,762 47,111 40,518 30,920 23,802
--------- -------- -------- -------- --------
Gross profit . . . . . . . . . . 23,726 21,687 19,051 14,551 11,212
Operating expenses . . . . . . . 19,092 16,975 13,973 10,821 8,914
--------- -------- -------- -------- --------
Operating income . . . . . . . . 4,634 4,712 5,078 3,730 2,298
Interest expense . . . . . . . . (1,411) (1,295) (1,357) (710) (573)
Other income (expense) . . . . . 115 58 66 (67) 24
--------- -------- -------- -------- --------
Income from continuing operations
before income taxes. . . . . 3,338 3,475 3,787 2,953 1,749
Income taxes . . . . . . . . . . 1,400 1,460 1,540 1060 667
--------- -------- -------- -------- --------
Income from continuing operations 1,938 2,015 2,247 1,893 1,082
Income from
discontinued operations. . . - - - 493 74
--------- -------- -------- -------- --------
Net income . . . . . . . . . . . $ 1,938 $ 2,015 $ 2,247 $ 2,386 $ 1,156
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Net income per common share:
Continuing operations. . . . $ .49 $ .55 $ .69 $ .64 $ .39
Discontinued operations . . . . - - - .17 .03
--------- -------- -------- -------- --------
. . . . . . . . . . . . . . . . $ .49 $ .55 $ .69 $ .81 $ .42
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Net income per common share -
assuming dilution:
Continuing operations. . . . $ .48 $ .51 $ .61 $ .55 $ .32
Discontinued operations. . . - - - .14 .02
--------- -------- -------- -------- --------
. . . . . . . . . . . . . . . . $ .48 $ .51 $ .61 $ .69 $ .34
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Weighted average common
shares outstanding . . . . . . . 3,918 3,640 3,244 2,963 2,749
Dilutive options . . . . . . . . 102 284 434 455 600
--------- -------- -------- -------- --------
. . . . . . . . . . . . . . . . 4,020 3,924 3,678 3,418 3,349
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
<CAPTION>
January 31
1998 1997 1996 1995 1994
------ ------- ------ ------ ------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital. . . . . . . . . $ 9,093 $ 9,268 $ 7,559 $ 4,186 $ 2,420
Total assets . . . . . . . . . . 44,312 34,751 32,816 22,186 19,573
Long-term obligations
(excluding current portion) . 9,075 5,603 7,778 3,626 4,024
Total liabilities. . . . . . . . 23,993 17,903 19,298 13,681 13,646
Total stockholders' equity . . . 20,319 16,848 13,518 8,505 5,927
</TABLE>
8
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 31
1998 1997
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, less allowance of $1,126,000 and $650,000,
respectively $13,822,621 $10,685,149
Other receivables 195,372 179,369
Inventories 8,887,898 9,256,455
Deferred income taxes 285,070 115,070
Prepaid expenses and other current assets 748,177 668,061
Income taxes receivable 72,668 664,042
---------------------------
Total current assets 24,011,806 21,568,146
Property, plant and equipment:
Land 48,424 48,424
Buildings and leasehold improvements 3,350,257 2,866,038
Machinery and equipment 27,786,725 22,039,414
---------------------------
31,185,406 24,953,876
Less accumulated depreciation (19,899,664) (16,237,440)
---------------------------
11,285,742 8,716,436
Intangible assets, net of accumulated amortization
of $1,102,000 and $620,000, respectively 8,331,705 3,549,917
Long-term receivable 476,905 705,781
Other 205,466 210,943
---------------------------
$44,311,624 $34,751,223
---------------------------
---------------------------
<CAPTION>
JANUARY 31
1998 1997
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks under credit facilities $ 5,760,436 $ 4,781,312
Accounts payable 3,216,356 2,982,508
Salaries, wages and payroll taxes 818,300 696,894
Other 1,255,415 1,009,306
Current portion of long-term debt and capital
lease obligations 3,867,986 2,830,033
---------------------------
Total current liabilities 14,918,493 12,300,053
Long-term debt, net of current portion 6,517,724 4,563,880
Capital lease obligations, net of current portion 2,502,540 963,533
Deferred income taxes 54,326 75,326
SHAREHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares--20,000,000
Issued and outstanding shares--4,088,582 and
3,726,513, respectively 408,858 372,652
Additional paid-in capital 9,074,004 7,578,406
Retained earnings 10,835,679 8,897,373
---------------------------
Total shareholders' equity 20,318,541 16,848,431
---------------------------
$44,311,624 $34,751,223
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Net sales $74,487,763 $ 68,797,983 $ 59,568,901
Cost of goods sold 50,761,624 47,111,338 40,518,292
---------------------------------------
Gross profit 23,726,139 21,686,645 19,050,609
Selling, general and administrative
expenses 19,092,543 16,974,225 13,973,199
---------------------------------------
Income from operations 4,633,596 4,712,420 5,077,410
Other income (expense):
Interest income 115,194 57,615 36,384
Interest expense (1,410,484) (1,294,539) (1,356,958)
Other - - 30,000
---------------------------------------
Income before income taxes 3,338,306 3,475,496 3,786,836
Income taxes 1,400,000 1,460,000 1,539,660
---------------------------------------
Net income $ 1,938,306 $ 2,015,496 $ 2,247,176
---------------------------------------
---------------------------------------
Net income per share:
Basic $.49 $.55 $.69
Diluted .48 .51 .61
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1995 2,997,658 $299,766 $3,570,984 $ 4,634,701 $ 8,505,451
Common Stock issued in
connection with business
acquisition 325,138 32,514 2,387,486 - 2,420,000
Stock options exercised 148,965 14,897 175,041 - 189,938
Common Stock received as partial
consideration of stock options
exercised (8,935) (894) (62,520) - (63,414)
Tax benefit on stock options
exercised - - 218,374 - 218,374
Net income - - - 2,247,176 2,247,176
---------------------------------------------------------------------------------
Balance at January 31, 1996 3,462,826 346,283 6,289,365 6,881,877 13,517,525
Stock options exercised 275,278 27,528 529,307 - 556,835
Common Stock received as partial
consideration of stock options
exercised (11,591) (1,159) (149,524) - (150,683)
Tax benefit on stock options
exercised - - 909,258 - 909,258
Net income - - - 2,015,496 2,015,496
---------------------------------------------------------------------------------
Balance at January 31, 1997 3,726,513 372,652 7,578,406 8,897,373 16,848,431
Common Stock issued in
connection with business
acquisition 171,210 17,120 1,182,880 - 1,200,000
Stock options exercised 202,183 20,218 211,296 - 231,514
Common Stock received as partial
consideration of stock options
exercised (11,324) (1,132) (83,592) - (84,724)
Tax benefit on stock options
exercised - - 185,014 - 185,014
Net income - - - 1,938,306 1,938,306
---------------------------------------------------------------------------------
Balance at January 31, 1998 4,088,582 $408,858 $9,074,004 $10,835,679 $ 20,318,541
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,938,306 $ 2,015,496 $ 2,247,176
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 481,922 277,642 190,767
Depreciation 3,696,103 3,195,898 2,877,538
Deferred income taxes (191,000) 48,121 168,639
Changes in operating assets and liabilities:
Receivables (3,121,225) (564,055) (541,104)
Inventories 500,496 (1,478,188) 80,364
Income taxes 776,388 193,295 353,128
Prepaid expenses and other current assets (14,284) 74,047 (81,485)
Accounts payable 233,848 45,151 (1,072,440)
Salaries, wages and payroll taxes 121,406 113,498 (118,013)
Other liabilities 246,109 81,100 (127,381)
-----------------------------------------
Net cash provided by operating activities 4,668,069 4,002,005 3,977,189
INVESTING ACTIVITIES
Purchases of businesses, less cash acquired (3,186,009) - (4,355,010)
Additions to property, plant and equipment (4,452,983) (3,069,391) (2,627,110)
Long-term receivables 228,876 (14,223) 158,908
Net carrying amount of property disposals 6,131 1,444 5,938
Other (1,929) 255,347 18,992
-----------------------------------------
Net cash used in investing activities (7,405,914) (2,826,823) (6,798,282)
FINANCING ACTIVITIES
Increase in long-term debt 2,800,000 400,000 5,740,922
Proceeds from sale of Common Stock under option plans 146,790 406,152 126,524
Payments of long-term debt and capital lease obligations (3,286,791) (3,404,244) (3,181,486)
(Payments) borrowings under revolving credit facility 979,124 766,907 (1,058,792)
Lease financing of equipment 2,098,722 656,003 1,188,697
-----------------------------------------
Net cash provided by (used in) financing activities 2,737,845 (1,175,182) 2,815,865
-----------------------------------------
Decrease in cash and cash equivalents - - (5,228)
Cash and cash equivalents at beginning of year - - 5,228
-----------------------------------------
Cash and cash equivalents at end of year $ - $ - $ -
-----------------------------------------
-----------------------------------------
Supplemental schedule of non-cash investing and
financing activities:
Capital leases of equipment $ 437,974 $ 93,112 $ 163,488
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Vaughn Communications, Inc. is one of the largest providers in the United States
of high volume videotape duplication and compact disc replication services to
corporations, publishers and educational companies located in the United States.
The Company operates videotape duplication centers throughout the country in
areas selected because of their proximity to large corporate bases. In addition
to video services, the Company has generated approximately 16%, 20% and 12% of
its net sales for the years ended January 31, 1998, 1997 and 1996, respectively,
from the manufacture and sale of gift products to retailers in niche markets.
Additional information on the Company's operations by segment is included in
Note 9 to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and of
its majority-owned subsidiaries after elimination of all significant
intercompany accounts and transactions.
INVENTORIES
Inventories are valued at the lower of average cost (first-in, first-out method)
or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Assets are
depreciated using the straight-line and declining balance methods over their
estimated useful lives which are as follows:
Buildings 40 years
Equipment 3 - 5 years
Leasehold improvements 5 - 10 years
The carrying value of property, plant and equipment is assessed annually and/or
when factors indicating an impairment are present.
INTANGIBLE ASSETS
The intangible assets include the excess of purchase price over the fair value
of net assets of businesses acquired and are being amortized over periods of 10
to 40 years using the straight-line method. The carrying value of intangible
assets is assessed annually and/or when factors indicating impairment are
present.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method. Deferred
taxes are recorded to reflect the tax consequences of differences between tax
and financial reporting basis of assets and liabilities.
NET INCOME PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting Standard
No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 requires the disclosure of
basic and diluted earnings per share (EPS). Basic EPS is calculated using income
available to common shareholders divided by the weighted average of common
shares outstanding during the year. Diluted EPS is similar to basic EPS except
that the weighted average of common shares outstanding
13
<PAGE>
is increased to include the number of additional shares that would have been
outstanding if the dilutive potential common shares, such as options, had been
issued. All prior year earnings per share have been restated in accordance with
the provisions of SFAS 128. (See Note 11).
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, (APB 25) and related interpretations in accounting
for its employee stock options. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. INVENTORIES
The components of inventories were as follows at January 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Raw material $1,723,940 $2,190,327
Finished goods 7,163,958 7,066,128
-------------------------
$8,887,898 $9,256,455
-------------------------
-------------------------
</TABLE>
3. NOTES PAYABLE TO BANKS
In August 1997, the Company amended its $17,000,000 credit facility with a bank
to provide acquisition funding in the amount of $2,800,000 used in the
acquisition of Certified Media Corporation (see Note 10). In addition to the
$2,800,000 of acquisition term loan, the facility provides funding for prior
acquisitions, equipment purchases, and a revolving credit facility to be used to
finance working capital. The interest rate on the term debt and the revolving
debt is at the prime rate (8.5% at January 31, 1998). Advances under the credit
facility are limited to the lesser of $17,000,000 less the sum of the
outstanding principal amounts on any term notes payable to the bank, or the
collateral value of receivables and inventory. Interest on the credit facility
is payable monthly. All the Company's assets except real estate and fixtures
have been pledged to secure this indebtedness. This facility expires on May 31,
1998.
Pursuant to the loan agreement, the Company is required, among other things, to
maintain minimum levels of net worth, net income, debt service coverage and
ratio of debt to net worth. The Company is required to receive approval from the
bank prior to incurring or assuming any indebtedness not in the ordinary course
of business, paying any dividends or redeeming its capital stock, entering into
any transactions of merger, consolidation or liquidation, or making loans or
investments in another business.
14
<PAGE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following at January 31:
1998 1997
--------------------------
<S> <C> <C>
Term note payable to bank under credit facility in
20 quarterly installments of $140,000, secured
by all the Company's assets except real estate
and fixtures thereon. Interest is payable
monthly at the bank's prime rate (8.5% at
January 31, 1998). $2,520,000 $ -
Term note payable to bank under credit facility in
20 quarterly installments of $250,000, secured
by all the Company's assets except real estate
and fixtures thereon. Interest is payable
monthly at the bank's prime rate (8.5% at
January 31, 1998).
2,250,000 3,250,000
Note payable to Certified Media Corporation
payable in five annual installments of $300,000
plus accrued interest commencing July 31, 1998.
Interest is at the prime rate (8.5% on January
31, 1998). Secured by certain assets.
1,500,000 -
First mortgage loan on land and building secured
by properties having a net book value of
$620,000 at January 31, 1998.
1,315,342 1,366,545
Note payable to former shareholders of Certified
Media Corporation, payable in three annual
installments of $133,333 plus accrued interest
commencing July 31, 1998. Interest is at the
prime rate (8.5% on January 31, 1998).
400,000 -
Term note payable to bank in 36 monthly
installments of $23,611, secured by all the
Company's assets except real estate and fixtures
thereon. Interest is payable at
the bank's prime rate (8.5% on January 31, 70,833 330,555
1998).
Term note payable to bank in 36 monthly
installments of $11,111, secured by all the
Company's assets except real estate and fixtures
thereon. Interest is payable at
the bank's prime rate (8.5% on January 31, 1998). 222,222 344,444
Notes payable to Indian Arts and Crafts, Inc.
Interest on both notes is payable annually on
the anniversary date at 8.5%. Notes are secured
by assets having a net book value of $2,019,000
at January 31, 1998.
Note I is payable in annual installments of
$83,333 plus accrued interest. 166,667 166,667
Note II is payable in annual installments of
$107,143 plus accrued interest. 642,857 642,857
15
<PAGE>
<CAPTION>
4. LONG-TERM DEBT (CONTINUED) 1998 1997
--------------------------
<C> <C>
Note payable to Cranberry Novelty Manufacturing
Inc. payable in 10 annual installments of
$17,500. Interest is payable annually at the
prime rate (8. 5% at January 31, 1998). $ 87,500 $ 105,000
Note payable to Advanced Audio/Video Productions,
Inc., payable in 3 annual installments of
$33,333 plus accrued interest at the prime rate
(8. 5% on January 31, 1998). Secured by certain 33,333 66,667
assets.
Note payable, paid in full in fiscal 1998 - 91,125
--------------------------
9,208,754 6,363,860
Current portion (2,691,030) (1,799,980)
--------------------------
$ 6,517,724 $4,563,880
--------------------------
--------------------------
</TABLE>
In January 1997, the Company renewed its mortgage for three years at an interest
rate of 7.625%. It is payable in monthly installments of $12,802 including
interest with the balance payable in full on January 1, 2000. The agreement
grants the Company a three year renewal option at the then prevailing three year
commercial mortgage lending rate. The mortgage may be prepaid in whole at any
time subject to a prepayment premium. The interest rate is subject to a 4%
increase in certain events of default.
Required annual principal payments on long-term debt are as follows for years
ending January 31: 1999--$2,691,030; 2000--$3,460,462; 2001--$1,367,976;
2002--$984,644; 2003--$704,642.
Interest paid approximated interest expense for 1996, 1997 and 1998.
5. LEASES
The Company leases various types of equipment under long-term lease agreements
classified as capital leases. Property, plant and equipment includes the
following leased property:
<TABLE>
<CAPTION>
JANUARY 31
1998 1997
--------------------------
<S> <C> <C>
Equipment $ 6,430,000 $ 4,392,000
Less accumulated amortization (2,336,000) (2,224,000)
--------------------------
$ 4,094,000 $ 2,168,000
--------------------------
--------------------------
</TABLE>
Amortization of leased assets is included in depreciation.
The Company leases certain facilities, equipment and autos under noncancelable
operating lease agreements with initial lease terms in excess of one year. Rent
expense from these operating leases was $2,552,017, $1,724,000 and $1,069,000 in
1998, 1997 and 1996, respectively.
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at January 31,
1998:
16
<PAGE>
5. LEASES (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------------
<S> <C> <C>
Year ending January 31:
1999 $ 1,354,636 $2,627,334
2000 1,123,073 2,070,516
2001 813,351 1,451,300
2002 733,040 710,675
2003 426,408 131,421
-------------------------
Total minimum lease payments 4,450,508 $6,991,246
Amount representing interest (771,012) ------------
------------ ------------
Present value of net minimum lease payments 3,679,496
Current portion (1,176,956)
------------
Long-term capital lease obligations $ 2,502,540
------------
------------
</TABLE>
6. STOCK OPTIONS
Under the terms of the Company's stock option plans, 132,452 shares of Common
Stock were reserved at January 31, 1998 for issuance or grant to officers,
directors and employees at prices ranging from 85% to 110% of fair market value
at the date of grant. The options granted are determined by the Compensation
Committee. Options granted are usually exercisable at any time after grant,
except for those granted under the Company-wide stock option plan, which vest
over a four-year period. The options generally expire after five years.
A summary of outstanding options and shares reserved under the plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
RESERVED OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
-----------------------------------------
<S> <C> <C> <C>
Balance January 31, 1995 173,609 758,222 $1.96
Shares reserved 300,000 - -
Options exercised - (148,869) 1.28
Options granted (137,206) 137,206 6.54
Options terminated/expired 1,494 (1,494) 3.82
--------------------------
Balance January 31, 1996 337,897 745,065 2.88
Options exercised - (275,278) 2.02
Options granted (114,670) 114,670 10.74
Options terminated/expired 26,137 (26,137) 9.79
--------------------------
Balance January 31, 1997 249,364 558,320 4.73
Options exercised - (202,183) .89
Options granted (128,564) 128,564 6.19
Options terminated/expired 11,652 (11,652) 6.32
--------------------------
Balance January 31, 1998 132,452 473,049 $6.61
--------------------------
--------------------------
</TABLE>
17
<PAGE>
6. STOCK OPTIONS (CONTINUED)
As permitted by Statement of Financial Accounting Standard No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," the Company has elected to follow
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," to measure compensation cost for employee stock options. Under APB
25, if the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and net income per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for years
ended January 31, 1996, 1997 and 1998: risk-free interest rates ranging from
5.26% to 7.5%; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of .60; and a weighted average expected life
of the option of 5 years. The weighted average fair value of options granted
during the years ended January 31, 1998, 1977 and 1966 was $3.87, $6.51, and
$3.96 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Pro forma net income $1,702,000 $1,851,000 $2,091,000
Pro forma net income per share:
Basic $.43 $.51 $.64
Diluted $.43 $.48 $.57
</TABLE>
The above pro forma effects on net income and net income per share are not
likely to be representative of the effects of reported net income for future
years because options vest over several years and additional awards generally
are made each year.
18
<PAGE>
The following table summarizes information about the stock options outstanding
at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
$ 2.0000 - 3.1250 50,242 2.09 $ 2.9843 50,242 $ 2.9843
3.5000 - 5.1000 53,158 4.63 4.2070 33,358 3.6769
5.2500 - 5.8438 78,939 5.04 5.6207 47,912 5.6405
6.0000 - 6.2500 31,500 5.42 6.0794 12,150 6.2058
6.5000 - 6.5000 56,500 5.23 6.5000 47,500 6.5000
6.8750 - 6.8750 93,707 3.73 6.8750 42,904 6.8750
6.8758 - 9.2500 59,333 3.48 8.6370 32,575 8.1857
9.5000 - 9.5000 350 3.79 9.5000 350 9.5000
11.0500 - 11.0500 25,000 8.38 11.0500 6,250 11.0500
13.0000 - 13.0000 24,320 5.35 13.0000 6,320 13.0000
------------------------------------- -----------------------
$2.0000 - $13.0000 473,049 4.46 $ 6.6134 279,561 $ 5.8776
</TABLE>
At January 31, 1997, the Company had 404,921 options exercisable at a weighted
average exercise price of $3.32.
19
<PAGE>
7. INCOME TAXES
The provision for federal and state income tax expense from continuing
operations was as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,349,000 $1,185,300 $1,142,300
State 242,000 226,600 228,660
-------------------------------------
1,591,000 1,411,900 1,370,960
Deferred:
Federal (162,000) 40,900 143,400
State (29,000) 7,200 25,300
-------------------------------------
-------------------------------------
$1,400,000 $1,460,000 $1,539,660
-------------------------------------
-------------------------------------
</TABLE>
The components of the deferred tax assets and liabilities were as follows at
January 31:
<TABLE>
1998 1997
------------------------
<S> <C> <C>
Current deferred taxes:
Inventory reserves $ 580,000 $ 390,800
Bad debt expense 451,000 248,000
Additional tax cost of inventory 160,000 143,000
Rental equipment depreciation (906,000) (667,000)
Other - 300
------------------------
285,000 115,100
Non-current deferred taxes:
Depreciation (69,000) (82,000)
Other 15,000 6,700
------------------------
(54,000) (75,300)
------------------------
Net deferred tax assets $ 231,000 $ 39,800
------------------------
------------------------
</TABLE>
The difference between total income tax expense and the amount computed by
applying the statutory federal income tax rate to income before income taxes was
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $1,135,000 $1,219,000 $1,274,300
State income taxes, net of federal tax benefit 160,000 158,000 166,960
Intangible amortization 77,000 77,000 64,600
Other 28,000 6,000 33,800
--------------------------------------------
$1,400,000 $1,460,000 $1,539,660
--------------------------------------------
--------------------------------------------
</TABLE>
The Company paid income taxes of $1,459,000, $1,327,000 and $938,000 in 1998,
1997 and 1996, respectively.
8. RELATED PARTY TRANSACTION
Pursuant to a Stock Put Redemption Agreement between the Company and its Chief
Executive Officer ("CEO") as amended June 24, 1992, the Company has agreed to
redeem shares of Common Stock having a value of up to $1,500,000 from the CEO's
estate, following his death or, unless the Board determines that such redemption
is not in the best interest of the Company, from the CEO upon any entity
acquiring beneficial ownership of in excess of 20% of the Company without Board
approval. The put options to require or request redemption by the Company can be
exercised any time up to one year after the date of the event giving rise to the
option. The per share redemption price, in the event of death, will be the
greater of the fair market value or book value of the Common Stock. The per
share redemption price in event of change in control will be the greater of fair
market value, the highest price paid
20
<PAGE>
by the new controlling shareholder, or a multiple of ten times net pretax income
per share. Any redemption from the CEO's estate will be paid out of the proceeds
of $1,500,000 of term life insurance which the Company carries on the CEO's
life.
9. INDUSTRY SEGMENTS
The Company operates within two industry segments. Vaughn Communications
Division is engaged in video tape duplication and digital media replication. The
Vaughn Products Division is engaged in the manufacture and/or sale of souvenirs,
gifts, leather products and soft goods.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Net sales from continuing operations:
Communications Division $62,291,279 $55,040,394 $52,365,437
Products Division 12,196,484 13,757,589 7,203,464
--------------------------------------
Total net sales $74,487,763 $68,797,983 $59,568,901
--------------------------------------
--------------------------------------
Income from operations:
Communications Division $ 4,816,141 $ 4,345,161 $ 4,905,638
Products Division (182,545) 367,259 171,772
--------------------------------------
Total income from operations 4,633,596 4,712,420 5,077,410
Interest expense, net of interest income (1,295,290) (1,236,924) (1,320,574)
Other income - - 30,000
--------------------------------------
Income before income taxes $ 3,338,306 $ 3,475,496 $ 3,786,836
--------------------------------------
--------------------------------------
Depreciation and amortization:
Communications Division $ 3,860,588 $ 3,257,280 $ 2,994,128
Products Division 317,437 216,260 74,177
--------------------------------------
Total $ 4,178,025 $ 3,473,540 $ 3,068,305
--------------------------------------
--------------------------------------
Capital expenditures:
Communications Division $ 4,632,292 $ 2,752,630 $ 2,740,709
Products Division 258,665 409,873 50,489
--------------------------------------
Total $ 4,890,957 $ 3,162,503 $ 2,791,198
--------------------------------------
--------------------------------------
<CAPTION>
JANUARY 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Identifiable assets:
Communications Division $37,803,951 $27,321,777 $26,376,905
Products Division 6,507,673 7,429,446 6,438,913
--------------------------------------
Total assets $44,311,624 $34,751,223 $32,815,818
--------------------------------------
--------------------------------------
</TABLE>
10. ACQUISITIONS
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 CMC'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.
21
<PAGE>
10. ACQUISITIONS (CONTINUED)
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the year ended January 31, 1998,
reflect the purchase of the businesses, and include any results from operations
subsequent to the closing dates of the respective transactions.
Satastar Corporate Services, Inc. ("Satastar," dba PVS Corporate Services), a
videotape duplicator located in Chicago, Illinois, was merged with the Company
in June 1996 by the issuance of 165,357 shares of common stock in exchange for
all of the outstanding capital stock of Satastar Corporate Services, Inc. The
business combination has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements of the Company include the
combined results of operations of the Company and Satastar for all years
presented.
Included in results of operations for the year ended January 31, 1997 are the
following results of the previously separate companies for the period of
February 1, 1996 to June 28, 1996:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
COMPANY SATASTAR COMBINED
----------------------------------------
<S> <C> <C> <C>
Net sales $67,436,266 $1,361,717 $68,797,983
Net income (loss) 2,099,227 (83,731) 2,015,496
</TABLE>
The following is a reconciliation of revenue and earnings previously reported by
the Company for the year ended January 31, 1996 with the combined amounts
currently presented in the financial statement for the period.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1996
COMPANY SATASTAR COMBINED
----------------------------------------
<S> <C> <C> <C>
Net sales $55,513,000 $4,056,000 $59,569,000
Net income 2,145,000 102,000 2,247,000
</TABLE>
In April 1995, the Company completed the acquisition of all the capital stock of
Centercom, Inc. and Centercom South, Inc. (collectively "Centercom"), a
videotape duplicator with facilities in Milwaukee, Wisconsin; Chicago, Illinois;
and Tampa, Florida. The acquisition was accounted for by the purchase method of
accounting and, accordingly, results from operations have been included in
the consolidated financial statements from the date of the acquisition.
The purchase price was $6,420,000 including $5,250,000 of cash and 180,000
shares of Vaughn Communications, Inc. common stock valued at $1,170,000. In
addition, the selling shareholders of Centercom collectively receive $200,000 a
year for seven years under non-compete and consulting agreements. Goodwill
recorded in this transaction is being amortized over 15 years using the
straight-line method.
In January 1996, the Company completed the acquisition of substantially all of
the assets of Advanced Audio/Video Productions, Inc., a video tape duplicator
located in Denver, Colorado. The acquisition has been accounted for by the
purchase method of accounting, and the consolidated statement of income for the
year ended January 31, 1996 includes the results of Advanced Audio/Video for the
month of January 1996.
The purchase price was approximately $282,000 including a cash payment by the
Company of approximately $182,000 and long-term debt to the seller of $100,000.
(See Note 4 for description of long-term debt.) Goodwill recorded in this
transaction is being amortized over 15 years using the straight-line method.
On January 31, 1996, the Company acquired the assets and assumed certain
liabilities of Indian Arts and Crafts, Inc., a gift products business located in
Seattle, Washington. The acquisition has been accounted for by the purchase
method of accounting, and the consolidated financial statements for the year
ended January 31, 1996 reflect the purchase of the business, but do not include
any results from operations since the transaction was completed on the last day
of the fiscal year.
22
<PAGE>
10. ACQUISITIONS (CONTINUED)
The purchase price was approximately $2,332,000 including approximately $82,000
of cash, 145,138 shares of Vaughn Communications, Inc. common stock valued at
$1,250,000, and long-term debt to the seller of $1,000,000. (See Note 4 for
description of long-term debt.) Goodwill recorded in this transaction is being
amortized over 10 years using the straight-line method.
The following unaudited pro forma information presents the consolidated results
of operations of the Company as if the acquisitions had been completed at the
beginning of the year in which the acquisition occurred and the immediately
preceding year. In the opinion of the Company's management, all adjustments
necessary to present fairly such pro forma summary have been made based on the
terms and structure of the transactions.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Net sales $78,266,000 $75,175,000 $70,126,000
Net income 1,731,000 704,000 2,526,000
Net income per share:
Basic $.43 $.18 $.74
Diluted .42 .17 .66
</TABLE>
11. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Basic net income per share:
Net income $1,938,306 $2,015,496 $2,247,176
Weighted average shares outstanding 3,918,263 3,640,304 3,243,905
Net income per share $.49 $.55 $.69
Diluted net income per share:
Net income $1,938,306 $2,015,496 $2,247,176
Shares used in calculation:
Weighted average shares outstanding 3,918,263 3,640,304 3,243,905
Dilutive shares issuable in
connection with stock plans 101,719 284,129 433,648
--------------------------------------
4,019,982 3,924,433 3,677,553
--------------------------------------
--------------------------------------
Net income per share $.48 $.51 $.61
</TABLE>
Options to purchase 204,648 shares of common stock were not included in the
computation of diluted net income per share for fiscal 1998 because the options'
exercise price was greater than the average market price of the common shares.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments as of January 31,
1998 and 1997 approximated their fair value.
23
<PAGE>
13. SUBSEQUENT EVENT
In February 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 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.
Copywise net sales and income before income taxes (unaudited) for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Net sales $7,531,000 $10,028,000
Income before income taxes 1,159,000 1,753,000
</TABLE>
COMMON STOCK INFORMATION
The Company's Common Stock is traded over-the-counter and has been included in
the National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") National Market System since March 26, 1994, under the symbol VGHN.
The information presented is the quarterly high and low closing sales prices as
reported in the NASDAQ's National Market System. All prices are without retail
markups, markdowns or commissions.
<TABLE>
<CAPTION>
CALENDAR PERIOD SALE PRICE
- --------------------------------------------- --------------------------
HIGH LOW
<S> <C> <C>
1996: First Quarter. . . . . . . . . . . $ 9.375 $ 8.375
Second Quarter . . . . . . . . . . 19.00 9.00
Third Quarter. . . . . . . . . . . 15.00 9.50
Fourth Quarter . . . . . . . . . . 10.50 7.00
- ------------------------------------------------------------------------------
1997: First Quarter. . . . . . . . . . . $ 8.00 $ 6.00
Second Quarter . . . . . . . . . . 7.50 5.25
Third Quarter. . . . . . . . . . . 8.563 6.75
Fourth Quarter . . . . . . . . . . 8.00 5.4375
1998: First Quarter. . . . . . . . . . . $ 8.125 $ 5.50
</TABLE>
As of January 31, 1998, the Company had 310 shareholders of record.
- -----------------------------------------------------------------------------
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Vaughn Communications, Inc.
We have audited the accompanying consolidated balance sheets of Vaughn
Communications, Inc. and subsidiaries as of January 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vaughn
Communications, Inc. and subsidiaries at January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
March 27, 1998
/s/ Ernst & Young, LLP
25
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Vaughn Communications, Inc. of our report dated March 27, 1998,
included in the 1998 Annual Report to Shareholders of Vaughn Communications,
Inc.
Our audits also included the financial statement schedule of Vaughn
Communications, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-29895, No. 333-29913, No. 33-41882, 33-41883,
33-41884 and 33-41885) pertaining to certain stock option plans of Vaughn
Communications, Inc. of our report dated March 27, 1998, with respect to the
consolidated financial statements incorporated herein by reference, and our
report in the preceding paragraph with respect to the financial statement
schedule included in this Annual Report (Form 10-K) of Vaughn Communications,
Inc.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,948,621
<ALLOWANCES> 1,126,000
<INVENTORY> 8,887,898
<CURRENT-ASSETS> 24,011,806
<PP&E> 31,185,406
<DEPRECIATION> 19,899,664
<TOTAL-ASSETS> 44,311,624
<CURRENT-LIABILITIES> 14,918,493
<BONDS> 9,020,264
0
0
<COMMON> 408,858
<OTHER-SE> 19,909,683
<TOTAL-LIABILITY-AND-EQUITY> 44,311,624
<SALES> 74,487,763
<TOTAL-REVENUES> 74,487,763
<CGS> 50,761,624
<TOTAL-COSTS> 50,761,624
<OTHER-EXPENSES> 19,092,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,410,484
<INCOME-PRETAX> 3,338,306
<INCOME-TAX> 1,400,000
<INCOME-CONTINUING> 1,938,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,938,306
<EPS-PRIMARY> .49
<EPS-DILUTED> .48
</TABLE>
