<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X] Commission File No. 0-15424
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of Commission Only (as permitted by Rule 14a-6 (e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Vaughn Communications, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6 (i) (4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
- -------------------------------------------------------------------------------
<PAGE>
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
(5) Total fee paid:
- -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a) (2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No. 1:
- -------------------------------------------------------------------------------
(3) Filing Party:
- -------------------------------------------------------------------------------
(4) Date Filed:
- -------------------------------------------------------------------------------
<PAGE>
VAUGHN COMMUNICATIONS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 1998
To the Shareholders of Vaughn Communications, Inc:
The 1998 Annual Meeting of Shareholders of Vaughn Communications, Inc.
(the "Company") will be held at The Marquette Hotel, Seventh and Marquette,
Minneapolis, Minnesota, 55402, on Tuesday, June 23, 1998, at 4:00 P.M. for
the following purposes:
(1) To elect two directors as described in the accompanying Proxy
Statement.
(2) To consider and act upon a Proposal to approve the Company's 1998
Stock Option Plan.
(3) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on May 1, 1998 will be
entitled to vote at the meeting or any adjournments. You are cordially
invited to attend the meeting.
Please sign, date and return the enclosed form of Proxy whether or not
you plan to come to the meeting. Your cooperation in promptly signing and
returning your Proxy will be helpful and appreciated and will help avoid
further solicitation expense.
By Order of the Board of Directors
/s/ M. Charles Reinhart
M. Charles Reinhart
Secretary
Minneapolis, Minnesota
May 26, 1998
<PAGE>
VAUGHN COMMUNICATIONS, INC.
5050 WEST 78TH STREET
MINNEAPOLIS, MINNESOTA 55435
__________________________________
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
JUNE 23, 1998
__________________________________
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Vaughn Communications, Inc. (the "Company") of
proxies in the accompanying form from holders of shares of Common Stock to be
voted at the Annual Meeting of Shareholders to be held at the Marquette
Hotel, Seventh and Marquette, Minneapolis, Minnesota, 55402, on June 23,
1998, commencing at 4:00 P.M., and at any adjournment thereof.
As of the close of business on May 1, 1998, the record date for the
meeting, the Company had outstanding 4,088,582 shares of its $.10 par value
Common Stock entitled to vote at the meeting. The presence of shareholders
owning at least 2,044,291 shares of Common Stock, in person or by Proxy, will
constitute a quorum for the transaction of business. Each share is entitled
to one non-cumulative vote for each director to be elected and on any
additional proposals and matters of business to be brought before the Annual
Meeting. Common Stock is the only class of voting equity securities currently
authorized.
A shareholder may revoke a Proxy at any time before it is exercised by
filing with the Secretary of the Company a revoking statement, by executing a
Proxy bearing a later date or by voting in person at the Annual Meeting.
Mere attendance by the shareholder at the Annual Meeting does not have the
effect of revoking a Proxy previously given. When a Proxy in the
accompanying form is returned properly signed, the shares represented will be
voted in accordance with the shareholder's instructions. If no instructions
are indicated on the Proxy, the shares will be voted in favor of the
proposals to be considered at the Annual Meeting.
Expenses in connection with the solicitation of proxies will be paid by
the Company. Proxies are being solicited by mail, and, in addition,
directors, officers and regular employees of the Company (who will not
receive any additional compensation) may solicit proxies personally, by
telephone or by special correspondence. The Company will reimburse brokerage
firms and others for their expenses in forwarding Proxy materials to the
beneficial owners of the Company's Common Stock.
This Proxy Statement and the accompanying Proxy will be mailed to each
shareholder of record as of May 1, 1998 on or about May 26, 1998, together
with the Company's Annual Report to Shareholders, including the audited
financial statements of the Company for the year ended January 31, 1998,
reported on by Ernst & Young LLP, independent auditors.
1
<PAGE>
VOTING PROCEDURES
Where specific instructions are not indicated, the Proxy will be voted
FOR the election of all directors as nominated. Shareholder abstentions and
broker "non-votes" (proxies returned by a broker indicating a lack of voting
instruction by the beneficial holder of the shares and a lack of
discretionary authority on the part of the broker to vote a particular
proposal) will be counted as present or represented at the Annual Meeting of
Shareholders for purposes of determining the existence of a quorum.
Abstentions with respect to any matter brought to a vote at the Annual
Meeting will be treated as shares voted for purposes of calculating the votes
cast with respect to such matter, but shall not be deemed to have been voted
in favor of such matter. Broker non-votes with respect to any matter brought
to a vote at the Annual Meeting will be treated as shares not voted for
purposes of determining whether the requisite vote has been obtained. An
affirmative vote of a majority of the shares present or represented by Proxy
at the Annual Meeting is required for the election of each of the nominee
directors and for approval of any other proposal that may be presented at the
Annual Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
As of May 1, 1998, the only persons to the knowledge of the Board of
Directors who owned beneficially 5% or more of the Company's outstanding
shares of Common Stock, the Common Stock beneficially owned by the named
executive officers of the Company set forth in the Summary Compensation Table
and by the Company's executive officers and directors as a group were:
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner and Nature of Percent
or Identify of Group Beneficial Ownership(1) of Class(2)
- -------------------------- ----------------------- -----------
<S> <C> <C>
E. David Willette 887,164(3) 21.3%
5050 West 78th Street
Minneapolis, MN 55435
Donald J. Drapeau 46,400(4) 1.1%
5050 W. 78th Street
Minneapolis, MN 55435
William D. Dornbusch 67,357(5) 1.6%
5050 West 78th Street
Minneapolis, MN 55435
M. Charles Reinhart 79,761(6) 1.9%
5050 West 78th Street
Minneapolis, MN 55435
Douglas Olzenak 15,129(7) .4%
5050 West 78th Street
Minneapolis, MN 55435
2
<PAGE>
Dimensional Fund Advisers 227,800(8) 5.6%
1299 Ocean Avenue
Santa Monica, CA 90401
All Executive Officers and 1,620,015(9) 37.6%
Directors as a Group
(12 persons)
</TABLE>
- ---------------------------
(1) Each person or group has sole voting and investment power with respect to
all shares beneficially owned by such person or group.
(2) The percentage of beneficial ownership includes shares that may be
acquired under outstanding options that are or will be exercisable on or
before July 1, 1998 for only the respective individual or group.
(3) Includes options to purchase 81,525 shares of Common Stock, none of which
may be voted at the Annual Meeting.
(4) Includes options to purchase 25,500 shares of Common Stock, none of which
may be voted at the Annual Meeting.
(5) Includes options to purchase 18,265 shares of Common Stock, none of which
may be voted at the Annual Meeting.
(6) Includes options to purchase 18,268 shares of Common Stock, none of which
may be voted at the Annual Meeting.
(7) Includes options to purchase 8,316 shares of Common Stock, none of which
may be voted at the
Annual Meeting.
(8) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 227,800 shares of
Vaughn Communications stock as of December 31, 1997, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in series of the DFA Investment
Trust Company, a Delaware business trust, or the DFA Group Trust and DFA
Participant Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all
such shares.
(9) Includes options to purchase 225,874 shares of Common Stock, none of which
may be voted at the Annual Meeting. Of the number of shares beneficially
owned by the group, 1,394,141 were outstanding on the record date and are
entitled to vote at the Annual Meeting (approximately 34% of all shares
entitled to vote.)
3
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who beneficially own
more than 10% of its outstanding shares of Common Stock, to file with the
Securities and Exchange Commission (SEC) initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors, and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% shareholders were complied with in a timely manner, except
that William D. Dornbusch, the Company's former Vice President and General
Manager of the Company's Products Division, failed to timely file one report
with respect to two transactions; Donald J. Drapeau, the Company's President
and a director failed to timely file one report with respect to one
transaction; and each of Michael R. Sill, William D. Smith and Harold G.
Wahlquist, who are directors of the Company, failed to timely file one report
with respect to one transaction.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Articles provides for a Board of Directors (sometimes
referred to herein as the "Board") of not fewer than three nor more than
fifteen members. The Board has set the number of directors at nine. The
Articles also classify the Board into three classes, as nearly equal in
number as possible, with each director, except as provided in the following
paragraph with regard to vacancies, serving a three-year term and with the
terms of each class staggered so that, except as provided in the following
paragraph with regard to vacancies, only one class is elected at each year's
Annual Meeting of Shareholders.
Vacancies that occur during a term and vacancies that result from any
newly created directorships may be filled solely by an affirmative two-thirds
majority vote of the continuing directors. In either case, any director
appointed to fill such a vacancy is required to stand for election at the
next meeting of shareholders. If re-elected, such director's term would end
with the term of his or her respective class of directors.
The proxies named on the enclosed Proxy intend to vote for the election
of nominees Jeffery Johnson and Harold Wahlquist as the directors to be
elected for the term expiring at the 2001 Annual Meeting. Messrs. Johnson
and Wahlquist are the members of the regular class of directors elected by
the shareholders, the term of which will expire at this year's Annual
Meeting. In addition to being a director, Mr. Wahlquist is a member of the
Company's Compensation Committee.
A Stock Purchase Agreement dated April 4, 1995, between the Company and
Jeffrey Johnson and Robert Harmon (the "Centercom Purchase Agreement"),
pursuant to which the Company acquired the capital stock and videotape
duplication businesses of Centercom, Inc. and Centercom South, Inc.
4
<PAGE>
(referred to herein collectively as "Centercom"), entitles Messrs. Johnson
and Harmon to be nominated as directors by the Company's Board of Directors
and serve as directors of the Company and members of the Audit Committee of
the Board, until the latter of April 4, 1999, or the date on which they
collectively cease to beneficially own at least 1% of the Company's then
outstanding shares of Common Stock. In accordance with the Centercom
Purchase Agreement, E. David Willette, the Company's Chief Executive Officer,
has agreed to vote the shares of the Company's outstanding Common Stock which
he beneficially owns for the election of Messrs. Johnson and Harmon as
directors of the Company. (See Mr. Willette's current Common Stock ownership
in the table below.) Mr. Harmon was appointed to the Board of Directors on
April 4, 1995 in connection with the acquisition of Centercom and elected as
a director at the 1996 Annual Meeting for a term expiring at the 1999 Annual
Meeting. Mr. Johnson was appointed to the Board of Directors on April 4,
1995 in connection with the Centercom acquisition for a term expiring at the
1998 Annual Meeting.
Proxies cannot be voted for a greater number of directors than the two
directors to be elected at this year's Annual Meeting. Each nominee named
above has indicated a willingness to serve; however, in the event any of the
nominees should become unable to serve as a director, the Proxy will be voted
in accordance with the best judgment of the persons acting under the Proxy.
Seven other current directors have terms that do not expire at this
year's Annual Meeting of Shareholders. Each will continue to serve his full
term. Information concerning the persons nominated for election as directors,
as well as those continuing in office, is set forth in the following table:
<TABLE>
<CAPTION>
Common Stock Beneficially Owned
May 1 , 1998
--------------------------------------
Number of
Shares and
Served as Nature of
Director Beneficial Percent of
Name and Age(1) Principal Occupation (2) Since Ownership(3)(4) Class(4)
- ---------------------- -------------------------------------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Rodney P. Burwell Chairman of the Board, Xerxes Corporation 1993 148,150 3.6%
59 (Manufacturer of fiberglass underground fuel
storage tanks), Minneapolis, Minnesota(5)
Donald J. Drapeau President and Chief Operating Officer of 1995 46,400 1.1%
44 the Company
Robert Harmon Retired former President of Centercom 1995 102,000 2.5%
51 (video tape duplicator), Milwaukee,
Wisconsin(6)
Roger F. Heegaard Chairman, Homestyles Publishing & 1973 33,000 .8%
71 Marketing (magazine publishing),
Minneapolis, Minnesota
Jeffrey Johnson Retired former Vice President of 1995 102,000 2.5%
52 Centercom (video tape duplicator),
Milwaukee, Wisconsin(6)
Michael R. Sill Chairman, Chief Executive Officer of Road 1990 46,000 1.1%
66 Machinery & Supplies Co. (distribution of
construction equipment and services),
Minneapolis, Minnesota
5
<PAGE>
William D. Smith Chief Operating/Financial Officer, 1983 18,019 .4%
47 Viromed Laboratories, Inc. (laboratory
testing and products), Minneapolis,
Minnesota(7)
Harold G. Wahlquist Founder, Chairman and Chief Executive 1983 26,900 .7%
59 Officer of MidWest Bancorporation, Inc.,
a regional multi-bank holding company,
Minneapolis, Minnesota
E. David Willette Chairman of the Board and Chief Executive 1971 887,164 21.3%
62 Officer of the Company
</TABLE>
- ------------------------------------------------------------------------------
(1) Messrs. Johnson and Wahlquist are nominees for election as directors at
this year's Annual Meeting of Shareholders for three-year terms expiring
at the 2001 Annual Meeting. Directors Harmon, Heegaard, Smith and Drapeau
will continue in office for the term expiring at the 1999 Annual Meeting.
Directors Burwell, Sill and Willette will continue in office for the term
expiring at the 2000 Annual Meeting.
(2) Except as indicated in the following notes, each person has been engaged
in his principal occupation for more than the past five years.
(3) Each person has sole voting and investment power with respect to all
shares beneficially owned by him.
(4) Included in the number of shares are the following stock options with
respect to each person: Mr. Burwell - 14,000 shares; Mr. Drapeau - 25,500
shares; Mr. Harmon - 12,000 shares; Mr. Heegaard - 4,000 shares; Mr.
Johnson - 12,000 shares; Mr. Sill - 14,000 shares; Mr. Smith - 6,000
shares; Mr. Wahlquist - 6,000 shares; and Mr. Willette - 81,525 shares.
The percentage of beneficial ownership includes shares that may be
acquired under outstanding options that are or will be exercisable on or
before July 1, 1997.
(5) Mr. Burwell also owns hotel properties in Snowmass Village, Colorado and
Madison, Wisconsin, and is a director of Children's Broadcasting Network.
(6) Messrs. Harmon and Johnson formed Centercom as a partnership in 1979 and
incorporated the business in 1987. They held the positions with Centercom
indicated above until the Company acquired Centercom from them on April 4,
1995, at which time they were elected directors of the Company.
(7) From 1991 to 1996, Mr. Smith was Vice President and Chief Operating
Officer of Pace, Inc., an environmental testing company based in
Minneapolis, Minnesota.
MEETINGS OF THE BOARD OF DIRECTORS
AND THE COMMITTEES THEREOF
During the past fiscal year, the Board of Directors held four meetings.
Mr. Burwell attended less than 75% of the meetings of the Board of Directors,
Messrs. Harmon and Sill attended 75% of the meetings of the Board of
Directors, and the remaining members attended all of the meetings of the
Board of Directors and Committees of the Board of Directors. The Board of
Directors does not have a nominating committee.
The Compensation Committee, which is composed entirely of directors who
are not officers or employees of the Company, determines the cash
compensation of the Company's executive officers based upon recommendations
submitted to it by the Chief Executive Officer. It also administers the
Company's Performance Incentive Compensation Bonus Program and the stock
option plans in which the Company's
6
<PAGE>
employees participate. The current members of the Compensation Committee are
Roger F. Heegaard (Chair), Laurence F. LeJeune and Harold G. Wahlquist. Mr.
LeJeune's term as a Director and a member of the Compensation Committee will
expire at the 1998 Annual Meeting. The Compensation Committee held three
meetings and acted by unanimous written consent on two occasions during the
fiscal year ended January 31, 1998.
The Audit Committee, which is also composed entirely of directors who
are not officers or employees of the Company, is responsible for (i)
recommendation to the Board of Directors of independent auditors for the
Company; (ii) review of the timing, scope and results of the audit
examination conducted by the independent auditors and related fees; (iii)
review of the scope and adequacy of the Company's internal accounting
controls; and (iv) review of periodic comments and recommendations by the
independent auditors. The current members of the Audit Committee are William
D. Smith (Chair), Rodney P. Burwell, Robert Harmon, Jeffrey Johnson and
Michael R. Sill. The Audit Committee held one meeting during the fiscal year
ended January 31, 1998.
COMPENSATION OF DIRECTORS
The eight non-employee members of the Company's Board of Directors
(Messrs. Burwell, Harmon, Heegaard, Johnson, LeJeune, Sill, Smith and
Wahlquist) are paid fees of $500 per meeting of the Board of Directors
attended, but not more than $500 per quarter. No fees were paid to such
members for attendance at meetings of Committees of the Board of Directors
during the fiscal year ended January 31, 1998.
The non-employee directors are also entitled to receive nonstatutory
stock options under the Company's 1995 Non-Employee Directors' Stock Option
Plan (the "1995 Plan"). Pursuant to the terms of the 1995 Plan, in June,
1997, Messrs. Burwell, Harmon, Heegaard, Johnson, LeJeune, Sill, Smith and
Wahlquist were each granted nonstatutory stock options to purchase 2,000
shares of Common Stock at $6.50 per share. The exercise price for the stock
options was equal to the fair market value of the Company's Common Stock on
the date of grant. As of the date of this Proxy Statement, options to
purchase an aggregate of 28,000 shares of the Company's Common Stock have
been granted under the 1995 Plan to the eight non-employee directors of the
Company.
The 1995 Plan reserves a total of 100,000 shares of the Company's Common
Stock for issuance upon the exercise of the options granted under the 1995
Plan. The 1995 Plan provides that on the date of the 1995 Annual Meeting of
Shareholders and on the date of each Annual Meeting of Shareholders held in
an odd numbered calendar year thereafter options for 2,000 shares of Common
Stock shall be automatically granted to each non-employee director who (i)
either is elected at such Annual Meeting of Shareholders or whose term as a
director continues after such Annual Meeting of Shareholders and (ii) as of
the date of grant has served as a director of the Company for at least two
calendar years (as defined in the 1995 Plan). The Company does not receive
any cash or other consideration for the granting of options under the 1995
Plan.
In fiscal year 1998, the following options were exercised under the
Company's 1990 Non-Employee Directors Stock Option Plan: Messrs. Smith and
Wahlquist exercised options for 1,500 and 10,000 shares, respectively, in
June, 1997; and Mr. Sill exercised options for 10,000 shares in September,
7
<PAGE>
1997. The net value of the shares (market value less exercise price)
realized from these exercises was $9,750 in the case of Mr. Smith; $6,500 in
the case of Mr. Wahlquist; and $75,000 in the case of Mr. Sill.
EXECUTIVE OFFICERS
Information regarding the executive officers of the Company as of the
date of this Proxy Statement, including their names, ages, positions with the
Company, and a brief description of their business experience during the past
five years, is presented below. Executive officers are elected annually by
the Board of Directors.
E. DAVID WILLETTE, 62, has been Chief Executive Officer of the Company
since 1971, and Chairman of the Board since 1972. He also served as
President from 1971 to 1995, and as Treasurer from 1971 to 1996.
DONALD J. DRAPEAU, 44, President and Chief Operating Officer, joined the
Company in 1986 as General Manager of Sales and Marketing for the rental and
duplication departments of Vaughn Communications Group. In 1987 he was
promoted to General Manager of the rental division and in 1988 to General
Manager of the Vaughn Communications Division, becoming a Vice President in
1989. He was promoted to President and Chief Operating Officer in 1995.
M. CHARLES REINHART, 47, Chief Financial Officer and Secretary, is a
certified public accountant. He joined the Company's accounting staff in
1982, becoming Controller in 1983 and Secretary in 1987. He was promoted to
Chief Financial Officer in 1996.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION:
The objectives of the Company's Compensation policies are to:
* Attract and retain highly qualified and motivated executive
officers, which is critical to both the Company's near-term
and long-term success.
* Reinforce strategic performance objectives through the use of
incentive compensation programs.
* Create a mutuality of interests between the Company's executive
officers and shareholders through compensation structures that
share the risks and rewards of strategic decision making.
* Provide compensation that will continue to be deductible by the
Company for federal income tax purposes.
8
<PAGE>
The Committee's approach to base compensation is to offer competitive
salaries in comparison to market practices. The Committee annually examines
market compensation levels as a form of reference for annual salary
adjustments. Salary decisions are determined in a structural annual review
with recommendations from the Company's Chief Executive Officer. For the
fiscal year ending January 31, 1998 ("fiscal 1998"), average base salaries of
the Company's executive officers named under "Executive Officers" above,
other than the Chief Executive Officer, increased 2.3% compared to 8.4% for
the prior fiscal year ("fiscal 1997").
The Company's Performance Incentive Compensation Bonus Program is an
annual incentive bonus plan established to reward executive officers for
their respective contributions in accomplishing the Company's annual
financial objectives. The financial measures (e.g., pre-tax income, return
on assets and cash flow) and target bonuses are set in the beginning of the
fiscal year. Adjustments may be made during the year should unforeseen events
occur.
The recommendations of the Company's Chief Executive Officer are the
primary consideration reviewed by the Committee when setting the annual goals
and target bonuses for the other executive officers. The Committee seeks to
strike a balance between overall corporate performance and performance of the
specific areas of the Company under a participant's direct control. Balance
supports the accomplishment of overall objectives and rewards individual
contributions.
Individual annual bonus level targets are generally consistent with
market practices for positions with comparable decision making
responsibilities. Target performance levels are also based upon historic
patterns of Company performance and strategic objectives.
A performance measure qualification threshold for each financial measure
ensures that bonuses are not paid for substandard accomplishments. Each
financial measure also has a cap to limit the Company's potential executive
compensation expense. The average Performance Incentive Compensation bonus
paid in fiscal 1998 to the executive officers named under "Executive
Officers" above, other than the Chief Executive Officer, was 4.9% of their
base salaries compared to 7.9% in fiscal 1997.
The base salary and Performance Incentive Compensation bonus goals for
E. David Willette, the Company's Chief Executive Officer, are also determined
by the Committee in the manner described above. Mr. Willette's base salary
increase was 3.9% for fiscal 1998, and 10% for fiscal 1997. The financial
measures determining Mr. Willette's Performance Incentive Compensation bonus
include improvement in Company earnings, returns on assets and cash flow. In
fiscal 1998, Mr. Willette earned a Performance Incentive Compensation bonus
equal to 8.1% of his base salary compared to a bonus of 10% of his base
salary in fiscal 1997. The decreased percentage is the result of a lower
than planned return on assets, earnings and cash flow.
The Committee also seeks to match executive officer and shareholder
interests in the Company's longer term performance by periodically granting
executive officers nonstatutory stock options ("NSOs") and incentive stock
options ("ISO"). ISOs are entitled to favorable income tax treatment
under the Internal Revenue Code. The Company has three stock option plans
(the 1988 Stock Option Plan, the 1990 Discounted Stock Option Plan and the
1995 Stock Option Plan), each administered by the Committee, under which
these options are generally granted for terms of five or seven years. The
exercise prices of the ISOs are not less than the fair market of the
Company's Common Stock on the date
9
<PAGE>
of grant. NSOs may be granted at exercise prices of not less than 85% of the
stock's fair market value on the date of grant under the 1988 and 1995
Stock Option Plans, while the NSOs granted under the 1990 Discounted Stock
Option Plan are granted at exercise prices equal to the closing bid price of
the Company's Common Stock on the last trading date preceding the date of
grant. In general, the options may be exercised only while, and for certain
periods after, the executive officer is employed by the Company. All ISOs
and NSOs granted under the 1988 Stock Option Plan are exercisable in whole or
in part throughout a five-year term.
Under the Discounted Stock Option Plan, seven-year NSOs are granted to
the Company's executive officers during the first half of a fiscal year at an
"Original Option Price" equal to the fair market value of the Company's
Common Stock on the date of grant. Upon the grant of an officer's first
option under the Plan, the officer elects what percentage from 10% to 100% of
the officer's annual Performance Incentive Compensation bonuses, if and to
the extent later awarded, shall be applied on a cumulative basis to reduce
the Original Option Prices of the options which may be granted to the officer
under the Plan. The elected percentage may be changed only in the sole
discretion of the Committee prior to the start of the fiscal year for which
it is first to be effective. At the end of each fiscal year, the Committee
determines the aggregate portion of the corresponding target bonus awarded.
Each NSO is subject to discount for each of three fiscal years after grant.
The "Final Discount Option Price", determined on a cumulative basis with
respect to such third fiscal year, becomes the exercise price of the NSO for
the five-year balance of the seven-year option term.
NSOs granted under the 1990 Discounted Stock Option Plan vest for
exercise purposes, on a year-to-year cumulative basis, as to one-third of the
number of shares covered by the NSO. The vesting and discount pricing
provisions of this Plan operate to permit the grant of an NSO to an officer
only once in a period of three fiscal years and will generally induce the
officer to defer exercise until after such third fiscal year. Application by
the executive officers named under "Executive Officers" above of their
respective annual Performance Incentive Compensation bonuses awarded for the
last three fiscal years to reduce the exercise prices of their respective
NSOs under the 1990 Discounted Stock Option Plan is shown below in footnote
number one to the table.
All ISOs and NSOs granted under the Company's 1995 Stock Option Plan are
exercisable commencing six months after the date of grant subject to a five
year cumulative vesting schedule as follows: 10% of the options are
exercisable during the first year of the option term, an additional 15% of
the options are exercisable during the second year of the option term, and an
additional 25% of the options are exercisable during each of the third,
fourth and fifth years of the option term. The Committee from time to time
may also establish individual vesting performance goals for options though
none have been separately established during the last three fiscal years.
To further induce exercise and acquisition of the Company's Common Stock
by its executive officers, in 1992 the Committee adopted a so-called "reload
policy" with respect to option grants. Under this policy, ISOs and NSOs
which an officer may elect to exercise by paying the exercise price with
previously owned Company stock will qualify the officer for a new grant equal
to the number of payment shares surrendered on exercise. The exercise price
of the reload option is established at or with respect to the fair market
value of the Company's stock at the time of the reload grant.
Section 162(m) of the Internal Revenue Code generally limits the
corporate tax deduction for compensation paid to the named executive officers
in the Summary Compensation Table below to $1
10
<PAGE>
million, unless certain requirements are met. The Compensation Committee has
determined that it is not presently necessary to modify any of the Company's
current compensation programs or incentive plans, because compensation paid
to the named executive officers thereunder would either be exempted under
transition rules or be less than the $1 million limit and, therefore,
deductible for federal income tax purposes. The Compensation Committee will
continue to monitor this situation and will take appropriate action if it is
warranted in the future.
The foregoing Compensation Committee Report will not be deemed
incorporated by reference by any statement incorporating by reference this
Proxy Statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934 and shall not otherwise be deemed filed under
such Acts.
Members of the Compensation Committee:
Roger F. Heegaard, Chairman
Laurence F. LeJeune
Harold G. Wahlquist
COMPARATIVE STOCK PERFORMANCE
The Performance Graph set forth below compares the cumulative total
shareholder return on the Company's Common Stock for the last five fiscal
years with the cumulative total return on the Center for Research in Security
Prices (CRSP) Index for NASDAQ Stock Market (U.S. Companies) and the CRSP
Index for NASDAQ Non-Financial Stocks published by The University of Chicago
Graduate School of Business. The cumulative total shareholder return
computations set forth in the Performance Graph assume the investment of $100
in the Company's Common Stock, the CRSP Index for NASDAQ Stock Market (U.S.
Companies) and the CRSP Index for NASDAQ Non-Financial Stocks on January 31,
1992, and reinvestment of all dividends. No dividends were paid on the
Company's Common Stock during the comparison period. The graph below shall
not be deemed incorporated by reference by any statement incorporating by
reference this Proxy Statement into any filing under the Securities Act of
1933 or under the Securities Exchange Act of 1934 and shall not otherwise be
deemed filed under such Acts.
11
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
Performance Graph for
VAUGHN COMMUNICATIONS, INC.
PREPARED BY THE CENTER FOR RESEARCH IN SECURITY PRICES
Produced on 04/24/98 including data to 01/30/98
[GRAPH]
LEGEND
<TABLE>
<CAPTION>
01/29/93 01/31/94 01/31/95 01/31/96 01/31/97 01/30/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
VAUGHN COMMUNICATIONS, INC. 100.0 260.6 333.3 442.4 333.3 290.9
Nasdaq Stock Market (US Companies) 100.0 115.0 109.7 155.1 203.3 240.3
Nasdaq Non-Financial Stocks 100.0 116.2 107.7 151.8 197.3 224.6
SIC 0100-5999, 7000-9999 US & Foreign
</TABLE>
NOTES:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 01/29/93.
12
<PAGE>
The Company selected the indices set forth in the Performance Graph
above, rather than the S&P 500 Index and a peer group index, for two reasons.
The Company's market capitalization is closer to the average market
capitalization of the corporations in the CRSP Indices, and there is no
published peer group index which includes corporations engaged in the
Company's principal business segment, high volume video tape reproduction.
Accordingly, the CRSP Index for NASDAQ Non-Financial Stocks is a more
meaningful comparison.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company was, during the
fiscal year ended January 31, 1998, an officer, former officer or employee of
the Company. No executive officer of the Company served as a member of (i)
the compensation committee of another entity in which one of the executive
officers of such entity served on the Company's Compensation Committee, (ii)
the Board of Directors of another entity in which one of the executive
officers of such entity served on the Company's Compensation Committee, or
(iii) the compensation committee of another entity in which one of the
executive officers of such entity served as a member of the Company's Board
of Directors, during the fiscal year ended January 31, 1998.
EMPLOYMENT, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
E. DAVID WILLETTE, the Company's Chief Executive Officer and Chairman of
the Board, entered into an employment agreement with the Company dated March
13, 1998 (the "Willette Agreement"), which employs Mr. Willette as the
Company's Chief Executive Officer. DONALD J. DRAPEAU, the Company's
President, entered into an employment agreement with the Company dated
September 26, 1995, as amended on March 13, 1998 (collectively the "Drapeau
Agreement"), which employs Mr. Drapeau as the Company's President. Both the
Willette and Drapeau Agreements prohibit the officers from competing with the
Company or soliciting its employees during the term of their respective
agreements and for the five-year period following their respective
termination dates.
The Willette and Drapeau Agreements provide for an initial three-year
term; an initial annual salary of $200,000 and $120,000 for Messrs. Willette
and Drapeau, respectively; payment of car expenses for Mr. Willette and a car
allowance for Mr. Drapeau; reimbursement for business expenses; and stock
options, bonuses and other benefits similar to those provided to other senior
executives of the Company. After expiration of the initial term, the
Willette and Drapeau Agreements automatically renew for successive terms of
one year each, unless 90 days preceding the expiration of the initial term or
any renewal term, a party gives written notice of nonrenewal.
The Willette and Drapeau Agreements are terminable by the Company for
"cause" (as defined in the agreements) immediately upon written notice, and
at the option of the Company if the officer becomes totally disabled upon
written notice. In addition, the Willette Agreement is terminable by the
Company at any time upon 90 days written notice to Mr. Willette. The
Willette Agreement automatically terminates 30 days from the date of Mr.
Willette's death while the Drapeau Agreement automatically terminates upon
the death of Mr. Drapeau. Messrs. Willette and Drapeau may terminate their
respective agreements for "good reason" (as defined in their respective
agreements) upon 90 days written notice to the Company and at any time upon
60 days written notice to the Company.
13
<PAGE>
In the event either agreement is terminated by the Company other than
for cause or due to nonrenewal at the end of a term, the Company will be
obligated to pay or provide the officers with severance compensation as
follows. With respect to Mr. Willette, the Company is obligated to provide
to him on a monthly basis at the rate in effect as of the date of termination
all of the following: (i) salary and car expenses for the unexpired term of
the Willette Agreement, (ii) an adjusted bonus amount, (iii) all expense
reimbursements due Mr. Willette in one lump sum within 45 days after
termination, (iv) an amount which when added to salary already payable will
equal three years' salary at the salary rate in effect on the date of
termination, (v) continuance of medical insurance until the later of the date
Mr. Willette is provided medical insurance by a new employer or three years
after the date of termination and (vi) all granted but unvested stock options
immediately become fully vested and exercisable through the expiration date
of such options. With respect to Mr. Drapeau, the Company is obligated to
pay or provide him on a monthly basis at the rate in effect as of the date of
termination all of the following: (i) salary and car allowance for the
unexpired term of the Drapeau Agreement, (ii) an adjusted bonus amount, (iii)
all expense reimbursements due Mr. Drapeau in one lump sum within 15 days
after termination and (iv) an amount which when added to the salary, car
allowance and bonus payable will equal one year's compensation for such
items. The Company is also obligated to pay the officers their respective
foregoing severance compensation if they terminate their respective
agreements for good reason.
Salary and other benefits are payable for one year and 180 days after
the notice of termination due to total disability is delivered to Mr.
Willette and Mr. Drapeau, respectively. No compensation is payable by the
Company to Messrs. Willette and Drapeau after the respective dates of death,
but expense reimbursements and earned but unpaid bonus compensation will be
paid out to their respective estates. If the officers terminate their
respective agreements without good reason, all compensation payable by the
Company will cease upon the date of such termination.
The Company is obligated to pay Mr. Drapeau $100,000 in one lump sum
payment upon the consummation of a "Change of Control" of the Company. An
additional $100,000 is payable by the Company to Mr. Drapeau on the date one
year after consummation of such Change of Control, subject to certain terms
and conditions specified in the Drapeau Agreement. The Drapeau Agreement
defines a "Change of Control" to include any one of the following: (i) any
person becomes the beneficial owner of 20% or more of the combined voting
power (with respect to the election of directors) of the Company's then
outstanding securities; (ii) the individuals who as of the date of the
Drapeau Agreement constitute the Board of Directors (and certain new
directors) 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 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 an agreement for the sale or disposition by the Company of all
or substantially all of the Company's business or assets.
14
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for
each of the last three fiscal years ended January 31 earned by or awarded to
the Chief Executive Officer of the Company and the other executive and
non-executive officers of the Company who had annual salary and bonus
compensation during the last fiscal year in excess of $100,000 (collectively
the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation(2) Awards
------------------------- -------------
Securities
Underlying
Name and Principal Options/ All Other
Position Year Salary ($) Bonus (1)($) SARs(3)(#) Compensation(4)($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
E. David Willette 1998 203,470 16,567 22,000 -0-
Chief Executive 1997 195,883 19,504 25,000 -0-
Officer 1996 178,313 78,485 34,000 -0-
Donald J. Drapeau 1998 129,867 7,453 10,500 1,386
President and 1997 124,948 13,733 12,000 2,636
Chief Operating 1996 113,588 37,198 12,500 1,290
Officer
Douglas Olzenak 1998 104,692 - 304 993
General Manager of 1997 101,161 - 263 2,010
Vaughn Comm. Div. 1996 88,730 - 268 875
</TABLE>
- -------------------------
(1) Includes the following amounts awarded under the Company's Performance
Incentive Compensation Program described in the Compensation Committee
Report on Executive Compensation which the Named Executive Officers
elected to apply to reduce the Original Option Prices of their respective
NSOs under the Company's 1990 Discounted Stock Option Plan: Mr. Willette
- $16,000 in fiscal 1996.
(2) No Named Executive Officer received perquisites and other personal
benefits from the Company in excess of $50,000 or 10% of such officer's
total annual salary and bonus paid for the years indicated.
(3) No stock appreciation rights ("SARS") have been granted to the Company's
Named Executive Officers during the last three fiscal years and no SARS
were outstanding on January 31, 1998.
(4) The amounts shown are Company contributions to the respective 401 (k)
Plan accounts of the Company's Named Executive Officers.
15
<PAGE>
OPTION GRANTS AND EXERCISES
The following tables summarize for fiscal 1998 the option grants and
exercises to or by the Named Executive Officers and the value of the options
held by such persons at January 31, 1998. No SARs have been granted since
1985, nor were any SARs exercised or outstanding during or at the end of
fiscal 1998. The terms and conditions of the ISOs and NSOs under the
Company's stock option plans are summarized in the Compensation Committee
Report on Executive Compensation.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options/SARs Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise for Option Term
Options/SARs in Fiscal or Base Expiration ----------------------------------
Name Granted (#) Year Price ($/Sh) Date 0%($) 5%($) 10%($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. David Willette 22,000 20% $ 5.10 April 29, 2007 19,800 102,814 230,174
Donald J. Drapeau 10,500 9% $ 6.00 April 29, 2004 -0- 25,647 59,769
Douglas Olzenak 304 * $ 9.00 Feb. 1, 2002 (2) 595 1,324
Dec. 16, 2007
</TABLE>
* Less than 1%
[Balance of page intentionally left blank.]
16
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
--------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Options/SARs in-the-Money Options/SARs
Shares at Fiscal Year End(#) at Fiscal Year End($)(1)
Acquired on Value Exercisable(E) Exercisable(E)
Name Exercise(#) Realized($) Unexercisable(U) Unexercisable(U)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. David Willette 98,000 666,890 63,475 E 107,277 E
55,550 U 20,476 U
- ---------------------------------------------------------------------------------------------------
Donald J. Drapeau 25,000 173,800 17,800 E 21,562 E
24,700 U - U
- ---------------------------------------------------------------------------------------------------
Douglas Olzenak 627 (1,293) 8,092 E 2,971 E
560 U 46 U
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on a fiscal year end of January 31, 1998 and a closing Common Stock
price of $6.000 per share on January 31, 1998. The value of in-the-money
options is calculated as the difference between the fair market value of
the Common Stock underlying the options and the exercise price of the
options at fiscal year end. Exercisable options refer to those options
that are exercisable at January 31, 1998, while unexercisable options
refer to those options not exercisable at January 31, 1998 but which will
become exercisable at various times in the future.
17
<PAGE>
PROPOSAL NO. 2
APPROVAL OF 1998 STOCK OPTION PLAN
PROPOSAL
The Board of Directors adopted the 1998 Stock Option Plan (the "1998
Plan") on May 5, 1998, subject to approval of the 1998 Plan by the
shareholders of the Company at the Company's 1998 Annual Meeting of
Stockholders, because all options available under the Company's 1995 Stock
Option Plan (the "1995 Plan") have been granted. The 1998 Plan is intended
to provide the Company with a means to provide incentives to attract and
retain persons of desired ability to serve in management and other key
positions with the Company.
The 1998 Plan is substantially similar to the 1995 Plan except that it
contains a new provision requiring the forfeiture of options granted under
the 1998 Plan upon violation of the noncompete provision imposed by the terms
of the 1998 Plan and related stock option agreements. See "Plan Description"
below.
As of the date of this Proxy Statement, and pursuant to the terms of the
1998 Plan, options to purchase an aggregate of 57,000 shares of the Company's
Common Stock have been granted under the 1998 Plan to four key employees of
the Company. The exercise of these options is contingent upon approval of
the 1998 Plan by the shareholders of the Company at the Company's 1998 Annual
Meeting of Shareholders. Accordingly, these options will become null and
void if the shareholders do not approve the adoption of the 1998 Plan.
If the shareholders of the Company approve the adoption of the 1998
Plan, the Company intends to register with the Securities and Exchange
Commission the 300,000 shares of Common Stock reserved for issuance pursuant
to the exercise of options granted under the 1998 Plan.
PLAN DESCRIPTION
The 1998 Plan reserves a total of 300,000 shares of the Company's Common
Stock for issuance upon the exercise of options granted under the 1998 Plan
to select management and other employees of the Company, which may include
officers of the Company, a group currently consisting of approximately three
persons. The 1998 Plan provides for the issuance of either incentive stock
options that qualify for favorable tax treatment upon exercise afforded by
Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory
options that do not qualify for such favorable federal income tax treatment.
See "Federal Income Tax Consequences" below. The 1998 Plan is administered
by the Company's Compensation Committee (the "Committee"). See "MEETINGS OF
THE BOARD OF DIRECTORS AND THE COMMITTEES THEREOF." The 1998 Plan will
terminate on May 5, 2008, unless the term is extended or terminated earlier
by action of the Board of Directors.
The 1998 Plan provides that options may be granted at any time by the
Committee under such terms and conditions as the Committee may determine,
subject to the terms and conditions specified in the 1998 Plan. The
Committee determines the optionees to whom, and the number of shares for
which, options will be granted under the 1998 Plan. Options will generally
be granted after recommendation by management. Because the employees who may
participate in the 1998 Plan in the future and the amount of their options
are determined by the Committee in its discretion, it is not possible to
state the names or positions of, or the number of options that may be granted
to, the Company's officers or other employees in the future. There is no
limitation in the 1998 Plan as to the number of employees who are eligible to
receive options. No participant may receive options under the 1998 Plan in
any fiscal year of the Company which, when added to all other options granted
to such participant during such fiscal year under any other stock option
plans of the Company, would total more than 50,000 shares of Common Stock.
18
<PAGE>
Incentive stock options granted under the 1998 Plan shall have an
exercise price equal to the 100% of the fair market value of the Common Stock
as of the date of grant, except that in the case of options granted to an
owner of 10% or more of the Company's outstanding shares of Common Stock, the
exercise price may not be less than 110% of the fair market value of the
Common Stock as of the date of grant. Nonstatutory stock options granted
under the 1998 Plan shall have an exercise price that is not less than 85% of
the fair market value of the Common Stock as of the date of grant.
Incentive stock options granted under the 1998 Plan to an owner of 10%
or more of the Company's outstanding shares of Common Stock must terminate
five years after the date of grant. In general, all other options granted
under the 1998 Plan will have option terms of seven years and shall vest on a
year-to-year cumulative basis as to the number of shares covered by the
option as follows: 10% on the date of grant; an additional 15% on the first
anniversary of the grant date; and an additional 25% on each of the second
through fourth anniversaries of the grant date, except that no option is
exercisable for a period of six months after the date of grant.
Options may be exercised through the payment of cash, by the transfer of
shares of Common Stock previously owned by the optionee, or with the
Committee's consent, through a so-called "cashless exercise" procedure.
Under a cashless exercise procedure, the option is exercised through a
national bank, trust company or brokerage firm which sells all of the shares
of Common Stock the optionee is entitled to receive upon exercise of the
option and credits to the Company's account the exercise price for the shares
purchased and the balance, if any, is credited to the optionee's account,
less all expenses and interest charges.
Nonstatutory options granted under the 1998 Plan are subject to such
transfer restrictions as may be imposed by the Committee, if any. Incentive
options granted under the 1998 Plan are nontransferable, except at death, and
during the optionee's life may be exercised only by the optionee. If the
optionee ceases to be employed by the Company by reason of disability or
retirement at or after age 57, or resigns as an employee within one year of a
"change of control" (as defined in the 1998 Plan), the optionee may exercise
any unexercised portion of the option through the remaining term of the
option without regard to the annual vesting provisions described above,
provided that incentive stock options may be exercised only within three
months after termination of employment by reason of such events and
thereafter expire. If the optionee ceases to be employed by the Company by
reason of death, the optionee's personal representative may exercise any
unexercised portion of the option without regard to the annual vesting
provisions described above within 12 months after the death of the optionee.
If the optionee ceases to be employed by the Company for any other reason,
the option expires on the date the optionee's employment terminates.
If an optionee's employment with the Company terminates for any reason,
except by reason of the optionee's death, disability or retirement at or
after the age of 57 or by the optionee for "good reason" as defined in the
1998 Plan, within one year of such optionee's exercise of all or part of
option(s) granted under the 1998 Plan, then the amount of "option gain"
realized upon such exercise shall be paid by such optionee to the Company
within 20 days of the optionee's date of termination. "Option gain" is
defined in the 1998 Plan to mean the excess of the fair market value of the
shares of Common Stock received upon exercise of the option as of the date of
exercise over the exercise price, multiplied by the number of shares of
Common Stock purchased upon such exercise, without regard to any subsequent
market price decrease or increase in shares of Common Stock. If at any time
within (i) the term of the optionee's option(s) granted under the 1998 Plan
or (ii) three years after the optionee's employment with the Company is
terminated or (iii) three years after the optionee's exercise of any portion
of the option(s) granted under the 1998 Plan, the optionee violates the terms
of any noncompete or confidential provision included in the 1998 Plan or set
forth in the optionee's employment agreement or engages in certain other
prohibited activities specified in the 1998 Plan which are, in general,
injurious to the business or reputation of the Company, then, and in such
event, all options granted under the 1998 Plan to such optionee automatically
terminate as of the date such optionee first engages in any such prohibited
activity (unless such options have previously terminated) and the option gain
realized by such optionee upon the exercise of all or part of such options
shall be paid over to
19
<PAGE>
the Company within 20 days of the date the optionee first engages in any such
prohibited activity. The Committee may release an optionee from all or any
part of the foregoing forfeiture provisions in it sole discretion.
If options granted under the 1998 Plan expire or terminate without
having been exercised in full, the shares of Common Stock not purchased under
such options will be available for purposes of new option grants under the
1998 Plan. The 1998 Plan provides for equitable adjustments in the number of
shares of Common Stock subject to, and the exercise price of, outstanding
options in the event of a stock dividend, stock split or other change in the
Company's capitalization affecting the Common Stock of the Company.
The Company's Board of Directors may amend the 1998 Plan at any time as
determined to be in the best interests of the Company, which amendment may
include an extension or termination of the 1998 Plan. The Board of Directors
may not (i) increase the maximum number of shares of the Company's Common
Stock reserved for issuance under the 1998 Plan or (ii) modify the
requirements as to eligibility for participation in the 1998 Plan, without
further approval by the shareholders of the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the Company's understanding of the
federal income tax consequences of the 1998 Plan. It is provided for general
informational purposes only and should not be construed as tax advice to or
by any individual.
An optionee will not realize taxable compensation income upon the grant
of an incentive stock option. In addition, assuming certain holding period
requirements are met, an optionee will not realize taxable income upon the
exercise of an incentive stock option if the option is exercised while the
optionee is an employee of the Company or any of its subsidiaries or within
three months after terminating employment (or within one year after
terminating employment by reason of permanent and total disability). The
amount by which the fair market value of the shares of Common Stock exceeds
the exercise price of the options at the time of exercise is an item of tax
preference for purposes of alternative minimum tax, which, for some
optionees, could trigger liability for the alternative minimum tax. To
qualify for favorable tax treatment, shares of Common Stock acquired upon
exercise of an incentive stock option must be held for at least two years
from the date of grant of the option and one year from the date of exercise.
Gain upon the sale of shares of Common Stock acquired pursuant to exercise of
an incentive stock option, but not meeting the holding period requirements
described above (referred to as a "disqualifying disposition"), will be taxed
at ordinary income rates up to the amount of gain which was deferred upon
exercise of the incentive stock option. Gain in excess of such amount will
qualify as long-term. Exercise of an incentive stock option does not entitle
the Company to an income tax deduction. However, any ordinary compensation
income which an optionee realizes when shares of Common Stock are sold in a
disqualifying disposition will result in the Company being allowed a
corresponding income tax deduction at that time.
An optionee will not realize taxable compensation income upon the grant
of a nonstatutory option. In general, an optionee who exercises a
nonstatutory option will realize taxable compensation income at that time
equal to the difference between the fair market value of the shares of Common
Stock on the date of exercise and the exercise price of the option. Any
ordinary compensation income realized by an optionee upon exercise of a
nonstatutory option will result in the Company being allowed a corresponding
income tax deduction at that time. When an optionee disposes of shares of
Common Stock acquired by the exercise of a nonstatutory option, any amount
realized which is in excess of the fair market value of the shares of Common
Stock on the date of exercise will be treated as short-term or long-term
capital gain, depending on the holding period of such shares.
CURRENT MARKET PRICE OF COMMON STOCK
The last sales price for shares of the Company's Common Stock on May 20,
1998 as reported by the Nasdaq National Market System was $10.00 share.
20
<PAGE>
OPTIONS TO EXECUTIVE OFFICERS, DIRECTORS AND EMPLOYEES
The following tables sets forth information as of the date of this Proxy
Statement with respect to all options granted to the Chief Executive Officer,
each executive officer of the Company whose annual salary and bonus for the
year ended January 31, 1998 exceeded $100,000, all current executive officers
of the Company as a group and all employees, including current officers who
are not executive officers of the Company as a group. No information is
provided concerning non-employee directors as they are not eligible to
receive options under the 1998 Plan.
<TABLE>
<CAPTION>
NUMBER NUMBER PER SHARE
OF CURRENTLY EXERCISE EXP.
NAME OF GROUP OR HOLDER SHARES EXERCISABLE PRICE DATE
- ------------------------- ------ ----------- ----------- ----
<S> <C> <C> <C> <C>
E. David Willette, 27,000 0 7.54375 5/03
Chief Executive Officer
Donald J. Drapeau 14,000 0 8.875 5/05
President
Current Executive Officers 47,000 0 8.875 5/05
as a group (3 persons)
All Employees, including 10,000 0 8.875 5/05
Current Non-Executive
Officers, as a group
(1 person)
</TABLE>
VOTE REQUIRED
The affirmative vote of shareholders of the Company owning in the
aggregate at least a majority of the Company's outstanding shares of Common
Stock present in person and by proxy, and entitled to vote, at the 1998
Annual Meeting of Shareholders is necessary to approve the adoption of the
1998 Plan. Votes cast as abstentions will not be counted as a vote for or
against the proposal to adopt the 1998 Plan, but will nevertheless have the
effect of increasing the total votes cast on the matter and thus increase the
number of votes necessary to approve the adoption of the 1998 Plan.
So-called "broker non-votes" (brokers failing to vote by proxy shares of the
Company's Common Stock held in nominee name for customers) will not be
counted at the Annual Meeting. The effect of such broker non-votes is to
decrease the total votes cast on the matter and thus decrease the number of
votes necessary to approve the adoption of the 1998 Plan.
Executive officers and directors of the Company own in the aggregate
1,394,141 shares of Common Stock or 34 percent of the outstanding shares of
Common Stock. See "VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS THEREOF."
Such officers and directors have indicated an intention to the Company to
vote in favor of the adoption of the 1998 Plan, which will, in all
likelihood, cause the approval of the adoption of the 1998 Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF APPROVAL
OF THE ADOPTION OF THE 1998 PLAN, AND THE PROXIES WILL BE VOTED IN FAVOR OF
SUCH APPROVAL, UNLESS OTHERWISE DIRECTED.
21
<PAGE>
TRANSACTIONS WITH MANAGEMENT
E. D. WILLETTE STOCK PUT REDEMPTION AGREEMENT, INCLUDING CHANGE OF CONTROL
PROVISION
Pursuant to a Stock Put Redemption Agreement between the Company and E.
David Willette dated August 27, 1986, as amended and restated June 24, 1992,
the Company has agreed to redeem shares of Common Stock having a value of up
to $1,500,000 from Mr. Willette's estate, following his death, or, unless the
Company's Board of Director's determines such redemption is not in the
Company's best interests, from Mr. Willette directly, if any purchaser other
than Mr. Willette (referred to as an "Interested Shareholder") should acquire
beneficial ownership of more than 20% of the Company without Board approval.
(See "Voting Securities and Principal Holders Thereof.")
The put option to require or request redemption by the Company may be
exercised at 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 Mr.
Willette's death, will be the greater of the fair market value or book value
of the Common Stock at the time of his death. The per share redemption
price, in the event an Interested Shareholder acquires more than 20% of the
Company, will be the greater of fair market value, the highest price paid by
the Interested Shareholder, or a multiple of ten (10) times the Company's
last year net pretax earnings per share. Any redemption from Mr. Willette's
estate will be paid out of the proceeds of a $1,500,000 life insurance policy
which the Company is required to carry on Mr. Willette's life.
The Company entered into the Stock Put Redemption Agreement with Mr.
Willette to induce him to continue his employment with the Company and to
permit an orderly disposition of shares which may be held by his estate. The
Agreement, as amended and restated, is also designed to encourage purchasers
seeking to acquire control of the Company to first negotiate with the Board
arrangements which are fair to all shareholders.
Since the Agreement is designed in part to discourage accumulations of
large amounts of stock by such purchasers, the Agreement could tend to reduce
temporary increases in the market price of the Company's stock that could be
caused thereby. As a result, shareholders could be deprived of certain
opportunities to sell their shares at temporarily higher market prices. The
Board believes protecting its ability to negotiate with an Interested
Shareholder seeking to change control of the Company is preferable to
discouraging such a proposal.
The Stock Put Redemption Agreement is subject to termination upon the
occurrence of a number of events, including the bankruptcy or insolvency of
the Company, cessation of business, voluntary termination of employment by
Mr. Willette prior to age 60 or involuntary termination by the Company for
cause.
ACQUISITION OF CENTERCOM FROM JEFFREY JOHNSON AND ROBERT HARMON AND RELATED
TRANSACTIONS
Pursuant to a Stock Purchase Agreement of even date (the "Centercom
Purchase Agreement"), on April 4, 1995, the Company acquired by purchase all
of the capital stock and video tape duplications business of Centercom, Inc.,
a Wisconsin corporation, and Centercom South, Inc., a Florida corporation,
(collectively "Centercom").
Centercom's two equal former shareholders were Jeffrey Johnson and
Robert Harmon. Pursuant to the Centercom Purchase Agreement, on April 4,
1995, the Company's Board of Directors elected Messrs. Johnson and Harmon to
two newly created directorships on the Company's Board (and the Audit
Committee thereof) (see "Election of Directors" and Meetings of the Board of
Directors and the Committees Thereof" above).
22
<PAGE>
In accordance with the Centercom Purchase Agreement Messrs. Johnson and
Harmon each receive $100,000 per year for a period of seven years ending
April 3, 2002, under consulting and noncompete agreements. These agreements
provide that Messrs. Johnson and Harmon will each be on call to provide up to
500 hours of consulting services to the Company during the first year of the
agreements and up to 300 hours in each of the six remaining years. Each are
also prohibited from competing with the Company in any geographic location
within the United States for the seven-year term of the agreements.
The Company also entered into two ten-year leases for the video tape
duplication facilities owned by a partnership of Messrs. Johnson and Harmon
in Milwaukee, Wisconsin. The two leases expire April 3, 2005. One facility
totals approximately 22,847 feet at an annual net rent of $146,221. The
other adjacent facility totals approximately 15,144 square feet at an annual
net rent of $40,132 for the first three years and $53,004 for the remaining
seven years. The Company merged its preexisting facilities in Milwaukee into
these Centercom facilities. Management of the Company believes that the
facilities leased from Messrs. Johnson and Harmon are necessary for its video
tape duplication business and that the lease terms and conditions are no less
favorable to the Company than could have been obtained from an unrelated
third party.
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Ernst & Young LLP as
the auditors of the Company's financial statements for the fiscal year ending
January 31, 1999. Ernst & Young LLP, or a predecessor thereof, has audited
the Company's financial statements for a number of years and has no direct or
indirect financial interest in the Company. Representatives of Ernst & Young
LLP will be present at the Annual Meeting and will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder desiring to have an appropriate proposal for action
presented at next year's Annual Meeting of Shareholders, now scheduled for
June 1999, and who wishes to have it set forth in the Proxy Statement and
form of Proxy for the meeting, must notify the Company and submit the
proposal in writing for receipt at the Company's executive offices noted
above not later than January 15, 1999. See SEC Rule 14a-8 for additional
applicable requirements and procedures.
The Board of Directors knows of no matters that will be presented for
consideration at the Annual Meeting other than those referred to in this
Proxy Statement. If any other matter properly comes before the Annual
Meeting calling for a vote of shareholders, it is intended that the proxies
solicited by the Board of Directors will be voted in accordance with the
judgment of the persons named in the proxies.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ M. Charles Reinhart
M. CHARLES REINHART
SECRETARY
Minneapolis, Minnesota
May 26, 1998
<PAGE>
APPENDIX A
VAUGHN COMMUNICATIONS, INC.
PROXY FOR
ANNUAL MEETING OF SHAREHOLDERS, JUNE 23, 1998
The undersigned, revoking all prior proxies, appoints E. David Willette
and M. Charles Reinhart, or either of them, as proxies, with full power of
substitution and revocation, to represent the undersigned and to vote all
shares of the Common Stock of Vaughn Communications, Inc. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be
held on June 23, 1998, at The Marquette Hotel, Seventh and Marquette,
Minneapolis, Minnesota, 55402, commencing at 4:00 p.m., and any adjournment
thereof, upon the following matters:
1. ELECTION OF DIRECTORS
____ For the two nominees listed below (except as marked to the
contrary below).
____ Withhold authority to vote for all nominees listed
below.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
Jeffrey Johnson and Harold Wahlquist
2. PROPOSAL TO APPROVE THE COMPANY'S 1998 STOCK OPTION PLAN.
____ FOR ____ AGAINST ____ ABSTAIN
3. SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING OR OF ANY ADJOURNMENT THEREOF.
____ FOR ____ AGAINST ____ ABSTAIN
(TO EXECUTE YOUR PROXY, PLEASE DATE AND SIGN BELOW, AND RETURN TO THE COMPANY
IN THE ENVELOPE PROVIDED.)
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND, IF NO CHOICE IS
SPECIFIED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE APPROVAL OF
THE COMPANY'S 1998 STOCK OPTION PLAN, AND IN THE DISCRETION OF THE PROXY
HOLDER ON ALL OTHER MATTERS.
Receipt of Notice of Meeting and Proxy Statement is hereby acknowledged.
Dated: , 1998
---------------------
-----------------------------------------
-----------------------------------------
Please sign this proxy exactly as your name
appears on your certificate. Joint owners
should each sign personally. Trustees and
executors and others signing in a
representative capacity should indicate the
capacity in which they sign.
<PAGE>
APPENDIX B
VAUGHN COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
1. PURPOSE
The Plan is intended to provide a means for Vaughn Communications, Inc.
(the "Company"), by offering incentives to selected management and other key
employees of the Company, and of any majority owned direct or indirect
subsidiaries of the Company, to attract and retain persons of ability and
motivate them to advance the interests of the Company.
It is intended that some of the options granted under the Plan will be
designated and constitute "incentive stock options" within the meaning of
Section 422 or other similar provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and the other options granted under the Plan will be
designated and constitute "nonstatutory options," i.e., options not
qualifying under Section 422 or other similar provisions of the Code. Unless
otherwise indicated, the terms and conditions of the Plan shall apply equally
to all options granted hereunder, whether incentive stock options or
nonstatutory options. It is also intended that the Plan be administered so
as to comply with Rule 16b-3 under the Securities Exchange Act of 1934.
2. SHARES SUBJECT TO THE PLAN
A total of 300,000 shares of authorized but unissued or reacquired $.10
par value Common Stock of the Company is reserved for issuance upon exercise
of options under the Plan. If any option expires or terminates without
having been exercised in full, the unacquired shares shall be available for
the grant of future options under the Plan.
<PAGE>
3. ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee"). Each of the members of
the Committee shall be a "Non-Employee Director" within the meaning of Rule
16b-3, as then in effect, of the General Rules and Regulations under the
Securities Exchange Act of 1934. A "Non-Employee Director" under Rule 16b-3
means a director of the Company who is not (1) currently an officer of the
Company or its parent or subsidiary or otherwise currently employed by the
Company or its parent or subsidiary, (2) does not receive compensation,
either directly or indirectly, from the Company or its parent or subsidiary
for services rendered as a consultant or in any capacity other than as a
director, except for an amount that does not exceed the dollar amount for
which disclosure would be required pursuant to Item 404(a) of Regulation S-K,
(3) does not possess an interest in any other transaction for which
disclosure would be required pursuant to Item 404(a) of Regulation S-K, and
(4) is not engaged in a business relationship for which disclosure would be
required pursuant to Item 404(b) of Regulation S-K.
4. ELIGIBILITY AND AMOUNT OF GRANT
The Committee shall determine the grantees to whom (the "Optionees"),
and the number of shares for which, incentive stock options and/or
nonstatutory options shall be granted under the Plan. Optionees shall be
management or other employees of the Company, including officers, or of any
of the Company's aforesaid subsidiaries, who the Committee determines have
contributed materially to the success of the Company or are in a position to
contribute materially to the future success of the Company. Except as
hereinafter limited, an eligible Optionee may be granted one or more options
hereunder which may be incentive stock options and/or nonstatutory options.
No eligible Optionee may receive options hereunder in any fiscal year of the
Company,
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including for purposes of such calculation only all options received by the
Optionee in such fiscal year under any other stock option plans of the
Company, totaling more than Fifty Thousand (50,000) shares.
Notwithstanding the foregoing and except as hereafter provided, an
individual shall not be eligible to receive incentive stock options under the
Plan, if before the incentive stock option is granted the individual owns
(directly and through application of the constructive stock ownership
attribution rules of Section 425(d) of the Code) more than Ten Percent (10%)
of the total combined voting power of all classes of stock of the Company or
any subsidiary. This stock ownership provision shall not apply, and the
individual shall be eligible to receive an incentive stock option, if at the
time such option is granted the option exercise price is at least One Hundred
Ten Percent (110%) of the fair market value of the stock subject to the
option and the incentive stock option is not exercisable after the expiration
of five years from the date the option is granted.
Notwithstanding any other provision in this Plan, the aggregate fair
market value (determined at the time an option is granted) of shares with
respect to which incentive stock options are exercisable for the first time
by an Optionee during any calendar year (under this Plan and all other such
plans of the Company and its subsidiaries pursuant to Section 422 or other
similar provisions of the Code) shall not exceed $100,000. To the extent
necessary to avoid such limitation, the shares granted to any Optionee under
this Plan shall be deemed to be nonstatutory options.
5. OPTION PRICE
The option exercise price for all incentive stock options granted under
the Plan (except as otherwise herein provided) shall equal One Hundred Percent
(100%) of the fair market value of
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<PAGE>
the Company's Common Stock on the date of grant. The option exercise price
for the nonstatutory options granted under the Plan shall not be less than
85% of the fair market value of the Common Stock on the date of grant. Fair
market value shall be determined by the Committee based upon the last sale
price of the Common Stock in the National Association of Securities Dealers
Automated Quotations System (NASDAQ) for National Market Issues or, as
applicable, for Small-Cap Issues, as reported by the National Association of
Securities Dealers for the last business trading day preceding the date of
grant, or through such other measure or means as the Committee may in good
faith determine to be appropriate to determine such fair market value. The
Committee may authorize the Chief Executive Officer or Secretary of the
Company to make any determinations required in this Section 5.
6. OPTION TERMS
Options granted hereunder shall be evidenced by an Option Agreement
executed as of the date of grant by the Company and the Optionee, on such
terms as may be determined by the Committee, including the following:
(a) The Option Agreement shall specify whether the option is an
incentive stock option or a nonstatutory option and shall set forth
the number of shares and the option exercise price to which the
option pertains. It shall also specify that the option shall vest on
a year-to-year cumulative basis as to the number of shares covered by
the option as follows: ten percent (10%) on the date of grant; plus
fifteen percent (15%) on the first anniversary date of the date of
grant; plus twenty-five percent (25%) on the second anniversary date
of the date of grant; plus twenty-five percent (25%) on the third
anniversary date of the date of grant; plus twenty-five percent (25%)
on the fourth anniversary date of
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<PAGE>
the date of grant. The option shall be exercisable in whole or in part
as to any vested portion during the option term which shall be up to ten
(10) years as specified by the Committee in the Option Agreement (except
as otherwise provided in Section 4, this subsection and subsection (e)
below and/or in the Option Agreement), except that the option shall
first become exercisable six months after the date of grant and shall
not be exercisable prior thereto.
(b) The option exercise price shall be paid at the time of
exercise which shall be in writing and, at the election of the
Optionee, may be paid in cash and/or by the sale and delivery of
certificates(s) duly endorsed for transfer, in shares of the
Company's Common Stock already owned by the Optionee. Any shares so
sold to the Company in payment of the option exercise price shall be
valued at fair market value on the exercise date as determined by the
Committee, or by the Chief Executive Officer or the Secretary of the
Company as the Committee's designee (as provided in Section 5). Fair
market value shall be deemed to be the last sale price of the Common
Stock in the NASDAQ for National Market Issues or, as applicable, for
Small-Cap Issues, as reported by the National Association of
Securities Dealers for the last business trading day preceding the
date of exercise. Any fractional share not required for payment of
the option exercise price shall be paid for by the Company in cash on
the basis of the same value utilized for such exercise.
(c) If available, the Committee may also permit the Optionee to
utilize any so-called "cashless exercise" procedures; to exercise the
option through a national bank or trust company or brokerage firm
which is a member of the
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<PAGE>
National Association of Securities Dealers, pursuant to which upon
presentation of written exercise to such bank, trust company or broker
and to the Company, and upon authorization therefor by the Committee,
any or all of the shares an Optionee is entitled to receive on exercise
is sold by such bank, trust company or broker, or an agent therefor, and
the option exercise price for the shares purchased by the Optionee is
credited to a designated account of the Company on either the trade date
or the customary settlement date, provided only that if the Company is
not to receive credit of the option exercise price to its account until
such settlement date, on or before the trade date the selling bank,
trust company or broker confirm to the Company its obligation to pay the
same to the Company as of the settlement date. The balance of the
proceeds for any shares sold in a cashless exercise of an option, less
customary brokerage commissions, handling fees, other related brokerage
charges and interest expense pending settlement and delivery of
certificate(s), if applicable, shall be credited to the Optionee's
account. If the sale proceeds are insufficient therefor, such costs of
sale shall be paid directly by the exercising Optionee. The Company
shall instruct the Company's Transfer Agent and Registrar, in accordance
with the request of the selling bank, trust company or broker and/or
Optionee, to issue certificate(s) for the portion of the shares acquired
on exercise which are sold in the cashless exercise to the selling bank,
trust company or broker or its designee, and to issue certificate(s) for
such shares acquired on exercise which are not sold in the cashless
exercise, if any, to the Optionee or the Optionee's designee.
-6-
<PAGE>
The Committee, however, shall be free to alter the above or
establish any rules appropriate to the use of any cashless exercise
procedure, but shall not permit the same, unless or until exercise
and sale of the shares are registered under the Securities Act of
1933 and in compliance with any applicable registration requirements
of state securities law, and, in the case of officers of the Company
or other persons subject to Section 16 of the Securities Exchange Act
of 1934, in absence of an opinion of counsel for the Company that
such cashless exercise transaction will not result in such person's
violation of the rule against realization of short-swing profits
pursuant to Section 16(b) thereof.
(d) Unless the issuance of the shares upon the exercise of an
option hereunder is registered under federal and state securities
laws, the Optionee upon exercise shall be required to sign and
deliver to the Company and be bound by a customary "investment
letter," setting forth the Optionee's investment representation and
securities law transfer restrictions consistent with federal and
state securities law exemptions from registration for issuance of the
shares on exercise and consistent with Rule 144 under the Securities
Act of 1933, and requisite legends and stop transfer orders shall be
placed upon or against the certificates for the shares by the
Company's Transfer Agent and Registrar. Without regard to
registration or exemption therefrom on exercise, if the Optionee is
then an officer or other "affiliate" of the Company with the meaning
of said Rule 144, securities law transfer restrictions consistent
with said Rule 144 shall in any event be applicable and requisite
legends and stop transfer orders shall be placed upon or against the
certificates for the shares by the Company's Transfer Agent and
-7-
<PAGE>
Registrar. The Company shall not be obligated for but does currently
anticipate registration of the shares issued under the Plan under
federal and certain state securities laws.
(e) If the Optionee, until such time continuously employed by
the Company or its subsidiaries, is terminated by reason of death or
disability or retires at or after age 57 or resigns as an employee of
the Company within one year of a "Change of Control", the option, to
the extent not previously exercised, may be exercised in whole or in
part during the balance of the stated term of the option without
regard to the annual exercise vesting provisions of subsection (a)
above, except that no option shall be exercisable for a period of six
(6) months after the date of grant, and except that an incentive
stock option may be exercised only within three (3) months after
termination of employment by reason of such event and shall thereupon
expire, unless the Optionee shall die during such period or while
employed in which case the option may be exercised within twelve (12)
months after the death of the Optionee. The Committee may by prior
approval also permit an Optionee to retire to the same effect or on
any less favorable basis prior to age 57. The Committee may grant,
withhold or condition its approval for any reason it deems to be in
the best interests of the Company. In the event of the Optionee's
death, the option may be exercised by the personal representative of
the Optionee's estate and/or by the Optionee's heirs, as the case may
be. If the Optionee's employment terminates for any other reason,
the option shall expire on the date the Optionee's employment
terminates. Notwithstanding anything herein to the contrary, unless
expiring earlier in accordance with another express
-8-
<PAGE>
provision of this Plan or the Option Agreement, all options granted
under the Plan shall terminate and expire ten (10) years after the date
of grant. As used herein, a "Change of Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) other than such Optionee
becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of securities
of the Company representing 20% or more of the combined voting power
(with respect to the election of directors) of the Company's then
outstanding securities; (ii) at any time after the adoption of this
Plan, individuals who as of the date of adoption of this Plan constitute
the Board (and any new director whose election to the Board or
nomination for election to the Board by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office) cease for any reason to constitute a majority of the
Board; (iii) the consummation of a merger or consolidation of the
Company with or into any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity) more than 70% of the combined voting power (with
respect to the election of directors) of the securities of the Company
or of such surviving entity outstanding immediately after such merger or
consolidation; or (iv) the consummation of a plan of complete
liquidation of the Company or of an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
business or assets.
-9-
<PAGE>
(f) The incentive stock options hereunder shall not be
transferable, in whole or in part, by the Optionee except by will or
the laws of descent and distribution. During the Optionee's
lifetime, the incentive stock options granted hereunder shall be
exercisable only by the Optionee, and only while and if continuously
employed by the Company or a subsidiary of the Company, except as
provided in Section 6(e) above. The nonstatutory stock options
granted hereunder shall be subject to such restrictions on transfer
(if any) imposed by the Committee.
(g) An incentive stock option hereunder shall not contain terms
pursuant to which the exercise of the option would affect the
Optionee's right to exercise a nonstatutory option hereunder, or vice
versa, such that the incentive stock option would be deemed a
prohibited "tandem stock option" within the meaning of Section 422 of
the Code and the regulations thereunder.
(h) If the Optionee sells, exchanges or otherwise disposes of
shares acquired upon exercise of an incentive stock option within two
(2) years of the date of grant, or one (1) year after the date of
exercise, the Optionee shall be required to notify the Company
promptly in writing and disclose the amount of gain or loss resulting
from the sale, exchange or other disposition of his or her shares.
(i) If the Optionee's employment is terminated for any reason,
except by reason of the Optionee's death, disability or retirement at
or after the age of 57 or by the Optionee for "Good Reason" as
defined below, within one year of such Optionee's exercise of all or
any part of an option hereunder, then the amount of "Option Gain" as
defined below realized upon such exercise shall be paid by such
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<PAGE>
Optionee to the Company within twenty (20) days of the Optionee's
date of termination. As used herein, "Option Gain" shall mean the
excess of the fair market value of the shares of Common Stock
received upon exercise of the option as of the date of exercise over
the exercise price, multiplied by the number of shares of Common
Stock purchased upon such exercise, without regard to any subsequent
market price decrease or increase in shares of Common Stock. Fair
market value shall be deemed to be the last sale price of the Common
Stock in the NASDAQ for National Market Issues or, as applicable,
Small-Cap Issues, as reported by the National Association of
Securities Dealers for the last business trading date preceding the
date of exercise. As used herein "Good Reason" shall be defined as
(i) a material diminishment of the responsibilities, duties and
authority of such Optionee's immediately prior position in the
Company or under any written employment agreement between such
Optionee and the Company, (ii) a material reduction in such
Optionee's salary and bonus, if any, unless such reduction is
reasonably related to the financial condition of the Company, (iii)
the failure of the Company to provide such Optionee with all plans,
programs and other benefits of the Company in accordance with the
terms of any written employment agreement between such Optionee and
the Company, (iv) the failure of any successors, assigns, or
surviving corporation or entity to assume and faithfully perform the
material obligations of the Company under any written employment
agreement between the Optionee and the Company, or (v) the Company's
commission of any material breach of any written employment agreement
between the Optionee and the Company, which is not remedied by the
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<PAGE>
Company in a reasonable period (but not less than ninety (90) days)
after receipt of written notice thereof from such Optionee.
(j) If any time within (i) the term of the Optionee's option
hereunder, or (ii) three years after the Optionee's employment with
the Company is terminated or (iii) three years after the Optionee's
exercise of any portion of an option hereunder, the Optionee (iv)
violates the terms of any noncompete or confidentiality provision set
forth in an employment agreement between the Optionee and the
Company, (v) discloses without the prior written consent of the
Company (which consent may be withheld at the discretion of the
Company) "Confidential Information" as defined below to any person
not employed by the Company or authorized by the Company to receive
such Confidential Information, (vi) solicits or assists anyone else
in the solicitation of any of the Company's then current employees to
terminate their employment with the Company and to become employed by
any other business enterprise, (vii) directly or indirectly, alone or
as a partner, consultant, advisor, employee or in any other capacity,
engages in any commercial activity in competition with any part of
the Company's business (which currently involves videotape
duplication, compact disc replication and duplication and diskette
duplication services to corporations, publishers, religious and
educational companies and other institutional entities and the
manufacture and sale of gift products and collectibles to retailers)
in those states in which the Company conducted business during the
term of the option or as of the date of termination of employment,
(viii) engages in any activity which has a material and adverse
effect upon the business or reputation of the Company, (ix)
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<PAGE>
violates any of the Company's policies or (x) participates, directly or
indirectly, in a hostile takeover attempt of the Company, then, and
in such event, (xi) any and all options granted hereunder to such
Optionee shall automatically terminate as of the date such Optionee
first engages in any such prohibited activity, unless such options
have previously terminated by operation of another term or condition
of this Plan or the Option Agreement governing such option(s) and
(xii) the Option Gain realized by such Optionee upon the exercise of
all or any portion of such options shall be paid over to the Company
within twenty (20) days of the date the Optionee first engages in
such prohibited activity. As used herein, "Confidential Information"
means information that is proprietary to the Company or proprietary
to others and entrusted to the Company. Confidential Information
also includes, but is not limited to, customer lists; information
relating to business plans and to business that is conducted or
anticipated to be conducted; past, current or anticipated products;
and information concerning research, development, purchasing,
accounting, computer software, selling and services.
(k) The Committee may release the Optionee from all or any part
of the terms of Subscctions 6(i) and 6(j) in its sole discretion;
provided, however, that such release is in the best interests of the
Company.
(l) The Plan and the options granted hereunder and all
determinations made and actions taken pursuant to this Plan, to the
extent not otherwise governed by the laws of the United States, shall
be governed by the laws of the State of Minnesota and construed
accordingly without giving effect to principles of conflicts of laws.
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<PAGE>
7. TERMINATION
Unless extended or sooner terminated by action of the Company's Board of
Directors, the Plan shall terminate ten (10) years from its effective date.
Options outstanding under the Plan at the time of termination shall remain in
effect until exercise or expiration.
8. EFFECTIVE DATE
The effective date of the Plan shall be May 5, 1998, the date of adoption
by the Company's Board of Directors.
9. ADJUSTMENT OF SHARES
In the event of a recapitalization, merger, consolidation, reorganization,
stock dividend, stock split or other change in capitalization affecting the
Common Stock of the Company, appropriate equitable share and per share option
exercise price adjustments in outstanding options, and appropriate equitable
share adjustments in the shares then reserved for issuance under the Plan,
shall be made by the Company's Board of Directors or by the President or
Secretary of the Company acting as the Board's designated representative to
prevent dilution or enlargement of rights.
10. AMENDMENT
The Company's Board of Directors may amend the Plan at any time as
determined to be in the best interests of the Company, including any amendment
to extend or terminate the Plan. The Board shall not, however, without
shareholder approval, increase the maximum number of shares subject to the Plan
or restrict the class of persons eligible to be granted options under the Plan.
