On April 6, 2011, Reser’s presented a written offer to Vaughan to purchase 100 percent of the equity of Vaughan for $0.80 per share, plus nominal per share amounts for certain warrants, which would have resulted in a total purchase price of $8.1 million. However, certain equity components, specifically non-publicly traded warrants issued to a lender and stock options issued primarily to employees, were ostensibly excluded from the written offer letter.
On April 8, 2011, Vaughan responded by acknowledging receipt of the written offer and, citing certain of Vaughan’s financial metrics and certain valuation multiples in recent industry transactions, requested Reser’s to reevaluate their offer to determine whether it could increase the purchase price. The response was prepared by Vaughan’s Chairman and Chief Executive Officer, its Chief Financial Officer, and its President and Chief Operating Officer, and was signed by the Chairman and sent to Reser’s by the Chief Financial Officer. Metrics and valuation multiples cited in the communication were those derived by the Chief Financial Officer from various public filings.
On April 20, 2011, at the request of Reser’s, Vaughan provided Reser’s with additional information regarding its outstanding securities. The additional information included the equity components of Vaughan’s capital structure – primarily the details of employee stock options and non-publicly traded warrants. The information was provided by Vaughan’s Chief Financial Officer and authorization for providing this information was given by Vaughan’s Chairman and Chief Executive Officer.
On April 22, 2011, Reser’s presented a revised written offer increasing the proposed purchase price to $15.0 million, which would have resulted in per share Merger Consideration of approximately $1.31.
On April 28, 2011, the Board met telephonically to discuss Reser’s April 22, 2011 offer. Prior to this time, there was no reason to involve the Board, since management believed – and the Board subsequently confirmed – that the prior offer was inadequate. Thus, this was the first disclosure to the Vaughan Board regarding the Reser’s proposal.
Management made a presentation to the Board at this telephonic meeting on April 28, 2011, advising the Board of the various steps and milestones in the negotiation process and of the progress of the negotiations with Reser’s. The Board agreed with management’s position that the offer from Reser’s was inadequate and instructed management to inform Reser’s of the Board’s determination and to continue negotiations with Reser’s to increase the purchase price.
On May 7, 2011, Vaughan sent a letter to Reser’s that contained non-public information requested by Reser’s on May 5, 2011, and additional non-public information, including the following:
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| | • | information regarding Vaughan’s net operating loss carryforwards for federal income tax purposes; |
| | • | information regarding intangible assets, and |
| | • | potential new business, without naming specific potential customers. |
The information regarding net operating loss carryforwards disclosed that: (a) Vaughan Foods, Inc. has a net operating loss carryforward for Federal income tax purposes of $8.2 million that can be used by the acquiring subsidiary – although with certain limitations – over a period of at least the next 12 years; and (b) Vaughan has $1.0 million in Oklahoma job and investment credit carryforwards. The letter urged Reser’s to make a careful analysis of the net operating loss carryforwards, since Vaughan’s management believes they could have considerable value, despite the limitations.
In addition, Vaughan pointed out that the intangible assets acquired in the merger, primarily customer relationships, intellectual property and (possibly) goodwill, may be amortized under for tax purposes and used to offset other taxable income over a period of 15 years.
Engagement of Burrill
On June 16, 2011, the Board engaged Burrill to provide a written opinion to the Board as to the fairness of the proposed transaction to the Vaughan stockholders from a financial point of view. Prior to that date, management did not believe there would be any benefit for the stockholders to incur the expense of engaging financial advisors until such time as management believed it had an agreement in principle that it believed reflected the true value of Vaughan and that would be acceptable to the Board. At this time, no binding agreement had been entered, and management believed that a fairness opinion was necessary in order to provide assurance to the stockholders that the proposed transaction was fair from a financial point of view. Burrill is an investment banking firm based in San Francisco, California, that has substantial experience in the mid- and small-cap markets. As part of its investment banking activities, it is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes and other purposes. The Board considered several investment banking firms, but selected Burrill based on its qualifications, reputation and experience in rendering fairness opinions in connection with merger and acquisition transactions generally, as well as substantial experience in transactions similar to the Merger. Burrill has not previously provided any services for Vaughan, Reser’s or Merger Sub.
Issuance of Director Options
On June 22, 2011, options to purchase common stock were awarded to the independent directors of Vaughan. Since its initial public offering in June, 2007, each independent director of Vaughan has received an annual grant of options to purchase 5,000 shares of Vaughan common stock in connection with his or her service on the Board. The options have an exercise price equal to the market price of a share of Vaughan common stock on the date of grant. The stock options awarded on June 22, 2011, constituted the stock option awards that each independent director was entitled to for 2011 in accordance with Vaughan’s independent director equity compensation policy and were similar to the options issued to each director in prior years.
Board’s Evaluation of the Adequacy of the Offer
The Board’s view is that Vaughan, prior to Reser’s offer, had communicated with a sufficient number of parties, including brokers and potential acquirers (both strategic and financial), to obtain the best value reasonably available to stockholders.
Specifically, Vaughan received an informal, non-written overture from a potential strategic party in 2009 for an amount that was less than one-half of the Merger Consideration and was unable to obtain a better value at that time. In the first quarter of 2010, Vaughan completed an equity offering of securities that, based on the amount raised and the number of shares gave the Company a market cap of approximately $3.8 million.
From January 1, 2009 through July 6, 2011, Vaughan’s management believes that it received between five and ten unsolicited informal inquiries by parties each interested in acquiring a controlling interest in Vaughan – either, in some cases, to take out all shares or, in other cases, to make a supplemental investment in the equity of Vaughan. In Management’s judgment, based on the ranges of values informally discussed (when they were discussed at all), each of those unsolicited verbal inquiries would have resulted in transaction values that that would have been materially lower than the Merger Consideration and were otherwise unacceptable because they would have resulted in significant dilution of the existing stockholders and, accordingly, were not pursued further.
Vaughan’s Senior Officers
The Merger Agreement provides that, at the closing of the Merger, Vaughan is required to deliver to Reser’s the resignation of each of its officers and directors as well as those of its subsidiaries prior to the Effective Time. After the execution and delivery of the Merger Agreement, July 6, 2011, and before Vaughan filed preliminary proxy materials with the SEC, July 21, 2011, Reser’s agreed to waive that closing condition with respect to Vaughan’s senior executive officers – Messrs. Grimes, Vaughan and Jones. As a result, Vaughan’s senior executive officers will continue to be employed by Vaughan after the Merger in the same capacity as before the Merger. However, Reser’s has no formal or implied obligation to employ Vaughan’s senior executive officers for any specific length of time following the Effective Time. The Management Agreements that are in effect as of the Effective Time and that have been in effect since 2009, will continue in full force and effect following the Effective Time.
Repayment of Certain Indebtedness
Within 30 days after the closing of the Merger, the surviving corporation in the Merger i.e., Vaughan, will pay Herbert B. Grimes, approximately $810,000 plus accrued interest, in full satisfaction of a note he holds (“Grimes Note”). The Grimes Note was provided as partial consideration for the sale of Mr. Grimes’ interest in Allison’s Gourmet Kitchens, LLP, in 2007. The original note was due and payable on June 30, 2008; however, due to Vaughan’s inability to satisfy this note when due, Mr. Grimes has renewed and extended the Grimes Note on several occasions. The Grimes Note is due on July 5, 2013, with interest accruing at the rate of 10 percent per annum. Vaughan has been making weekly payments to Mr. Grimes in the amount of $1,500 and has scheduled certain one-time payments. Mr. Grimes previously agreed that repayment of the note was subject to Vaughan’s ability to pay.
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This Current Report on Form 8-K shall not constitute an offer to sell or the solicitation of an offer to buy securities, nor shall there be any sale of securities in any jurisdiction in which such solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| Vaughan Foods, Inc. |
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Dated: September 9, 2011 | By: | /s/ Gene P. Jones |
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| | Name: Gene P. Jones |
| | Title: Secretary, Treasurer and Chief Financial Officer |
