UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 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):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.10 par value
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
4,103,384 Shares of Common Stock
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $10.00 per share proposed cash
payment to be transferred to holders of 4,103,384 shares of Common
Stock upon consummation of the transaction plus payment to holders of
options to purchase 453,378 shares of Vaughn common stock for the
spread between the $10.00 merger consideration and the exercise price
of such options.
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$42,661,467
-----------------------------------------------------------------------
(5) Total fee paid:
$8,532.29
-----------------------------------------------------------------------
/ / 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.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
VAUGHN COMMUNICATIONS, INC.
5050 WEST 78TH STREET
MINNEAPOLIS, MINNESOTA 55435
Dear Shareholder:
The Board of Directors of Vaughn Communications, Inc. ("Vaughn") has
approved a merger in which the Company and Twin Acquisition Corp. ("TAC") will
merge, with Vaughn being the surviving corporation (the "Merger").
The Board of Directors of Vaughn and a special committee of Vaughn's
independent, non-employee directors (the "Special Committee") determined that
the right to receive $10.00 in cash for each share of Vaughn common stock is
fair to Vaughn shareholders and is in the best interests of Vaughn shareholders.
The Board of Directors of Vaughn and the Special Committee recommend that
shareholders vote in favor of the Merger. Certain members of Vaughn's Board of
Directors have interests in the Merger that may conflict with the interests of
Vaughn shareholders generally. See "Special Factors--Conflicts of Interest" in
the attached proxy statement (the "Proxy Statement").
You are cordially invited to attend a special meeting of Vaughn shareholders
(the "Special Meeting") to vote whether to approve and adopt the Merger in
accordance with the Agreement and Plan of Merger, dated as of December 11, 1998,
among Vaughn, TAC and, only for purposes of Section 8.11 thereof, Allied
Digital, Inc., parent of TAC.
YOUR VOTE IS VERY IMPORTANT
Whether or not you plan to attend the Special Meeting, please take the time
to vote on the proposal submitted by completing and mailing the enclosed proxy
card to us. Please sign, date and mail your proxy card indicating how you wish
to vote. If you fail to return your proxy card, the effect will be a vote
against the Merger.
The date, time and place for the Special Meeting is:
- , 1999, at a.m., local time
- at The Marquette Hotel
Seventh and Marquette
Minneapolis, Minnesota 55402
The enclosed Proxy Statement provides you with detailed information about
the Merger. In addition, you may obtain information about Vaughn from documents
filed with the Securities and Exchange Commission. We encourage you to read this
entire document carefully.
Sincerely,
E. David Willette
CHIEF EXECUTIVE OFFICER
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") OR ANY STATE SECURITIES REGULATORS NOR HAS THE SEC OR ANY
STATE SECURITIES REGULATOR PASSED UPON THE FAIRNESS OR MERITS OF SUCH MERGER OR
UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PROXY STATEMENT DATED , 1999, AND FIRST MAILED TO SHAREHOLDERS ON OR
ABOUT , 1999.
VAUGHN COMMUNICATIONS, INC.
5050 WEST 78TH STREET
MINNEAPOLIS, MINNESOTA 55435
________________________________________________________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1999
________________________________________________________________________________
To the Shareholders of Vaughn Communications, Inc.:
Notice is hereby given that a special meeting of the shareholders (the
"Special Meeting") of Vaughn Communications, Inc. ("Vaughn" or the "Company")
will be held at The Marquette Hotel, Seventh and Marquette, Minneapolis,
Minnesota 55402 on , , 1999, at a.m. local time,
for the following purposes:
1. To consider and vote upon a proposal recommended by the Board of Directors
of Vaughn and a special committee of Vaughn's independent non-employee
directors to approve and adopt a plan of merger in accordance with the
Agreement and Plan of Merger, dated as of December 11, 1998 (the "Merger
Agreement"), among Vaughn, Twin Acquisition Corp. ("TAC"), a Minnesota
corporation, and, only for purposes of Section 8.11 thereof, Allied Digital,
Inc., parent of TAC, pursuant to which (i) TAC will be merged with and into
Vaughn (the "Merger"), with Vaughn being the surviving corporation and (ii)
each shareholder of Vaughn (other than shareholders who properly exercise
their dissenters' rights under Minnesota law) will become entitled to
receive $10.00 in cash (the "Merger Consideration") for each outstanding
share of Vaughn common stock, par value $.10 per share (the "Vaughn Common
Stock"), owned immediately prior to the effective date of the Merger. A copy
of the Merger Agreement is attached as Annex A to the accompanying proxy
statement (the "Proxy Statement"). The Merger Agreement is also described in
the attached Proxy Statement.
2. To act upon such other matters as may properly come before the Special
Meeting or any adjournment(s) or postponement(s) of the Special Meeting.
The Board of Directors of the Company has fixed the close of business on
, 1999 as the record date for determination of shareholders entitled
to notice of, and to vote at, the Special Meeting and any adjournment(s) and
postponement(s) of the Special Meeting. A complete list of the shareholders
entitled to vote at the Special Meeting or any adjournments or postponements of
the Special Meeting will be available at and during the Special Meeting.
You have the unconditional right to revoke your proxy at any time prior to
its use at the Special Meeting by:
- attending the Special Meeting and voting in person,
- delivering to Vaughn prior to the vote at the Special Meeting a duly
executed proxy with a later date than your original proxy, or
- giving written notice of revocation to Vaughn addressed to Mr. M. Charles
Reinhart, Secretary, Vaughn Communications, Inc., 5050 West 78th Street,
Minneapolis, Minnesota 55435 prior to the vote at the Special Meeting.
If you return a proxy without specifying a choice on the proxy, the proxy
will be voted "FOR" the Merger. Further information regarding the Special
Meeting is in the attached Proxy Statement.
Under Minnesota law, holders of shares of Vaughn Common Stock have the right
to dissent from the Merger and to receive payment of the fair value of their
shares upon compliance with the Minnesota Business Corporation Act (the "MBCA").
This right is explained more fully under "The Merger--
Dissenters' Rights" in the accompanying Proxy Statement. The dissenters' rights
provisions of the MBCA are attached to the Proxy Statement as Annex C.
You are cordially invited to attend the Special Meeting. However, whether or
not you expect to attend the Special Meeting in person, please complete, sign,
date and return the accompanying proxy without delay in the enclosed postage
prepaid envelope. The proxy is revocable and will not be used if you are present
and vote in person. If you receive more than one proxy card because you own
shares registered in different names, or at different addresses, sign and return
each proxy card.
By order of the Board of Directors,
E. David Willette
Chief Executive Officer
Minneapolis, Minnesota
, 1999
IMPORTANT
PLEASE DO NOT SEND YOUR VAUGHN COMMON STOCK CERTIFICATES AT THIS TIME. IF
THE MERGER IS APPROVED AT THE SPECIAL MEETING, YOU WILL BE SENT INSTRUCTIONS
REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES.
TABLE OF CONTENTS
PAGE
---------
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 4
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................................................ 10
INFORMATION CONCERNING VAUGHN COMMON STOCK................................................................. 11
THE SPECIAL MEETING........................................................................................ 11
Date, Place, Time and Purpose............................................................................ 11
Matters to Be Considered at the Meeting; Effect of Approval of Merger Agreement.......................... 12
Record Date; Voting at the Meeting....................................................................... 12
Vote Required............................................................................................ 13
Solicitation, Revocation and Use of Proxies.............................................................. 13
Surrender of Share Certificates.......................................................................... 13
SPECIAL FACTORS............................................................................................ 14
Background of the Merger................................................................................. 14
Reasons for the Merger and Recommendation of the Board of Directors...................................... 17
The Board's Recommendation............................................................................... 19
Opinion of the Company's Financial Advisor............................................................... 19
Certain Effects of the Merger............................................................................ 24
Conflicts of Interest.................................................................................... 25
Certain Federal Income Tax Consequences.................................................................. 26
THE MERGER................................................................................................. 28
Ownership of Capital Stock............................................................................... 28
Benefits Under Employment Agreements..................................................................... 28
Employment by Vaughn..................................................................................... 28
Indemnification.......................................................................................... 28
Conduct of Vaughn's Business After the Merger............................................................ 29
Effective Time........................................................................................... 29
Regulatory Requirements.................................................................................. 29
Dissenters' Rights....................................................................................... 30
Financing................................................................................................ 31
Expenses of the Transaction.............................................................................. 32
THE MERGER AGREEMENT....................................................................................... 33
The Merger............................................................................................... 33
The Surviving Corporation................................................................................ 33
Consideration to be Received in the Merger............................................................... 33
Surrender and Payment of Shares.......................................................................... 34
Representations and Warranties........................................................................... 35
Certain Covenants........................................................................................ 36
No Solicitations of Transactions......................................................................... 36
Directors and Officers of Vaughn Following the Merger.................................................... 37
Indemnification.......................................................................................... 38
Financing................................................................................................ 38
Cooperation and Reasonable Efforts....................................................................... 38
Conditions to Consummation of Merger..................................................................... 38
Termination.............................................................................................. 40
Termination Fees......................................................................................... 41
Amendment and Waiver..................................................................................... 41
Expenses................................................................................................. 41
Guaranty................................................................................................. 41
i
PAGE
---------
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................................................. 42
Willette Subscription Agreement.......................................................................... 42
Willette Option Termination and Grant Agreement.......................................................... 42
Treatment of Options..................................................................................... 42
Employment of Vaughn's Executive Officers................................................................ 43
Fees Payable to the Special Committee and Financial Advisor.............................................. 43
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 44
BUSINESS AND OPERATIONS OF VAUGHN.......................................................................... 45
General.................................................................................................. 45
Vaughn Communications Division........................................................................... 45
Discontinued Operations--Vaughn Products Division........................................................ 48
Former Businesses........................................................................................ 48
Backlog.................................................................................................. 49
Employees................................................................................................ 49
Compliance With Environmental Laws....................................................................... 49
Recent Acquisitions...................................................................................... 49
Properties............................................................................................... 53
Legal Proceedings........................................................................................ 53
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................................................ 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION....................... 61
Cautionary Factors That May Affect Future Results........................................................ 61
Year 2000 Compliance..................................................................................... 61
Results of Operations--Nine Month Period Ended October 31, 1998 Compared to Nine Month Period Ended
October 31, 1997....................................................................................... 61
Results of Operations--Year Ended January 31, 1998 Compared to Year Ended January 31, 1997............... 62
Results of Operations--Year Ended January 31, 1997 Compared to Year Ended January 31, 1996............... 64
OWNERSHIP OF VAUGHN COMMON STOCK........................................................................... 66
SHAREHOLDER PROPOSALS...................................................................................... 67
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 67
OTHER MATTERS.............................................................................................. 67
ANNEX A
Agreement and Plan of Merger............................................................................... A-1
ANNEX B
Fairness Opinion of EVEREN Securities, Inc................................................................. B-1
ANNEX C
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act................................... C-1
ANNEX D
Option Termination and Grant Agreement, dated as of December 11, 1998, by and among E. David Willette,
Vaughn Communications, Inc. and Allied Digital Technologies Corp. ....................................... D-1
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHY SHOULD VAUGHN MERGE WITH TAC?
For shareholders of Vaughn Communications, Inc. ("Vaughn"), the Merger (as
defined in this Proxy Statement) provides cash for their shares of common stock
of Vaughn, par value $.10 per share (the "Vaughn Common Stock"), at a premium of
approximately 27% over the average closing price for the four-week period
immediately preceding the date that Vaughn first made any public announcement
regarding the Merger. The Board of Directors and a special committee, comprised
of independent, non-employee directors of Vaughn (the "Special Committee"), have
determined that the Merger and the consideration to be received is fair to, and
is in the best interests of, the shareholders of the Company. See "Special
Factors--Reasons for the Merger and Recommendation of the Board of Directors."
Certain members of Vaughn's Board of Directors have interests in the Merger that
generally may be considered in conflict with the interests of Vaughn
shareholders generally. See "Special Factors--Conflicts of Interest."
WHO IS TAC?
Twin Acquisition Corp. ("TAC") is a Minnesota corporation and wholly-owned
subsidiary of Allied Digital, Inc. ("ADI"), formed for the purpose of merging
with and into Vaughn.
WHAT WILL BE RECEIVED IN EXCHANGE FOR VAUGHN COMMON STOCK?
Other than shares owned by shareholders who have demanded dissenters' rights
and satisfied the procedures relating to dissenters' rights, each share of
Vaughn Common Stock will be converted automatically into the right to receive
$10.00 per share, without interest. See "The Merger--Ownership of Capital
Stock."
WHERE AND WHEN IS THE SPECIAL MEETING?
The Special Meeting (as defined in this Proxy Statement) of Vaughn
shareholders and adjournments of the Special Meeting will be held at a.m.,
local time, on , 1999, at The Marquette Hotel, Seventh and
Marquette, Minneapolis, Minnesota 55402 (the "Special Meeting").
HOW WILL I BE TAXED ON THE MERGER?
For U.S. Federal income tax purposes, the receipt of cash by holders of
Vaughn Common Stock will be a taxable transaction. All shareholders are urged to
consult their tax advisors to determine the effect of the Merger under federal
tax law (or foreign tax law where applicable), and under their own state and
local tax laws. See "Special Factors--Certain Federal Income Tax Consequences."
WHAT WILL HAPPEN TO VAUGHN AFTER THE MERGER?
After the Merger, Vaughn Common Stock will no longer be publicly traded and
members of the general public will therefore no longer have the opportunity to
participate in its future earnings and growth. Vaughn will be an indirect
wholly-owned subsidiary of Allied Digital Technologies Corp., a Delaware
corporation ("Allied"). After the Merger, shares of Vaughn Common Stock will no
longer be quoted on the Nasdaq National Market System ("Nasdaq"). See
"Information Concerning Vaughn Common Stock." Shortly after the Merger, it is
anticipated that Vaughn will be reincorporated in Delaware.
ARE THERE RISKS TO BE CONSIDERED?
The cash consideration of $10.00 for each share of Vaughn Common Stock will
not change even if the market price of Vaughn Common Stock changes before the
Merger is completed. For other factors to consider, see "Information Concerning
Vaughn Common Stock."
1
ARE VAUGHN SHAREHOLDERS ENTITLED TO DISSENTERS' RIGHTS?
Yes. Under the Minnesota Business Corporation Act ("MBCA"), Vaughn
shareholders are entitled to dissenters' rights. The rules governing the
exercise of dissenters' rights must be strictly complied with, otherwise a
shareholder's dissenters' rights may be lost. For a description of these rights
and how to satisfy the requirements of the MBCA, see "The Merger--Dissenters'
Rights" and Annex C.
WHO CAN VOTE AT THE SPECIAL MEETING?
Holders of Vaughn Common Stock at the close of business on the Record Date
(as defined in this Proxy Statement), which is , 1999, may vote at
the Special Meeting. Each share of Vaughn Common Stock is entitled to one vote.
WHAT VOTE IS REQUIRED?
The Merger must be approved by the holders of a majority of the shares of
Vaughn Common Stock outstanding on the Record Date. On the Record Date, there
were shares of Vaughn Common Stock outstanding.
WHAT WILL HAPPEN TO VAUGHN COMMON STOCK OPTIONS TO PURCHASE VAUGHN COMMON STOCK
AND ARE MANAGEMENT SHAREHOLDERS TREATED DIFFERENTLY FROM OTHER SHAREHOLDERS?
Each option to purchase Vaughn Common Stock outstanding immediately prior to
the filing of a certificate of merger with the Secretary of State of the State
of Minnesota (the "Effective Time") (whether or not such option is vested or
exercisable) will be canceled. Other than pursuant to the Option Termination and
Grant Agreement, dated December 11, 1998 (the "Willette Option Termination and
Grant Agreement") among the Company, Allied and E. David Willette ("Willette"),
attached hereto as Annex D and incorporated herein by reference, each holder of
an option that is canceled will receive a cash payment equal to the product of
(a) the excess of the cash consideration in the Merger over the exercise price
of the option multiplied by (b) the number of shares subject to the option, less
any applicable withholding taxes. See "Interests of Certain Persons in the
Merger--Willette Option Termination and Grant Agreement; --Treatment of
Options." Current shareholders in Vaughn will not continue their equity interest
in Vaughn following the Merger or share in any future earnings or the potential
growth of Vaughn.
IF MY SHARES OF VAUGHN COMMON STOCK ARE HELD IN "STREETNAME" BY MY BROKER, WILL
MY BROKER VOTE MY SHARES FOR ME?
No. The law does not allow your broker to vote your shares of Vaughn Common
Stock on the Merger at the Special Meeting without your direction. You should
follow the instructions from your broker on how to vote your shares. Shares that
are not voted because you do not instruct your broker are called "broker
non-votes," and will have the effect of a vote "AGAINST" the Merger.
IF I SEND IN MY PROXY CARD BUT FORGET TO INDICATE MY VOTE, HOW WILL MY SHARES BE
VOTED?
If you sign and return your proxy card but do not indicate how to vote your
shares at the Special Meeting, the shares represented by your proxy will be
voted "FOR" the Merger.
WHAT SHOULD I DO NOW TO VOTE AT THE SPECIAL MEETING?
Sign, mark and mail your proxy card indicating your vote on the Merger in
the enclosed return envelope as soon as possible, so that your shares of Vaughn
Common Stock can be voted at the Special Meeting.
2
MAY I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes. You may change your vote at any time before your proxy is voted at the
Special Meeting. You can do this in three ways:
- You can send Vaughn a written statement that you revoke your proxy, which
to be effective must be received by Vaughn at its executive offices prior
to the vote at the Special Meeting; or
- You can send Vaughn a new proxy card prior to the vote at the Special
Meeting, which to be effective must be received by Vaughn prior to the
vote at the Special Meeting; or
- You can attend the Special Meeting and vote in person. Your attendance
alone will not revoke your proxy. You must attend the Special Meeting and
cast your vote at the Special Meeting.
You should send your revocation of a proxy or new proxy card to the
Secretary of Vaughn at the address on the cover of this Proxy Statement. If your
shares are held by a broker, you must follow the directions provided by your
broker to vote your shares or to change your instructions.
DO I SEND IN MY STOCK CERTIFICATES NOW?
No. If the Merger is completed, you will receive written instructions for
delivering your stock certificates representing Vaughn Common Stock in order to
receive $10.00 per share cash consideration in the Merger from Chase Mellon
Shareholder Services, LLC ("Chase Mellon"), who has been appointed as paying
agent in connection with the Merger. DO NOT SEND YOUR STOCK CERTIFICATES NOW.
3
SUMMARY
THROUGHOUT THIS PROXY STATEMENT (THE "PROXY STATEMENT") THE TERM "MERGER"
MEANS THE MERGER BETWEEN TWIN ACQUISITION CORP., A MINNESOTA CORPORATION
("TAC"), AND VAUGHN COMMUNICATIONS, INC., A MINNESOTA CORPORATION ("VAUGHN" OR
THE "COMPANY"), WITH VAUGHN BEING THE SURVIVING CORPORATION (THE "SURVIVING
CORPORATION"). THE TERM "MERGER AGREEMENT" MEANS THE AGREEMENT AND PLAN OF
MERGER DATED AS OF DECEMBER 11, 1998, AMONG VAUGHN, TAC AND ALLIED DIGITAL,
INC., PARENT OF TAC ("ADI") (ONLY FOR PURPOSES OF SECTION 8.11 THEREOF). A COPY
OF THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT.
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER AND THE OTHER INFORMATION
CONTAINED IN THIS PROXY STATEMENT, YOU SHOULD READ THIS ENTIRE PROXY STATEMENT
CAREFULLY, AS WELL AS THE ADDITIONAL DOCUMENTS TO WHICH IT REFERS. FOR
INSTRUCTIONS ON OBTAINING MORE INFORMATION, SEE "WHERE YOU CAN FIND MORE
INFORMATION."
THE PARTIES
Vaughn............................ Vaughn is a multimedia business service provider
providing high volume videotape duplication and digital
media (compact disc and magnetic floppy disk)
replication for the corporate, educational and
institutional user. The principal executive offices of
the Company are located at 5050 West 78th Street,
Minneapolis, Minnesota 55435 and its telephone number at
that address is (612) 832-3200.
TAC............................... TAC, a Minnesota corporation and wholly-owned subsidiary
of ADI, was formed solely for the purpose of merging
with and into Vaughn and furthering the transactions
contemplated by the Merger Agreement. TAC has no other
material operations.
Allied Digital, Inc............... ADI, a New York corporation and wholly-owned operating
subsidiary of Allied Digital Technologies Corp.
("Allied"), is the sole shareholder of TAC. The
principal executive offices of ADI are located at 140
Fell Court, Hauppauge, New York 11788 and its telephone
number is (516) 232-2323. ADI is guaranteeing the
performance of the obligations of TAC under the Merger
Agreement.
THE MERGER AND THE SPECIAL MEETING
Reasons for the Merger............ The Company believes that it cannot access the necessary
capital to execute its growth strategy on a stand-alone
basis given the current conditions in the public equity
market. The Company's business strategy of growing its
business-to-business video duplication sales through
acquisitions and new facility openings, and expanding
its product offering to existing customers by
introducing newer multi-media technologies (such as
compact disc ("CD") replication) requires substantial
capital. Lack of appreciation in the per share price of
Vaughn Common Stock due to a number of factors has
limited the Company's ability to raise capital through
the public markets. The Board of Directors and the
special committee to the Vaughn Board of Directors (the
"Special Committee") believe that it is fair to, and in
the best interests of, Vaughn shareholders to accept
$10.00 in cash for their shares, a price determined by
the financial advisor to the Special Committee to be
fair to Vaughn's shareholders and a
4
27% premium over the average closing price of Vaughn
Common Stock for the four-week period immediately
preceding the date on which Vaughn first publicly
announced the Merger. See "Special Factors--Background
of the Merger" and "Special Factors--Reasons for the
Merger and Recommendation of the Board of Directors."
Recommendation of the Special
Committee and Board of
Directors....................... The Special Committee, comprised of independent, non-
employee directors of Vaughn, and the Board of Directors
of Vaughn have unanimously approved the Merger and
recommended that Vaughn shareholders vote "FOR" the
proposal to approve the Merger. See "Special Factors--
Background of the Merger" and "Special Factors--Reasons
for the Merger and Recommendation of the Board of
Directors." Certain members of Vaughn's Board of
Directors have interests in the Merger that generally
may be considered in conflict with the interests of
Vaughn shareholders. See "Special Factors-- Conflicts of
Interest." The members of the Special Committee received
certain compensation in consideration of their services
as members of the Special Committee. See "Interests of
Certain Persons in the Merger--Fees Payable to the
Special Committee and Financial Advisor."
Date, Place and Time of the
Special Meeting................. This Proxy Statement is furnished to holders of shares
of Vaughn Common Stock for use at the Special Meeting in
connection with the approval of the Merger. The Special
Meeting will be held at The Marquette Hotel, Seventh and
Marquette, Minneapolis, Minnesota 55402, on ,
1999 at a.m. local time, and at any adjournments or
postponements of the Special Meeting.
Record Date, Voting at the
Meeting......................... The Company has set a record date for determining those
shareholders who are entitled to notice of and to vote
at the Special Meeting. The Record Date is ,
1999 (the "Record Date"). See "The Special
Meeting--Record Date; Voting at the Meeting."
Total Value of the Merger......... The total transaction value of the Merger is expected to
be approximately $ million, which includes (i)
approximately $41.0 million in cash to be paid for
shares of Vaughn Common Stock, based on the number of
shares of Vaughn Common Stock outstanding on December
11, 1998; (ii) approximately $1.6 million in cash to be
paid to holders of options to purchase shares of Vaughn
Common Stock (net of option exercise prices) when the
Merger is completed; (iii) assumption of outstanding
indebtedness of Vaughn of approximately $20.0 million;
and (iv) approximately $ million in transaction
expenses.
Options........................... Each option to purchase Vaughn Common Stock outstanding
immediately prior to the Effective Time (whether or not
the
5
option is vested or exercisable) will be canceled. Other
than pursuant to the Willette Option Termination and
Grant Agreement, each holder of an option that is
canceled will receive a cash payment equal to the
product of (a) the excess of cash consideration in the
Merger over the exercise price of the option multiplied
by (b) the number of shares subject to the option, less
any applicable withholding taxes. See "Interests of
Certain Persons in the Merger--Willette Option
Termination and Grant Agreement;--Treatment of Options."
Conflicts of Interest............. In connection with the Merger, stock options to purchase
128,500 shares of Vaughn Common Stock held by E. David
Willette, the Chief Executive Officer and a director of
Vaughn ("Willette"), will be canceled and Willette will
acquire, in consideration for such cancellation, a
non-qualified option to purchase 10,000 shares of Series
C Preferred Stock of Allied at an exercise price of
$543,634.20. Willette will also purchase 27,320 shares
of Class A Common Stock of Allied and 4,289 shares of
Series B Preferred Stock of Allied for a total cash
purchase price of $565,500 immediately prior to the
Effective Time. See "Special Factors--Conflicts of
Interest--Willette Option Termination and Grant
Agreement; Willette Subscription Agreement," for further
information.
It is anticipated that neither TAC nor Vaughn will
change the composition of management of Vaughn
immediately following the Effective Time. Under the
terms of existing employment agreements with each of
Donald J. Drapeau and M. Charles Reinhart, each such
individual shall receive $100,000 in one lump sum
payment upon consummation of the Merger. An additional
$100,000 is payable to each of Messrs. Drapeau and
Reinhart on the date one year after the consummation of
the Merger, subject to certain conditions in their
employment agreements. See "Special Factors--Conflicts
of Interest" for further information.
Dissenters' Rights................ Under the MBCA, Vaughn's shareholders are entitled to
assert dissenters' rights. Pursuant to the Merger
Agreement, the obligation of TAC to merge with and into
Vaughn is subject to the condition, which may be waived
by TAC, that holders of no more than 10% of the
outstanding shares of Vaughn Common Stock exercise
dissenters' rights in accordance with the MBCA. See "The
Merger--Dissenters' Rights" and Annex C.
THE MERGER AGREEMENT
Conditions to the Merger.......... The Merger will be completed only if a number of
conditions are met or waived by Vaughn and TAC, as
applicable. These conditions include:
- Vaughn shareholders holding a majority of the
outstanding Vaughn Common Stock approve the
Merger;
6
- TAC shall have received all necessary financing to
consummate the Merger;
- Holders of not more than 10% of the outstanding
shares of Vaughn Common Stock have exercised
dissenters' rights under the MBCA;
- No judgment, injunction or order prohibiting the
Merger exists;
- Holders of outstanding options agree in writing to
(a) accept a cash payment specified in the Merger
Agreement in consideration of the termination of
such options and (b) waive all rights of such
holder under the Company option plans;
- All necessary governmental approvals are obtained;
- Total debt of Vaughn determined on a consolidated
basis in accordance with U.S. generally accepted
accounting principles, consistently applied
("GAAP"), as of the Effective Time shall not
exceed $20.5 million; and
- The transactions contemplated by the Willette
Option Termination and Grant Agreement and the
Subscription Agreement, dated December 11, 1998,
between Allied and Willette (the "Willette
Subscription Agreement"), shall have been
consummated.
See "The Merger Agreement--Conditions to Consummation of
Merger" for a complete description.
Superior Acquisition Proposals and
Termination Fee................. Vaughn may accept another offer under certain
circumstances. However, Vaughn must pay TAC $1.9
million, and reimburse TAC for its reasonable
out-of-pocket expenses up to a maximum amount of
$900,000, if the Merger Agreement is terminated in the
event that:
- Vaughn's Board of Directors notifies TAC that it
has determined, in good faith, and after
consultation with and advice from its financial
advisors, that another acquisition proposal is
reasonably likely to be subject to completion and,
if consummated, is more favorable from a financial
point of view than the Merger ("Superior
Acquisition Proposal");
- Vaughn's Board of Directors approves, recommends
or endorses a Superior Acquisition Proposal. See
"The Merger Agreement--No Solicitations of
Transactions";
7
- Vaughn breaches any material representation,
warranty, covenant, agreement or other obligation
under the Merger Agreement and the breach
continues without cure for a period of 30 days
after notice by TAC, another Transaction Proposal
(as defined in the section
entitled "The Merger Agreement--No Solicitation of
Transactions") has been made and, within 12 months
of the termination of the Merger Agreement by TAC
pursuant to the terms and conditions thereof,
Vaughn consummates any Transaction Proposal
(whether or not proposed prior to the Special
Meeting and whether or not it involves the same
third party making any other Transaction
Proposal);
- Vaughn's Board of Directors withdraws, modifies,
or amends, in a manner adverse to TAC, its approval
of the Merger or its recommendation that Vaughn's
shareholders approve the Merger, another
Transaction Proposal has been made and, within 12
months of the termination of the Merger Agreement
by TAC pursuant to the terms and conditions
thereof, Vaughn consummates any Transaction
Proposal (whether or not proposed prior to the
Special Meeting and whether or not it involves the
same third party making any other Transaction
Proposal); or
- Vaughn fails to call the Special Meeting, another
Transaction Proposal has been made and, within 12
months of the termination of the Merger Agreement
by TAC pursuant to the terms and conditions
thereof, Vaughn consummates any Transaction
Proposal (whether or not proposed prior to the
Special Meeting and whether or not it involves the
same third party making any other Transaction
Proposal).
See "The Merger Agreement--Termination."
Amending or Waiving Terms of the
Merger Agreement................ Vaughn and TAC may amend the Merger Agreement by mutual
consent before or after Vaughn's shareholders vote on
the Merger. After Vaughn's shareholders approve the
Merger, applicable law may require that subsequent
amendments be approved by Vaughn shareholders. Either
Vaughn or TAC may waive a right to withdraw from the
Merger in circumstances that, under the Merger
Agreement, would allow them to withdraw from the Merger.
Federal Income Tax Consequences... The receipt of cash by holders of Vaughn Common Stock
will be a taxable transaction. All shareholders are
urged to consult their own tax advisors to determine the
effect of the Merger on the shareholder under federal
law, and under their own state and local tax laws. See
"Special Factors--Certain Federal Income Tax
Consequences."
8
Regulatory and Third-Party
Approvals....................... Other than compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, there are no
material regulatory approvals required. Failure to
obtain non-material governmental consents will not
prevent completion of the Merger. Note that, as a
condition to the Merger, which may be waived by TAC,
Vaughn is obligated to obtain the consents of various
third parties, if necessary, who are parties to
contracts with Vaughn. See "The Merger--Regulatory
Requirements."
Vaughn Common Stock Information... The closing price of Vaughn Common Stock on December 10,
1998, which was the day immediately preceding Vaughn's
announcement that it had signed the Merger Agreement was
$8.25. The closing price of Vaughn Common Stock on
, 1999, which was the last trading day for
which a closing price was available before this Proxy
Statement was mailed, was $ .
Vaughn Recent Earnings............ Vaughn reported (i) third quarter net sales of
$20,864,752 and a net loss of $1,961,333, or a loss of
$.47 per common share basic and diluted and (ii) for the
nine-month period ended October 31, 1998, net sales of
$60,234,011 and a net loss of $260,833, or a loss of
$.07 per common share basic and $.06 per common share
diluted.
Opinion of Financial Advisor...... EVEREN Securities, Inc. ("EVEREN"), financial advisor to
the Special Committee, provided an opinion to the Board
of Directors, dated December 11, 1998, that, subject to
certain factors stated in the opinion, the cash price of
$10.00 per share of Vaughn Common Stock provided in the
Merger Agreement is fair, from a financial point of
view, to holders of Vaughn Common Stock. The full text
of EVEREN's written opinion, which sets forth the
assumptions made, the matters considered, the scope and
limitations of the review undertaken and the procedures
followed by EVEREN in rendering such opinion, is
attached to this Proxy Statement as Annex B. EVEREN's
opinion was provided for the information and assistance
of the Board of Directors and is not a recommendation as
to how Vaughn shareholders should vote at the Special
Meeting. Vaughn shareholders are urged to, and should,
read EVEREN's opinion carefully in its entirety. See
"Special Factors--Opinion of the Company's Financial
Advisor." EVEREN will be paid the balance of their fee
by the Company if the Merger is consummated. See
"Interests of Certain Persons in the Merger--Fees
Payable to the Special Committee and Financial Advisor."
9
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company, as restated to give effect to the sale of the Products
Division which has been treated as a discontinued operation. The Products
Division was sold by the Company as of November 16, 1998. The selected
historical consolidated financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section appearing elsewhere in this Proxy Statement. Such interim
data, in the opinion of management of the Company, contains all adjustments
necessary for a fair presentation of such information. The results of operations
for interim periods should not be taken as indicative of future operating
results or financial position for the full year.
VAUGHN COMMUNICATIONS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
YEAR ENDED JANUARY 31, NINE MONTHS ENDED
----------------------------------------------------- ------------------------
OCTOBER 31, OCTOBER 31,
1998 1997 1996 1995 1994 1998 1997
--------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................. $ 62,291 $ 55,040 $ 52,365 $ 38,270 $ 29,145 $ 60,234 $ 45,593
Net income from continuing operations...... 2,153 1,922 2,200 1,847 995 2,058 1,609
Net income (loss) from discontinued
operations............................... (215) 93 47 539 161 (2,319) 135
Basic earnings per share:
continuing operations.................... 0.54 0.53 0.68 0.62 0.36 0.50 0.42
discontinued operations.................. (0.05) 0.03 0.01 0.17 0.06 (0.57) 0.03
Diluted earnings per share:
continuing operations.................... 0.53 0.49 0.60 0.54 0.30 0.50 0.40
discontinued operations.................. (0.05) 0.02 0.01 0.15 0.04 (0.56) 0.03
Working capital............................ 9,093 9,268 7,559 4,186 2,420 5,986 8,981
Total assets............................... 44,312 34,751 32,816 22,186 19,573 45,875 43,823
Long-term obligations (excluding current
portion)................................. 9,075 5,603 7,778 3,626 4,024 8,222 9,126
Total liabilities.......................... 23,993 17,903 19,298 13,681 13,646 25,906 23,923
Total shareholders' equity................. $ 20,319 $ 16,848 $ 13,518 $ 8,505 $ 5,927 $ 19,969 $ 19,900
10
INFORMATION CONCERNING VAUGHN COMMON STOCK
As of December 11, 1998, there were approximately 4,103,384 shares of Vaughn
Common Stock outstanding and approximately 295 holders of record of Vaughn
Common Stock. Vaughn Common Stock is traded on the over-the-counter market and
has been quoted on Nasdaq since March 26, 1994, under the symbol VGHN. The
following table sets forth for the quarterly periods the high and low closing
sales prices as quoted on Nasdaq. All prices are without retail markups,
markdowns or commissions.
SALE PRICE
--------------------
HIGH LOW
--------- ---------
Fiscal year ended January 31, 1997
First Quarter (February 1, 1996 through April 30, 1996)................................... $ 9.375 $ 8.375
Second Quarter (May 1, 1996 through July 31, 1996)........................................ $ 19.00 $ 9.00
Third Quarter (August 1, 1996 through October 31, 1996)................................... $ 15.00 $ 7.00
Fourth Quarter (November 1, 1996 through January 31, 1997)................................ $ 10.50 $ 7.00
Fiscal year ended January 31, 1998
First Quarter (February 1, 1997 through April 30, 1997)................................... $ 8.00 $ 6.00
Second Quarter (May 1, 1997 through July 31, 1997)........................................ $ 7.50 $ 5.25
Third Quarter (August 1, 1997 through October 31, 1997)................................... $ 8.563 $ 6.75
Fourth Quarter (November 1, 1997 through January 31, 1998)................................ $ 8.00 $ 5.4375
Fiscal year ending January 31, 1999
First Quarter (February 1, 1998 through April 30, 1998)................................... $ 8.125 $ 5.50
Second Quarter (May 1, 1998 through July 31, 1998)........................................ $ 10.375 $ 7.25
Third Quarter (August 1, 1998 through October 31, 1998)................................... $ 8.50 $ 5.50
The Company has not paid dividends on Vaughn Common Stock during the fiscal
years ended January 31, 1998 and 1997. The payment of dividends, if any, will be
contingent upon the Company's revenues and earnings, if any, capital
requirements and general financial condition. It is the current policy of the
Company's Board of Directors, in view of the Company's contemplated financial
requirements, to retain all earnings, if any, for use in the Company's business
operations.
On December 10, 1998, the calendar day before the public announcement of
entering into the Merger, the high and low sales prices for the Vaughn Common
Stock were $8.25 and $8.00, respectively, as quoted on Nasdaq. The closing sales
price for Vaughn Common Stock on December 10, 1998 was $8.25 per share.
THE SPECIAL MEETING
Throughout this Proxy Statement the term "Merger" means the merger between
TAC and Vaughn, with Vaughn being the Surviving Corporation. The term "Merger
Agreement" means the Agreement and Plan of Merger dated as of December 11, 1998,
among Vaughn, TAC and ADI (only for purposes of Section 8.11 thereof). A copy of
the Merger Agreement is attached as Annex A to this Proxy Statement.
DATE, PLACE, TIME AND PURPOSE
This Proxy Statement (the "Proxy Statement") is being furnished to Vaughn
shareholders in connection with the solicitation of proxies by the Board of
Directors of Vaughn for use at the Special Meeting to be held at The Marquette
Hotel, Seventh and Marquette, Minneapolis, Minnesota 55402, on ,
, 1999 at a.m. local time, and any adjournments and
postponements of the Special Meeting. At the Special Meeting, holders of record
as of , 1999 of Vaughn Common Stock will be eligible to vote upon
the recommendation of Vaughn's Board of Directors to approve and adopt a plan of
merger in accordance with the Merger Agreement, pursuant to which (i) TAC will
be merged with and into Vaughn, with Vaughn being the Surviving Corporation, and
(ii) each outstanding share of Vaughn Common Stock will be canceled and
converted automatically into the right to
11
receive $10.00 in cash, payable to the holder of such share, without interest,
other than shares of Vaughn Common Stock held by shareholders who are entitled
to, and who have perfected, their dissenters' rights. See "The
Merger--Dissenters' Rights" for further information.
This Proxy Statement and the accompanying form of proxy are first being
mailed on or about , 1999, to all shareholders of record as of the
Record Date (as defined below).
MATTERS TO BE CONSIDERED AT THE MEETING; EFFECT OF APPROVAL OF MERGER AGREEMENT
At the Special Meeting, holders of Vaughn Common Stock as of the Record Date
will be asked to consider and vote upon a proposal to approve and adopt the
Merger Agreement.
Pursuant to the MBCA, a plan of merger involving a Minnesota corporation
must initially be approved by the affirmative vote of a majority of the board of
directors of such corporation prior to submission of such plan to such
corporation's shareholders. In addition, the Articles of Incorporation, as
amended and restated, of the Company provide that a plan of merger must be
submitted to the shareholders after approval by the Board of Directors. In
accordance therewith, the Board of Directors of the Company has unanimously
approved the Merger Agreement and has directed that it be submitted to the
shareholders for their approval in accordance with the MBCA and the Articles of
Incorporation of the Company, as amended and restated.
The Board of Directors and the Special Committee have approved the Merger
Agreement and recommend that the shareholders vote "FOR" approval and adoption
of the Merger Agreement.
RECORD DATE; VOTING AT THE MEETING
The Board of Directors has fixed the close of business on , 1999
as the record date (the "Record Date") for the determination of the shareholders
entitled to notice of, and to vote, at the Special Meeting and any adjournments
and postponements of the Special Meeting. On the Record Date, there were
shares of Vaughn Common Stock outstanding, which shares were held by
approximately holders of record. Shares of Vaughn Common Stock are the
only authorized and outstanding voting securities of the Company. Each holder of
record of Vaughn Common Stock as of the Record Date is entitled to cast one vote
per share, exercisable in person or by properly executed proxy, upon each matter
properly submitted for the vote of the shareholders at the Special Meeting.
Votes at the Special Meeting will be tabulated by an Inspector of Election
appointed by Vaughn.
A majority of the shares of Vaughn Common Stock issued and outstanding and
entitled to vote, present in person or represented by proxy, will constitute a
quorum for the transaction of business at the Special Meeting. If a quorum
should not be present, the Special Meeting may be adjourned from time to time,
until a quorum is present. Abstentions and broker non-votes are counted for
purposes of determining the presence of a quorum at the Special Meeting for the
transaction of business.
The Vaughn Board of Directors and the Special Committee have determined that
the right to receive $10.00 in cash for each share of Vaughn Common Stock is
fair to, and in the best interests of, all of Vaughn shareholders. However, any
holder of record of shares of Vaughn Common Stock as of the Record Date who,
prior to the vote on the Merger at the Special Meeting, makes a written demand
by following the procedures prescribed by Sections 302A.471 and 302A.473 of the
MBCA, has the right to payment of the "fair value" of such shares by Vaughn, as
the Surviving Corporation in the Merger, in lieu of receiving the consideration
provided under the Merger Agreement (the "Dissenters' Rights"). A summary of the
procedures relating to the exercise of Dissenters' Rights under the MBCA is
included in this Proxy Statement under "The Merger--Dissenters' Rights" and the
full text of Sections 302A.471 and 302A.473 of the MBCA is included as Annex C
hereto. The obligation of TAC to merge with and into Vaughn is subject to the
condition, which may be waived by TAC, that holders of no more than 10% of the
outstanding shares of Vaughn Common Stock satisfy the MBCA's procedures to
properly exercise and perfect Dissenters' Rights under the MBCA. See "The
Merger--Dissenters' Rights."
12
VOTE REQUIRED
Approval of the principal terms of the Merger Agreement requires the
affirmative vote of holders of a majority of the outstanding shares of Vaughn
Common Stock entitled to vote at the Special Meeting under the MBCA and Vaughn's
Articles of Incorporation, as amended and restated. A failure to vote, an
abstention from voting, or a broker non-vote, will have the same legal effect as
a vote cast against approval of the Merger and the Merger Agreement. Brokers,
and in many cases nominees, will not have discretionary power to vote on the
proposals to be presented at the Special Meeting. Accordingly, beneficial owners
of shares must instruct their brokers or nominees how to vote their shares at
the Special Meeting.
SOLICITATION, REVOCATION AND USE OF PROXIES
Vaughn will bear all expenses of the solicitation of proxies in connection
with this Proxy Statement, including the cost of preparing and mailing this
Proxy Statement. Vaughn will reimburse brokers, fiduciaries, custodians and
other nominees for reasonable out-of-pocket expenses incurred in sending this
Proxy Statement and other proxy materials to, and obtaining instructions
relating to such materials from, beneficial owners of Vaughn Common Stock.
Vaughn shareholder proxies may be solicited by directors, officers and employees
of the Company in person or by telephone, facsimile or by other means of
communication. Vaughn will also reimburse custodians, nominees and fiduciaries
for forwarding proxies and proxy materials to beneficial owners of their stock
in accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC").
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) filing with the Secretary of Vaughn written notice
revoking it before the vote at the Special Meeting; (ii) executing a proxy with
a later date; or (iii) attending the Special Meeting and voting in person at the
Special Meeting. Any written notice of revocation should be delivered to Vaughn
Communications, Inc., 5050 West 78th Street, Minneapolis, Minnesota 55435,
Attention: Secretary. Subject to proper revocation, all shares of Vaughn Common
Stock represented at the Special Meeting by properly executed proxies received
by Vaughn will be voted in accordance with the instructions contained in such
proxies. Executed but unmarked proxies will be voted "FOR" the approval of the
Merger.
SURRENDER OF SHARE CERTIFICATES
Chase Mellon has been designated to act as paying agent for the benefit of
holders of shares of Vaughn Common Stock in connection with the Merger and as
such will receive the $10.00 per share cash consideration to which holders of
shares will become entitled. TAC will deposit with Chase Mellon the funds
required in order to pay the Merger Consideration. Such funds will be invested
by Chase Mellon as directed by the Surviving Corporation and any interest and
other income resulting from such investment will be paid to the Surviving
Corporation.
Promptly after the date on which the transactions contemplated by the Merger
Agreement are consummated (the "Closing Date"), Chase Mellon will send to each
holder of shares of Vaughn Common Stock outstanding immediately prior to the
Effective Time a letter of transmittal (the "Letter of Transmittal") and
instructions for use in effecting the surrender of certificates. The Letter of
Transmittal will specify that the delivery will be effected, and risk of loss
and title will pass, only upon delivery of the certificates representing shares
of Vaughn Common Stock to Chase Mellon. Chase Mellon will receive a fee which
Vaughn expects will not exceed $ as compensation for its services plus
reimbursement of its out-of-pocket expenses in connection with such services.
Vaughn has agreed to indemnify Chase Mellon against certain liabilities arising
out of or in connection with its engagement.
Each holder of a share of Vaughn Common Stock that has been converted into
the right to receive the cash consideration in the Merger, upon surrender to
Chase Mellon of a certificate or certificates representing such shares, together
with a properly completed Letter of Transmittal covering such shares, will be
entitled to receive the cash consideration payable in respect of such shares.
Until so surrendered, each such certificate will, after the Effective Time,
represent for all purposes, only the right to receive such
13
cash consideration. No interest will be paid or will accrue on any cash payable
as cash consideration in the Merger.
If any portion of the cash consideration is to be paid to a person other
than the registered holder of the shares of Vaughn Common Stock represented by
the certificate or certificates surrendered in exchange therefor, it will be a
condition to such payment that the certificate or certificates so surrendered be
properly endorsed or otherwise be in proper form for transfer and that the
person requesting such payment will pay to Chase Mellon any transfer or other
taxes required as a result of such payment to a person other than the registered
holder of such shares or establish to the satisfaction of the Surviving
Corporation or Chase Mellon that such tax has been paid or is not applicable.
At any time following the sixth month after the Effective Time, the
Surviving Corporation will be entitled to require Chase Mellon to deliver to it
the funds made available to Chase Mellon and not disbursed to holders of Vaughn
Common Stock, and thereafter such holders will be entitled to look to the
Surviving Corporation only as general creditors thereof for payment of their
claim for cash. Notwithstanding the foregoing, to the fullest extent permitted
by law, neither the Surviving Corporation nor Chase Mellon will be liable to any
holder of a share of Vaughn Common Stock or to any other person for any Merger
Consideration (as defined in this Proxy Statement) delivered in respect of such
share to a public official pursuant to any applicable abandoned property,
escheat or similar law.
If any certificates representing shares of Vaughn Common Stock have not been
surrendered before the fifth anniversary of the Effective Time, any cash in
respect of such certificates will, to the extent permitted by applicable law,
become the property of the Surviving Corporation. In addition, if any cash in
respect of certificates representing shares of Vaughn Common Stock would, prior
to the fifth anniversary of the Effective Time, otherwise escheat to or become
the property of a governmental entity, such cash will, to the extent permitted
by applicable law, become the property of the Surviving Corporation.
At and after the Effective Time, there will be no further registration of
transfers of Vaughn Common Stock on the records of Vaughn or its transfer agent.
From and after the Effective Time, the holders of Vaughn Common Stock
outstanding immediately prior to the Effective Time will cease to have any
rights with respect to such shares except as provided in the Merger Agreement or
applicable law.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF VAUGHN.
SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION
PRESENTED IN THIS PROXY STATEMENT AND TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO VAUGHN IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
Over the period of July 31, 1997 through February 5, 1998, the Chief
Executive Officer of the Company received three preliminary contacts regarding
the possible acquisition of the Company, one of which involved taking the
Company private. None of the ensuing discussions advanced beyond the initial
stage. As a result of these contacts, however, the Board of Directors met on
February 19, 1998, to (i) become informed of the nature of the discussions to
date; (ii) be advised by Gray, Plant, Mooty, Mooty & Bennett, P.A. ("Gray
Plant"), legal counsel to the Company, concerning the Board of Directors' legal
duties and obligations; and (iii) establish the Special Committee to evaluate
any acquisition proposal that may be presented to the Company. The Board of
Directors then considered the merits of investigating the market for the Company
given the current market conditions for mergers and acquisitions. Also at this
meeting, four investment bankers made presentations to the Board of Directors
about the services they could provide in exploring a potential sale of the
Company. After the presentations were concluded, the Board of Directors
determined to investigate the market for the Company through engagement of the
services of an investment banker and established the Special Committee. The
Board of Directors gave the Special Committee the power and authority to (i)
make a recommendation to the Board of Directors to
14
accept or reject any proposed sale of the Company or similar transaction; (ii)
engage a financial advisor to review and evaluate, from a financial point of
view, the fairness to the shareholders of any proposed transaction under review
by the Special Committee; (iii) engage a financial advisor to determine the
Company's market value and assist in marketing the Company if determined to be
advisable; (iv) to establish subcommittees (composed of one or more members of
the Special Committee) to assist the Special Committee in the fulfillment of its
duties and responsibilities; and (v) review and evaluate the fairness to
Vaughn's shareholders of any proposed transaction which would result in the
Company no longer being publicly traded or any other proposed transaction
involving the sale of the Company or its business whether or not such
transaction would result in the Company no longer being publicly traded. The
members of the Special Committee are Rodney Burwell, Roger Heegaard, Jeffrey
Johnson, Michael Sill, William Smith and Harold Wahlquist, none of whom are
employees of the Company. See "Directors and Executive Officers."
On February 19, 1998, immediately following the adjournment of the Board of
Directors meeting, the Special Committee held its first meeting. The members of
the Special Committee elected Mr. Burwell as Chair of the Special Committee. The
Special Committee then discussed the presentations given by the four investment
bankers at the preceding Board of Directors meeting and unanimously determined
to invite EVEREN Securities, Inc. ("EVEREN") to meet with the Special Committee
on February 26, 1998 to review in further detail its preliminary market
valuation for the Company and its proposal for marketing the Company.
On February 26, 1998, the Special Committee met with representatives of
EVEREN to review EVEREN's assessment of the range of potential values which
might be received by Vaughn's shareholders through a sale of the Company's
business, a proposed timetable for marketing the Company, confidentiality
procedures and obligations, use of financial projections, responsibilities of
the Company and related matters. In addition, the Company reviewed the proposed
fee arrangement with EVEREN for its services. After the EVEREN representatives
left the meeting, the Special Committee unanimously approved the engagement of
EVEREN, on behalf of the Company, to market the Company in accordance with the
terms of EVEREN's proposal presented to the Special Committee.
On March 13, 1998, the Board of Directors held a Special Meeting at which,
among other things, representatives of EVEREN informed the Board of Directors of
a proposed sequence of events which they anticipated would take place over the
next several months in connection with marketing the Company. The initial step
in the process was the preparation and distribution of a Confidential Memorandum
describing the Company which would be distributed to potential interested
parties identified by EVEREN and the Special Committee. Only parties which
entered into a confidentiality agreement would be given the Confidential
Memorandum. Contacted parties would then be invited to submit indications of
interest to acquire the Company by a specified deadline. The Special Committee
would then review the terms of the bids, and select which parties would advance
to the next level of management interviews and in-depth due diligence
activities. Next, the Special Committee would consider the bids, as revised, to
determine whether or not to accept one and proceed to negotiate the terms and
conditions of a definitive agreement for an acquisition transaction. EVEREN
advised the Company that the Company's Products Division would not be of
interest to any of the prospective parties and would have to be sold, liquidated
or otherwise disposed of prior to consummation of any acquisition of the
Company. Information contained in the Confidential Memorandum excluded
information on the Company's Products Division. See "Business and Operations of
Vaughn--Discontinued Operations--Vaughn Products Division."
EVEREN began marketing the Company to a group of qualified financial and
strategic acquirers during the final week of March, 1998. On April 20, 1998, all
parties that had (i) executed a confidentiality agreement, (ii) received a
Confidential Memorandum and (iii) indicated an on-going interest in acquiring
the Company, received a letter from EVEREN requesting the submission of a
preliminary non-binding indication of interest.
15
On May 5, 1998, the Board of Directors held its regular quarterly meeting,
at which, among other things, the Board reviewed the efforts of EVEREN to market
the Company. The Board considered a status report of EVEREN dated May 4, 1998,
which indicated that May 4, 1998 was the deadline for parties to submit
indications of interest. At that point, EVEREN had received five indications of
interest and requests from at least five other bidders to extend the deadline
for submission of their preliminary bids. The Board also discussed the terms of
the preliminary proposals received to date. Mr. Willette indicated that the next
step was for the Special Committee to meet to select the parties that would move
on to the next level of the process which would involve management interviews
and in-depth due diligence activities.
On May 13, 1998, the Special Committee met with representatives of EVEREN to
review the indications of interest received to date. EVEREN reported on the
bidding process, indicating that as of May 11, 1998, eight indications of
interest had been received. All but one of the indications were cash offers.
EVEREN recommended that the Company not proceed further with two of these
parties. One party's proposal was deemed inadequate and one stock offer from a
private company was unacceptable in structure. After reviewing the bids, the
Special Committee authorized EVEREN to proceed with management interviews and
in-depth due diligence with several of the parties who provided the most
attractive indications of interest and with such other parties that submitted
indications of interest that were at least as attractive as those. From May 20,
1998 through the third week of June, 1998, management of the Company met with
representatives of these parties as well as representatives from a stockholder
of Allied (the "Allied Stockholder") and two other interested parties that
submitted indications after the May 13, 1998 meeting of the Special Committee.
Further due diligence visits with management and lenders for all of these
parties continued through mid-July, 1998.
On July 23, 1998, EVEREN sent to all parties remaining interested in the
Company (including the Allied Stockholder) a letter requesting their submission
of a firm offer, preliminary evidence of ability to finance a transaction and
comments on a proposed form of purchase agreement. EVEREN received final offers
with comments on the proposed form of purchase agreement and preliminary
evidence of ability to finance a transaction from the Allied Stockholder and one
other party (the "Second Bidder") on August 14, 1998. The Allied Stockholder
offered to acquire the Company for cash through a merger transaction. The Second
Bidder offered to acquire the Company for cash through a tender offer. The
Allied Stockholder and the Second Bidder conducted additional due diligence and
site visits between August 14, 1998 and September 6, 1998. During that period,
Vaughn and its advisors began preliminary work to revise and negotiate the
proposed form of purchase agreement with both the Allied Stockholder and the
Second Bidder. On September 8, 1998, the Allied Stockholder and the Second
Bidder submitted final revisions to the economic terms of their offers.
The Special Committee met on September 10, 1998 by telephone conference to
review EVEREN's analysis of the final bids of the Allied Stockholder and the
Second Bidder. Copies of EVEREN's final bid analysis were provided to the
members of the Special Committee prior to this meeting. Representatives of Gray
Plant also participated in this meeting to assist the Special Committee in
reviewing the final bids. After an extensive review and discussion of the
economic terms and structure of each bid, the due diligence activities still
pending for the Allied Stockholder and the Second Bidder, the financing
capabilities of the Allied Stockholder and the Second Bidder, the proposed
premium to be paid by the Allied Stockholder and the Second Bidder, as compared
to the historical trading price of Vaughn Common Stock, as well as to comparable
transactions either completed or pending during the last six months, and the
likelihood of consummating a transaction with the Allied Stockholder and the
Second Bidder, the members of the Special Committee present authorized the
Company to proceed to negotiate a definitive merger agreement with the Allied
Stockholder subject to final approval of the terms of such merger agreement by
the Special Committee and the Board of Directors.
From approximately September 11, 1998 through November 30, 1998, the Allied
Stockholder, its lenders and its other representatives completed their due
diligence review of the Company. Vaughn and
16
the Allied Stockholder, directly and through their respective legal counsel,
also continued negotiations of the business, financial and legal terms of the
Merger Agreement. The parties and their respective legal counsel had exchanged
several drafts of an agreement during this period. Also during this period, the
Company was attempting to sell its Products Division and focusing its efforts on
completing this sale. The Company sold the Products Division as of November 16,
1998.
On December 1, 1998, Allied submitted a final bid to the Special Committee
for its consideration. Among other things, the revised bid adjusted the Merger
Consideration from $11.50 to $10.00 per share of Vaughn Common Stock. The Allied
representative advised the Company that the reduction in Merger Consideration
was necessitated by a combination of factors, the most important of which
related to a significant disruption in the capital markets as well as an
increased concern over the economic prospects for the industry, especially in
light of international market conditions. The revised bid also required that E.
David Willette and M. Charles Reinhart, respectively the Chief Executive Officer
and Chief Financial Officer of the Company, enter into amended employment
agreements and that Douglas Olzenak, a Vice President of Vaughn in charge of
sales, enter into a new written employment agreement. See "Special
Factors--Conflicts of Interest."
At a meeting of the Special Committee on December 4, 1998, the members of
the Special Committee reviewed the terms of the revised bid and the revised
Merger Agreement, as then currently negotiated between the Company and Allied,
and a representative of EVEREN made a presentation to the Special Committee
concerning its fairness opinion. EVEREN provided an oral opinion that the cash
consideration to be paid in the Merger was fair, from a financial point of view,
to Vaughn's shareholders. EVEREN stated that it was prepared to provide a
written opinion to that effect. EVEREN also stated that it had recontacted the
Second Bidder and that the $10.00 share price offered by Allied represented a
premium to the current price offered by the Second Bidder and was the highest
price among all bidders. Based upon that presentation and following a discussion
of the Merger Agreement as currently negotiated by representatives of the
Company and its legal counsel, the Special Committee authorized the Company to
complete negotiations on the Merger Agreement.
Final negotiations of the terms of the Merger Agreement continued from
December 4, 1998 through December 10, 1998. On December 11, 1998, the Special
Committee met, and following review of the Merger Agreement, the Special
Committee unanimously recommended that the directors approve the Merger
Agreement, subject to receipt of the fairness opinion from EVEREN.
On December 11, 1998, immediately following adjournment of the Special
Committee meeting, the Board of Directors met to review the terms of the Merger
Agreement and the recommendation of the Special Committee to approve the Merger
Agreement. At that Board meeting, EVEREN delivered to the Board of Directors its
written opinion that the Merger Consideration was fair, from a financial point
of view, to Vaughn's shareholders. See "Special Factors--Opinion of the
Company's Financial Advisor." Messrs. Willette, Drapeau, Reinhart and Olzenak
participated in the Board discussions and answered questions from the Board of
Directors regarding their proposed continued employment with Allied after
consummation of the Merger. See "Special Factors--Conflicts of Interest." At the
Board meeting on December 11, 1998, all members of the Board of Directors
unanimously approved the Merger Agreement and authorized the Chief Executive
Officer of the Company to execute and deliver the Merger Agreement on behalf of
the Company. After the close of business on December 11, 1998, the Merger
Agreement was executed and delivered, and the Company announced the signing of
the agreement on that date. See "Special Factors--Reasons for the Merger and
Recommendation of the Board of Directors."
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARD OF DIRECTORS
In reaching its decision to enter into the Merger Agreement, the Board of
Directors of the Company considered a number of factors, including the
following:
(i) The financial presentation of EVEREN (including the assumptions and
methodologies underlying its analyses and presentations of the stand-alone
value of the Company) made to the Board
17
of Directors and the opinion of EVEREN to the effect that, as of December
11, 1998, the Merger Consideration to be received by the Vaughn shareholders
in the Merger is fair to such holders from a financial point of view as
described under "Special Factors--Opinion of the Company's Financial
Advisor;"
(ii) The premium which the cash consideration to be paid in the Merger
represents over the historical and then current market prices for shares of
Vaughn Common Stock, as described under "Special Factors--Opinion of the
Company's Financial Advisor" and "Information Concerning Vaughn Common
Stock;"
(iii) Management's discussion with the Board of Directors concerning the
current conditions of the multimedia business services industry, and the
advantages which larger companies have over smaller companies such as the
Company because of a larger sales force and broader product lines;
(iv) A review of strategic alternatives, including possible business
combinations, and based on the foregoing, the belief that a transaction with
another company could not reasonably be expected to offer terms and
advantages comparable to those of a business combination involving Allied;
(v) A review of the terms and conditions of the Merger Agreement,
including the fact that the Merger Agreement permits the Company's Board of
Directors, in the exercise of its fiduciary duties, under certain
conditions, to furnish information to, or engage in negotiations with, third
parties in response to unsolicited acquisition proposals, and to terminate
the Merger Agreement, if the Company's Board of Directors determines that a
superior acquisition proposal has been made, subject to payment of a
break-up fee (see "The Merger Agreement--Termination Fees");
(vi) The likelihood that TAC will be able to complete the Merger (see
"The Merger Agreement--Termination"); and
(vii) A review of the Company's business, management, financial
performance and condition, strategic objectives, prospects and competitive
position.
The foregoing discussion of the information and factors considered by the
Board of Directors is not intended to be exhaustive. In view of the wide variety
of factors considered in connection with its evaluation of the proposed Merger,
the Board of Directors of the Company did not find it practical to, and did not,
quantify or otherwise attempt to assign relative weights to the specific factors
considered in reaching its determination, although its individual members may
have given differing weights to differing factors.
In making its fairness determination, the Board of Directors considered
that, although the Merger Agreement provides that the Company may not solicit or
encourage any Transaction Proposal (as defined herein), the Company may, if the
Board's fiduciary responsibilities under applicable law (as advised by counsel)
so require, participate in negotiations with third parties with respect to a
Superior Acquisition Proposal before the Merger is consummated. In this regard,
the Board of Directors considered the potential effect on offers or proposals
for an Transaction Proposal that could be caused by the provisions of the Merger
Agreement that provide for the payment of a $1.9 million termination fee and
reimbursement of expenses incurred by TAC up to $900,000 under certain
circumstances. The Board of Directors believed that (i) an effective
solicitation process had taken place in a way that did not adversely affect
relationships with Vaughn's employees, customers and suppliers and that Vaughn's
perceived value to potential acquirers was not diminished; (ii) preliminary
proposals received from and the financing resources of Allied and the Allied
Stockholder enhanced the probability of closing the transaction; and (iii)
Allied and the Allied Stockholder made it clear that it would withdraw its offer
if the termination fees and expense reimbursement terms of the Merger Agreement
would not be accepted. After considering these factors, in addition to the fact
that the termination fees requested by Allied and the Allied Stockholder as a
percentage of Vaughn's total enterprise value was in the range of termination
fees payable in other transactions of similar size since 1995, the Board
concluded that the provisions relating to the expense
18
reimbursement and termination fees requested by Allied and the Allied
Stockholder were not unreasonable and that the Company will still be able to
entertain a Superior Acquisition Proposal that would benefit the shareholders
despite such termination fees and expense.
The Board of Directors of Vaughn believed it was not necessary to structure
the Merger to require approval of at least a majority of unaffiliated
shareholders, nor to have a majority of non-employee directors retain an
unaffiliated representative to act solely on behalf of unaffiliated shareholders
for the purpose of negotiating the terms of the Merger and/or preparing a report
concerning the fairness of the Merger because (i) the Board created a Special
Committee of directors, consisting of directors who are not employees of Vaughn
and who will not have any continuing interest in or other relationship with the
Surviving Corporation, to make a recommendation to engage a financial advisor to
render an opinion as to the fairness, from a financial point of view, of the
consideration to be paid to Vaughn's shareholders in the Merger, (ii) EVEREN,
who was engaged by the Special Committee, delivered its opinion that such
consideration was fair to Vaughn's shareholders, (iii) six of eight directors on
the Board would not have any continuing ownership interest in or other
relationship with the Surviving Corporation and (iv) the Merger was approved
unanimously by all directors of Vaughn.
The Merger is proposed at this time because the Company believes that it
cannot access the necessary capital to execute its growth strategy on a
stand-alone basis given the current conditions in the public equity market. The
Company's business strategy to grow its business-to-business video duplication
sales through acquisitions and new facility openings, and to expand its product
offerings to existing customers by introducing newer multi-media technologies,
such as CD replication, requires substantial capital. Lack of appreciation of
the per share price of Vaughn Common Stock has limited the Company's ability to
raise capital through the public markets. The Company believes that several
factors, including (i) the lack of research coverage by an investment banking
firm, (ii) the small public float and relative illiquidity for Vaughn Common
Stock, (iii) the potential stock overhang from Mr. Willette's ownership position
in Vaughn Common Stock (see "Ownership of Vaughn Common Stock"), (iv) the lack
of other directly comparable public companies and (v) the perception of the
Company's vulnerability to changing multi-media delivery formats, have made it
improbable that the public markets will value Vaughn Common Stock consistent
with the Company's prospects. The Merger is structured so that Vaughn will be
the Surviving Corporation.
In approving the Merger, the Board of Directors was aware that, and
considered as a negative factor that, as a result of the Merger, Vaughn's
shareholders would no longer participate in the future growth and earnings of
the Company. However, after taking into account that the public markets
historically failed to value Vaughn Common Stock consistently with Vaughn's
prospects, the Board of Directors believed that a sale of the Company would
achieve a fair price for the Company and a greater value for Vaughn's
shareholders than if it remained a public company.
THE BOARD'S RECOMMENDATION
The Board of Directors of the Company, following the unanimous
recommendation to it by the members of the Special Committee, has unanimously
approved the Merger Agreement, the Merger and the transactions contemplated by
the Merger Agreement and recommends that the shareholders vote "FOR" approval
and adoption of the Merger Agreement and the Merger. The Board believes that the
consideration to be received by unaffiliated Vaughn shareholders is fair and in
the best interests of Vaughn shareholders. Certain members of Vaughn's Board of
Directors have interests in the Merger that may be in conflict with the
interests of Vaughn's shareholders generally. See "Special Factors--Conflicts of
Interest."
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
EVEREN has acted as financial advisor to the Company in connection with the
Merger and has assisted the Company's Board of Directors and the Special
Committee in their examination of the fairness, from a financial point of view,
of the cash consideration to be received by the shareholders in the Merger.
19
The Merger Consideration resulted from the negotiations between the Company,
Allied and the Allied Stockholder and was not initially determined by EVEREN.
EVEREN was retained by the Special Committee to: (i) act as financial
advisor in the sale of the Company, and (ii) render a fairness opinion (the
"Opinion") to the Board of Directors with respect to the Merger. EVEREN was
hired based on its qualifications and expertise in providing advice to companies
in merger and acquisition transactions, as well as its reputation as a
nationally recognized investment banking firm. Pursuant to a letter agreement
dated December 3, 1998, the fee payable to EVEREN for its role in rendering its
Opinion to the Special Committee is $100,000. EVEREN will receive a completion
fee for its role as financial advisor upon the closing of the Merger in the
amount of 1.25% of the Enterprise Value (as defined herein) less retainer
payments of $75,000 and the fee paid for rendering the Opinion for $100,000.
At the request of Vaughn, on December 11, 1998, EVEREN delivered an oral
opinion to the Special Committee, which was subsequently confirmed in writing to
the Board of Directors on such date, that, based upon and subject to the matters
set forth in its written opinion as of such date, the cash price of $10.00 per
share of Vaughn Common Stock (the "Merger Consideration") to be paid in the
Merger to the holders of the Vaughn Common Stock was fair, from a financial
point of view. The full text of the written opinion of EVEREN, dated as of
December 11, 1998, is set forth as Annex B to this Proxy Statement and describes
the assumptions made, matters considered and limits on the review undertaken.
Vaughn shareholders are urged to read the opinion in its entirety.
EVEREN's opinion addresses only the fairness of the consideration to be
received in the Merger, from a financial point of view, to the shareholders of
Vaughn and does not constitute a recommendation to any shareholder of Vaughn how
such shareholder should vote with respect to the approval of the Merger.
In addition to the analytical methodologies employed, the Merger
Consideration offered by Allied is the result of a comprehensive marketing
process which included all likely strategic and financial acquirers for the
Company. Upon review of bids received, the Merger Consideration represented the
highest price among all bidders.
In arriving at its opinion, EVEREN assumed and relied upon the accuracy and
completeness of the financial and other information obtained from public sources
or provided to it by the Company, and EVEREN has not assumed responsibility for
any independent verification of such information or undertaken any obligation to
verify such information. In addition, with respect to the financial forecasts
and projections of the Company used in EVEREN's analysis, the management of the
Company informed EVEREN that such forecasts and projections represent the best
current judgment of the management of the Company as to the future financial
performance of the Company on a stand-alone basis, and EVEREN assumed that the
projections had been reasonably prepared based on such current judgment. EVEREN
assumed no responsibility for and expresses no view as to such forecasts and
projections or the assumptions on which they were based.
EVEREN also took into account its assessment of general economic, market and
financial conditions and its experience in similar transactions, as well as its
experience in securities valuation in general. EVEREN's opinion necessarily is
based upon regulatory, economic, market and other conditions, as well as
information made available to EVEREN as of December 11, 1998. The regulatory,
economic, market and other conditions and the information made available to
EVEREN could only be evaluated by EVEREN on the date of the fairness opinion.
In connection with rendering its opinion, dated as of December 11, 1998,
EVEREN: (i) reviewed the Merger Agreement in substantially final form, (ii)
reviewed a draft of Vaughn's merger proxy statement, (iii) reviewed Vaughn's
annual report on Forms 10-K for the years ended January 31, 1997, and 1998, (iv)
reviewed Vaughn's quarterly reports on Forms 10-Q for the three months ended
July 30, 1998 and October 31, 1998, (v) reviewed Vaughn's current report on Form
8-K with a Date of Report of November 16, 1998, (vi) reviewed certain non-public
operating and financial information, including financial projections, relating
to Vaughn's business prepared by management of Vaughn, (vii) interviewed certain
20
members of Vaughn's management to discuss its operations, financial statements
and future prospects, (viii) reviewed the historical share prices and trading
volumes of Vaughn's Common Stock, (ix) reviewed premiums paid in recent merger
transactions of comparable size, (x) reviewed publicly available financial data
and stock market performance data of other publicly traded multi-media companies
which were deemed comparable to Vaughn, (xi) reviewed the terms of selected
recent acquisitions of companies which were deemed comparable to Vaughn, (xii)
reviewed termination fees agreed to on recent transactions of comparable size;
and (xiii) conducted such other studies, analyses, inquiries and investigations,
as deemed appropriate.
The following is a summary of the six primary valuation analyses of Vaughn
performed by EVEREN: (i) premiums in recent merger transactions of comparable
size, (ii) the Enterprise Value and Equity Value of the Transaction compared to
comparable publicly traded multi-media companies, (iii) the Enterprise Value of
the Transaction compared to comparable merger transactions, (iv) the Enterprise
Value and Equity Value of the Transaction compared to the value per share
derived from a discounted cash flow analysis, (v) Vaughn's historical share
price performance, and (vi) other relevant factors.
ENTERPRISE VALUE ANALYSIS:
EVEREN calculated the Enterprise Value, defined as the transaction value of
equity, which in the case of the Merger is based on Allied's offer of $10.00 per
share for Vaughn Common Stock multiplied by the primary shares outstanding plus
the cash paid to option holders based on the difference between the Merger
Consideration and the exercise price of their options (the "Equity Value"), plus
debt (including the obligation of all transaction expenses incurred by Vaughn).
Enterprise Value was analyzed as a multiple of latest twelve months through
October 31, 1998 ("LTM") net sales, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and earnings before interest and taxes
("EBIT"). Equity Value was analyzed as a multiple of 1998 and 1999 estimated net
income. The Enterprise Value multiples of LTM net sales, EBITDA and EBIT
associated with the Merger are 0.7x, 5.7x and 9.5x, respectively. The Equity
Value multiples of 1998 and 1999 estimated net income associated with the Merger
are 15.5x and 9.7x, respectively. EVEREN calculated net sales, EBITDA and EBIT
multiples based on Enterprise Value, and net income multiples based on Equity
Value in order to compare such multiples to the multiples calculated in the
comparable company trading analysis and comparable transaction analysis
discussed below.
PREMIUM ANALYSIS:
EVEREN reviewed premiums paid on target companies' stock prices one day, one
week and one month prior to the announcement of an acquisition. EVEREN reviewed
transactions that met the following criteria: (i) Enterprise Value was greater
than $50 million and less than $150 million, (ii) acquirer acquired a 50% or
greater interest in the target, (iii) the announcement occurred between May 30,
1998 and November 30, 1998, and (iv) the target companies excluded those
involved in financial services, real estate, telecommunications, and healthcare
companies. The review resulted in a range of premiums (discounts) paid: (i) one
day prior to announcement of (21.4%) to 100.0%, with a median of 14.9% and a
mean of 22.9%, (ii) one week prior to announcement of (22.3%) to 156.0%, with a
median of 22.1% and a mean of 29.9%, and (iii) one month prior to announcement
of (7.5%) to 166.7%, with a median of 28.6% and a mean of 33.6%. Utilizing a
subset of transactions including 15 of the 27 transactions previously analyzed
with Enterprise Values between $50 million and $100 million, the median one day,
one week and one month premiums were 13.6%, 22.1% and 26.1%, respectively.
EVEREN noted that the offer price for Vaughn of $10.00 per share was a
21.2%, 35.6% and 27.0% premium to the closing price of Vaughn's common stock one
day, one week and one month, respectively, prior to the first public
announcement of the Merger and that the premium offered to shareholders based on
closing prices one day, one week and four weeks prior to the announcement
compares favorably with premiums paid in the other transactions reviewed by
EVEREN, especially those with Enterprise Values between $50 million to $100
million.
21
COMPARABLE TRANSACTION ANALYSIS:
LOW MEDIAN MEAN HIGH
--------- ----------- ----- ---------
Enterprise Value to:
LTM Net Sales................................................... 0.1x 0.7x 0.9x 2.0x
LTM EBITDA...................................................... 2.6x 4.6x 5.6x 8.7x
LTM EBIT........................................................ 4.4x 10.4x 9.9x 14.6x
MERGER
CONSIDERATION
-----------------
Enterprise Value to:
LTM Net Sales................................................... 0.7x
LTM EBITDA...................................................... 5.7x
LTM EBIT........................................................ 9.5x
EVEREN prepared a comparable transaction analysis that consisted of
reviewing financial aspects of selected acquisitions of assets, businesses or
interests in businesses in the media duplication and multi-media related
services businesses, which EVEREN determined to be in similar lines of business
as Vaughn ("Selected Comparable Transactions"). EVEREN noted that no such
transactions took place under directly comparable market conditions or
competitive conditions or circumstances and that, accordingly, qualitative
judgments must be made concerning the differences between the characteristics of
these transactions and other factors and issues which would affect the price an
acquirer is willing to pay in an acquisition. Selected Comparable Transactions
included (acquirer/target): VDI Media/Dubs, Inc.; Citicorp Venture
Capital/Allied Digital Technologies Corp.; Technicolor Video Services/Nimbus CD
International, Inc.; Four Media/Video Symphony, Inc.; Cinram International,
Inc./Sony Music--Duplication Assets; The Todd AO Corp./Hollywood Digital, Cinram
International, Inc./Polygram NV--Disc Manufacturing; Cinram International,
Inc./Quixote--Disc Manufacturing; Four Media/Anderson Film Industries, Corp.;
Cinram International, Inc./Videoprint, Inc.; Cinram International,
Inc./Duplication France. EVEREN also investigated information available on the
pending acquisition of KAO Corporation's U.S. operations by Zomax Corporation.
The analysis of Selected Comparable Transactions yielded a range of transaction
value multiples of LTM net sales of 0.1x to 2.0x, with a median of 0.7x and mean
of 0.9x, LTM EBITDA of 2.6x to 8.7x, with a median of 4.6x and a mean of 5.6x,
LTM EBIT multiples of 4.4x to 14.6x, with a median of 10.4x and a mean of 9.9x.
EVEREN noted that the Enterprise Value multiples of LTM sales, EBITDA and EBIT
compared favorably with the respective multiples derived in the comparable
transaction analysis. In particular, the Enterprise Value multiples compared
favorably to Citicorp Venture Capital's acquisition of Allied where the
Enterprise Value to LTM sales, LTM EBITDA, and LTM EBIT were 0.7x, 4.6x and
8.3x, respectively.
COMPARABLE COMPANY TRADING ANALYSIS:
MERGER
LOW MEDIAN MEAN HIGH CONSIDERATION
--------- ----------- --------- --------- ---------------
Enterprise Value to:
LTM Net Sales................................................. 0.9x 1.6x 1.5x 1.9x 0.7x
LTM EBITDA.................................................... 4.9x 6.0x 6.5x 9.0x 5.7x
LTM EBIT...................................................... 9.4x 12.6x 13.6x 18.6x 9.5x
Equity Value to 1998 E Net Income............................... 12.1x 13.5x 13.4x 14.4x 15.5x
Equity Value to 1999 E Net Income............................... 7.7x 7.7x 7.7x 7.7x 9.7x
EVEREN prepared a comparable company trading analysis that consisted of
comparing financial market and operating performances of selected publicly
traded media duplication and other multi-media services companies, which EVEREN
determined to be in somewhat similar lines of business as Vaughn ("Selected
Comparable Companies"). EVEREN noted that each of the selected companies is
distinguishable from Vaughn, and that, accordingly, an analysis of the results
of the foregoing necessarily involves complex considerations and judgments
concerning differences in the financial and operating characteristics of the
companies and other factors to which they are being compared. The multiples and
ratios for each of the Selected Comparable Companies were based on the most
recent publicly available information and published estimates of research
analysts. The Selected Comparable Companies included: Four Media
22
Company; Video Services Corporation; The Todd-AO Corporation; Cinram
International, Inc. and VDI Media, Inc. With respect to the Selected Comparable
Companies, EVEREN considered total enterprise value as a multiple of LTM net
sales, LTM EBITDA and LTM EBIT. EVEREN's analysis of the Selected Comparable
Companies indicated enterprise value multiples of LTM net sales ranging from
0.9x to 1.9x, with a median of 1.6x and a mean of 1.5x; enterprise value
multiples of LTM EBITDA ranging from 4.9x to 9.0x, with a median of 6.0x and a
mean of 6.5x; and enterprise value multiples of LTM EBIT ranging from 9.4x to
18.6x, with a median of 12.6x and a mean of 13.6x. In addition, with respect to
the Selected Comparable Companies, EVEREN considered equity value as a multiple
of forward 1998 and 1999 net income. EVEREN's analysis of the Selected
Comparable Companies indicated equity value multiples of 1998 (estimated) net
income ranging from 12.1x to 14.4x, with a median of 13.5x and a mean of 13.4x.
EVEREN's analysis of the Selected Comparable Companies indicated an equity value
multiple of 1999 (estimated) net income of 7.7x (only one such estimate exists).
EVEREN noted that the Merger Consideration multiples are below that of the
Selected Comparable Companies. However, compared to the publicly traded
comparable group, Vaughn has lower margins and growth rates than the median for
the peer group. With a three year compound annual growth rate from 1995 to 1997
of sales of 18.6%, Vaughn ranks below the median growth rate of 37.9%. Likewise,
Vaughn's LTM EBITDA margin of 13.4% falls below the median of the Selected
Comparable Companies at 21.6%. With the exception of Video Services, Vaughn is
the smallest company in terms of sales and market capitalization and is at
competitive disadvantage in the marketplace in terms of raising public capital
or attracting institutional interest. As such, the use of this analysis is not
as relevant as other methodologies.
DISCOUNTED CASH FLOW ANALYSIS:
The Discounted Cash Flow Analysis ("DCF") attempts to value Vaughn's shares
today using the sum of (i) the discounted cash flows of the Company over the
course of the next five years, plus (ii) a discounted terminal value. Although
this methodology is utilized often in investment cost-benefit analysis, it is
heavily dependent on the accuracy of projections, the discount rate and the
terminal value multiples. In analyzing the Merger Consideration on a DCF basis,
we utilized management's profit projections under a "No Acquisitions" case,
capital expenditure projections provided to bidders during the sale process, a
terminal multiple range of 4.5x to 5.5x EBITDA (the approximate mean and median
range for Comparable Transactions), and a discount rate of 15% to 20%, which
represents a reasonable discount rate given the capital and size of the Company.
Based on such analysis, EVEREN derived a range of Enterprise Values and
subtracted the sum of the current debt outstanding plus the difference between
the Merger Consideration and the exercise price for all in-the-money options to
arrive at an implied Equity Value. Dividing by the number of Vaughn shares
currently outstanding as of October 31, 1998, yielded implied equity values per
share of Vaughn of $6.64 to $11.55. The Merger Consideration compared favorably
with this range of implied equity values per share calculated in the DCF
Analysis.
OTHER ANALYSES AND FACTORS:
In rendering its opinion, EVEREN: (i) prepared a history of trading prices
for Vaughn Common Stock from December 11, 1988 through December 11, 1998, which
showed a range of prices of $0.44 to $19.00 with an average price of $4.36 per
share over this period; (ii) prepared a history of trading prices for Vaughn
Common Stock from December 11, 1997 through December 11, 1998, which showed a
range of prices of $5.25 to $10.38 with an average price of $7.35 per share over
this period; (iii) prepared a history of trading volumes for Vaughn Common Stock
from December 11, 1997 through December 11, 1998, which showed that greater than
98% of the shares traded at or below the Merger Consideration of $10.00 over the
last year, and (iv) reviewed financial and operating characteristics of Vaughn
and its industry performance.
The foregoing is a summary of the material aspects of the financial analyses
used by EVEREN in connection with rendering its opinion. The preparation of a
fairness opinion is a complex process and is
23
not necessarily susceptible to partial analysis or summary description.
Selecting portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying EVEREN's opinion. In arriving at its opinion, EVEREN
considered the results of all such analyses. The analyses were prepared solely
for the purposes of EVEREN providing its opinion as to the fairness of the
Merger Consideration, from a financial point of view, to the holders of Vaughn
Common Stock, and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Any analysis of
the fairness of the Merger Consideration to be offered in the Merger, from a
financial point of view, to the holders of Vaughn Common Stock, involves complex
considerations and judgments concerning differences in the potential financial
and operating characteristics of the comparable companies and transactions and
other factors in relation to the trading and acquisition values of the
comparable companies. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than those suggested by such analyses. The estimates utilized
by EVEREN were developed solely for purposes of its analysis and the
presentations to the Vaughn Board of Directors and reflected computations of the
potential values through the application of various generally accepted valuation
techniques. Such estimates may not reflect actual market values, and do not
necessarily reflect values which may be realized if any other assets of Vaughn
are sold. EVEREN has not appraised or undertaken any valuation of any assets or
property nor has it made any solvency analysis of Vaughn. EVEREN's opinion and
the related presentation to the Vaughn Board on December 11, 1998 was one of
many factors taken into consideration by the Vaughn Board in making its
determination to approve the Merger. The foregoing summary does not purport to
be a complete description of the analyses performed by EVEREN.
EVEREN's opinion is for the use and benefit of the Vaughn Board of Directors
in its consideration of the Merger. This opinion is not intended to be and does
not constitute a recommendation to any shareholder as to how such shareholder
should vote with respect to the Merger. EVEREN was not requested to opine as to,
and its opinion does not in any manner address, Vaughn's underlying business
decision to proceed with or effect the Merger, or the relative merits of the
Merger as compared to any alternative business strategies which might exist for
Vaughn or the effect of any other transaction in which Vaughn might engage.
Pursuant to a letter agreement dated December 3, 1998, Vaughn paid to EVEREN
on December , 1998, a cash fee of $100,000 after EVEREN delivered its opinion
to the Vaughn Board of Directors on December 11, 1998. Furthermore, Vaughn has
agreed to reimburse EVEREN for certain out-of-pocket expenses and to indemnify
EVEREN for certain liabilities arising in connection with EVEREN's opinion.
As compensation for its services as financial advisor to the Company, the
Company has paid EVEREN a retainer of $75,000 to be credited against a fee,
payable upon the consummation of the Merger, in an amount equal to 1 1/4% of the
aggregate consideration received by the shareholders in connection with the
Merger, based on a share value of up to $15 per share, and 3% of the aggregate
consideration received by the Shareholders in excess of $15 per share. The
Company has also agreed to reimburse EVEREN for its reasonable out-of-pocket
expenses in connection with the performance of its services not to exceed
$25,000 in the aggregate without the Company's prior approval. In the ordinary
course of its business, EVEREN may trade Vaughn Common Stock for the accounts of
its customers. EVEREN does not hold, for its own account, any shares of Vaughn
Common Stock.
CERTAIN EFFECTS OF THE MERGER
Current Vaughn shareholders will not have an opportunity to continue their
equity interest in the Surviving Corporation and therefore will not share in the
future earnings and potential growth of Vaughn, nor have the right of equity
ownership. Upon completion of the Merger, Vaughn Common Stock will no longer be
quoted on Nasdaq, trading information will no longer be available and the
registration of Vaughn Common Stock under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), will be terminated. The termination of the
registration of Vaughn Common Stock under the Exchange Act will
24
reduce the information required to be furnished to the SEC and will make certain
provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b) and the requirement of furnishing a proxy or
information statement in connection with shareholder meetings, no longer
applicable.
The receipt of cash pursuant to the Merger will be a taxable transaction.
See "Special Factors-- Certain Federal Income Tax Consequences."
CONFLICTS OF INTEREST
In considering the recommendation of Vaughn's Board of Directors with
respect to the Merger, the Merger Agreement and the transactions contemplated by
the Merger Agreement, Vaughn's shareholders should be aware that certain members
of Vaughn's management and Board of Directors (identified in the following
paragraphs) have interests in the Merger that may be generally considered in
conflict with the interests of Vaughn shareholders generally. The Board of
Directors of Vaughn was aware of these interests and considered them, among
other matters, in approving the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement. These interests are discussed
below.
WILLETTE OPTION TERMINATION AND GRANT AGREEMENT; WILLETTE SUBSCRIPTION
AGREEMENT
In connection with the Merger, Willette and Allied entered into the Willette
Option Termination and Grant Agreement, which is attached hereto as Annex D and
is incorporated herein by reference. Pursuant to the Willette Option Termination
and Grant Agreement, immediately prior to the Effective Time, Willette, Chief
Executive Officer and director of Vaughn, will cancel certain stock options held
by him to purchase 128,500 shares of Vaughn Common Stock, representing (i) stock
options to purchase 20,500 shares of Vaughn Common Stock at an exercise price of
$3.1250 per share, (ii) stock options to purchase 22,000 shares of Vaughn Common
Stock at an exercise price of $5.10 per share, (iii) stock options to purchase
34,000 shares of Vaughn Common Stock at an exercise price of $5.8438 per share,
(iv) stock options to purchase 27,000 shares of Vaughn Common Stock at an
exercise price of $7.5438 per share, and (v) stock options to purchase 25,000
shares of Vaughn Common Stock at an exercise price of $11.05 per share (the
"Willette Options"). In consideration for such cancellation, Willette will
acquire a non-qualified option (the "Allied Option") consisting of the right to
purchase 10,000 shares of Series C Preferred Stock of Allied, par value $.01 per
share ("Allied Series C Preferred"), at an exercise price of $543,634.20,
subject to the terms and conditions set forth in a Stock Option Agreement and
Letter of Grant (the "Option Certificate") to be entered into on the Closing
Date by and between Allied and Willette. The Allied Series C Preferred has a
stated value of $100.00 per share; therefore, the Allied Option exercisable for
10,000 shares of Allied Series C Preferred has an ascribed value of $1 million.
Assuming Merger Consideration of $10.00 per share, subject to the terms and
conditions of the Merger Agreement, Willette would be entitled to an aggregate
spread of $456,365.80 in cancellation of the Willette Options. The exercise
price of $543,634.20 was calculated to give Willette equivalent value by
subtracting $456,365.80 from the $1 million ascribed value. The cancellation of
the Willette Options and grant of the Allied Option will take place immediately
prior to the Effective Time on the Closing Date.
Also in connection with the Merger, Willette and Allied entered into the
Willette Subscription Agreement pursuant to which Willette will purchase 22,820
shares of Class A Common Stock of Allied, par value $.01 per share ("Allied
Class A Common"), at a price of $5.00 per share, for $114,100 plus an additional
4,500 shares as his allocation under Allied's management equity program, at a
price of $5.00 per share, for $22,500, for a total purchase of 27,320 shares of
Allied Class A Common for $136,600. Willette will also purchase 4,289 shares of
Series B Preferred Stock of Allied, par value $.01 per share ("Allied Series B
Preferred" and together with the Allied Class A Common, the "Willette Shares"),
at a price of $100.00 per share, for a total purchase price of $428,900. The
closing of the purchase and sale of the Willette Shares will take place
immediately prior to the Effective Time on the Closing Date. The
25
effectiveness of the Willette Subscription Agreement and the Willette Option
Termination and Grant Agreement are subject to the consummation of the
transactions contemplated by the Merger Agreement (the "Transactions").
EMPLOYMENT AGREEMENTS
Prior to the Merger, Vaughn had existing employment agreements with
Willette, M. Charles Reinhart ("Reinhart") and Donald J. Drapeau ("Drapeau"). In
connection with the Merger, employment agreements of Willette and Reinhart have
been amended.
Pursuant to Amendment No. 1 to Mr. Willette's employment agreement, the
material changes are as follows: (a) ADI assumes all of Vaughn's
responsibilities under Mr. Willette's amended employment agreement; (b) Mr.
Willette's position is changed to Executive Vice President of ADI from Chief
Executive Officer of Vaughn; and (c) Mr. Willette's annual base salary is
increased from $200,000 to $225,000 per year.
Pursuant to Amendment No. 1 to Mr. Reinhart's employment agreement, the
material changes are as follows: (a) ADI assumes all of Vaughn's
responsibilities under Mr. Reinhart's amended employment agreement; (b) the
three-year term of Reinhart's employment agreement is shortened to terminate on
April 1, 2000 (from March 13, 2001), with no right of renewal; (c) the
non-competition restriction period binding on Mr. Reinhart is shortened to
eighteen months from five years; and (d) Mr. Reinhart is entitled to severance
compensation equal to $160,000, payable monthly in twelve equal installments
plus other benefits in the event of any of the following: (i) his employment
agreement is terminated without "Cause" (as defined in Mr. Reinhart's employment
agreement), (ii) the parties mutually agree to terminate his employment
agreement, (iii) his employment agreement expires by its own terms, or (iv) Mr.
Reinhart terminates his employment agreement for "Good Reason" (as defined in
Mr. Reinhart's employment agreement).
The effectiveness of the amendments to the employment agreements of Mr.
Willette and Mr. Reinhart are subject to the consummation of the Transactions.
Under existing employment agreements with Drapeau and Reinhart, each of them
will receive $100,000 in one lump sum payment upon the consummation of a "Change
of Control" of Vaughn. An additional $100,000 is payable to Drapeau and Reinhart
on the date one year after the consummation of such Change of Control, subject
to certain conditions in the employment agreements. Completion of the Merger
will constitute a "Change of Control" under the employment agreements and will
entitle Drapeau and Reinhart to these payments.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material United States
federal income tax consequences of the Merger. This discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), regulations promulgated
by the United States Treasury Department, judicial authorities, and current
rulings and administrative practice of the Internal Revenue Service (the
"Service") in each case as in effect as of the date hereof and all of which are
subject to change at any time, possibly with retroactive effect. This discussion
does not address all aspects of federal income taxation that might be relevant
to particular holders of Vaughn Common Stock in light of their status or
personal investment circumstances; nor does it discuss the consequences to such
holders who are subject to special treatment under the federal income tax laws
such as foreign persons, dealers in securities, regulated investment companies,
life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, taxpayers who hold Vaughn Common Stock as
part of a "straddle," "hedge" or "conversion transaction" or who have a
"functional currency" other than the United States dollar or to persons who
26
have received their Vaughn Common Stock as compensation. Further, this
discussion does not address the state, local or foreign tax consequences of the
Merger.
For United States federal income tax purposes, TAC will be disregarded as a
transitory entity and the Merger of TAC with and into Vaughn will be treated as
exchanges of a portion of Vaughn Common Stock for the cash in the Merger by its
holders.
The receipt of the cash consideration in the Merger by holders of Vaughn
Common Stock will be a taxable transaction for federal income tax purposes. Each
holder's gain or loss per share will be equal to the difference between the cash
consideration received in the Merger and the holder's basis per share in the
Vaughn Common Stock. Except as provided in the following paragraph, if a holder
holds Vaughn Common Stock as a capital asset, the gain or loss from the exchange
will be a capital gain or loss. This gain or loss will be long-term if the
holder's holding period is more than twelve months. Under current law, net
long-term capital gains of individuals are subject to a maximum federal income
tax rate of 20% (not taking into account any phase-out of personal exemptions
and certain itemized deductions) whereas the maximum federal income tax rate on
ordinary income and net short-term capital gains (I.E., gain on capital assets
held for less than twelve months) of an individual is currently 39.6% (not
taking into account any phase-out of personal exemptions and certain itemized
deductions). For corporations, capital gains and ordinary income are taxed at
the same maximum rate of 35%. Capital losses are currently deductible only to
the extent of capital gains plus, in the case of taxpayers other than
corporations, $3,000 of ordinary income ($1,500 in the case of married
individuals filing separate returns). In the case of individuals and other
non-corporate taxpayers, capital losses that are not currently deductible may be
carried forward to other years, subject to certain limitations. In the case of
corporations, capital losses that are not currently deductible may generally be
carried back to each of the three years preceding the loss year and forward to
each of the five years succeeding the loss year, subject to certain limitations.
A holder of Vaughn Common Stock may be subject to backup withholding at the
rate of 31% with respect to payments of cash consideration in the Merger
received pursuant to the Merger, unless the holder (a) provides a correct
taxpayer identification number ("TIN") in the manner required or (b) is a
corporation or other exempt recipient and, when required, demonstrates this
fact. To prevent the possibility of backup federal income tax withholding on
payments made to certain holders with respect to shares of Vaughn Common Stock
pursuant to the Merger, each holder must provide the disbursing agent with his
correct TIN by completing a Form W-9 or Substitute Form W-9. A holder of Vaughn
Common Stock who does not provide Vaughn with his or her correct TIN may be
subject to penalties imposed by the Service, as well as backup withholding. Any
amount withheld under these rules will be creditable against the holder's
federal income tax liability. Vaughn (or its agent) will report to the holders
of Vaughn Common Stock and the Service the amount of any "reportable payments,"
as defined in Section 3406 of the Code, and the amount of tax, if any, withheld
with respect thereto.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT A
COMPLETE DESCRIPTION OF ALL OF THE POTENTIAL TAX CONSEQUENCES THAT MAY OCCUR AS
A RESULT OF THE MERGER. VAUGHN SHAREHOLDERS SHOULD THEREFORE CONSULT THEIR TAX
ADVISORS REGARDING THE FEDERAL TAX CONSEQUENCES OF THE MERGER, AS WELL AS THE
TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER
JURISDICTION OF THE ABOVE DESCRIBED TRANSACTIONS.
27
THE MERGER
THE FOLLOWING IS A SUMMARY OF THE MERGER AGREEMENT, A COPY OF WHICH IS
ATTACHED AS ANNEX A TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. SUCH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT. SHAREHOLDERS ARE URGED TO REVIEW THE MERGER AGREEMENT CAREFULLY IN
ITS ENTIRETY.
OWNERSHIP OF CAPITAL STOCK
Concurrently with the Merger, it is anticipated that the following steps
will be taken:
(a) TAC has issued one thousand shares of common stock of TAC, par value
$0.01 per share, ("TAC Common Stock") to ADI. Pursuant to the Merger, one
thousand shares of TAC Common Stock (representing each share of TAC Common Stock
outstanding immediately prior to the Effective Time of the Merger) will be
canceled and converted on a one-for-one basis into one share of common stock of
the Surviving Corporation.
(b) Pursuant to the Merger, each share of Vaughn Common Stock outstanding as
of the Record Date (less any shares owned by Vaughn shareholders who are
entitled to, and have perfected, their dissenters' rights) will be canceled and
converted into the right to receive $10.00 per share in cash. For accounting
purposes, the Company will be deemed to have purchased these shares.
(c) As of December 11, 1998, there were options outstanding to purchase an
aggregate of 453,378 shares of Vaughn Common Stock (the "Vaughn Stock Options"),
which options were held by 492 persons. Other than as expressly set forth in the
Willette Option Termination and Grant Agreement, Vaughn shall adjust the terms
of all Vaughn Stock Options to provide that, at the Effective Time, each Vaughn
Stock Option outstanding immediately prior to the Effective Time, whether or not
then vested or exercisable, shall be canceled and thereafter the former holder
thereof shall be entitled by having held such Vaughn Stock Option only to a
payment from the Surviving Corporation (subject to any applicable withholding
taxes, as the case may be) equal to the product of (i) the total number of
shares of Vaughn Common Stock subject to such Vaughn Stock Option and (ii) the
excess of $10.00 over the exercise price per share of Vaughn Common Stock
subject to such Vaughn Stock Option, payable in cash immediately following the
Effective Time. See "Interests of Certain Persons in the Merger--Willette Option
Termination and Grant Agreement;--Treatment of Options."
BENEFITS UNDER EMPLOYMENT AGREEMENTS
Vaughn is a party to employment agreements with two of its executive
officers that will require the payment of a lump sum amount as a result of the
completion of the Merger. See "Special Factors-- Conflicts of Interest."
EMPLOYMENT BY VAUGHN
As a result of the Merger, Vaughn will be the Surviving Corporation, and
employees of Vaughn will become employees of the Surviving Corporation.
INDEMNIFICATION
Pursuant to the terms of the Merger Agreement, for a period of six years
after the Effective Time, and subject to any limitation imposed from time to
time under applicable law, the Surviving Corporation will indemnify and hold
harmless the present and former officers and directors of Vaughn and its former
subsidiaries in respect of acts or omissions occurring prior to the Effective
Time to the maximum extent provided under Vaughn's Articles of Incorporation and
by-laws, or any of its former subsidiary's certificate of incorporation or
by-laws, in either case, as in effect on the date of the execution of the Merger
Agreement.
For a period of six years after the Effective Time, the Surviving
Corporation will provide officers' and directors' liability insurance in respect
of acts or omissions occurring prior to the Effective Time covering each such
person currently covered by Vaughn's or any of its former subsidiary's officers'
and directors'
28
liability insurance policy on terms with respect to coverage and amount no less
favorable than those of such policy in effect on the date hereof, provided that,
in satisfying its obligation to provide liability insurance, the Surviving
Corporation will not be obligated under the Merger Agreement to pay premiums in
excess of 150% of the amount per annum Vaughn paid in its last full fiscal year.
The Company's Articles of Incorporation contains provisions eliminating a
director's personal liability for monetary damages to the Company and its
shareholders arising from a breach of a director's fiduciary duty except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; or (iii) for any
transaction from which the director derived an improper personal benefit.
In addition, the Company's By-Laws require the Company to indemnify Vaughn
directors and officers to the fullest extent permitted under the law. The
Company maintains director and officer insurance coverage for directors and
officers of Vaughn.
CONDUCT OF VAUGHN'S BUSINESS AFTER THE MERGER
As a condition to the consummation of the Merger, all directors of Vaughn
designated by TAC will submit their resignations effective upon consummation of
the Merger; however, it is anticipated that neither Vaughn nor TAC will change
the composition of management immediately following the Effective Time. TAC and
members of management of Vaughn expect that the day-to-day business and
operations of Vaughn will be conducted substantially as they are currently being
conducted by Vaughn. In addition, after the Merger, Vaughn intends to seek
certain strategic acquisitions of companies in comparable industries to take
advantage of increased margins by combining operations.
Other than the transactions contemplated hereby and the proposed financing,
the Company does not have, nor does it anticipate, any plans or proposals which
would result in a sale or transfer of a material amount of assets, or a material
change in the Company's dividend rate or policy or indebtedness or
capitalization. See "The Merger--Financing."
EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Minnesota or at such later time as
may be specified in the certificate of merger. The date and time of
effectiveness of the Merger is referred to generally in this Proxy Statement as
the "Effective Time." The Effective Time is currently expected to occur as soon
as practicable after the Special Meeting, subject to approval of the principal
terms of the Merger Agreement at the Special Meeting and satisfaction or waiver
of the terms and conditions set forth in the Merger Agreement.
REGULATORY REQUIREMENTS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), certain acquisition transactions may not be consummated unless
notice has been given and certain information furnished to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the Federal Trade Commission (the "FTC") and specified waiting period
requirements have been satisfied, unless earlier termination has been granted.
The Company and TAC each filed with the Antitrust Division and the FTC a
Notification and Report Form with respect to the Merger on December 14, 1998. On
, 1999, the FTC notified the Company and TAC that the waiting period under
the HSR Act had been terminated. At any time before or after the Effective Time,
and despite termination of the HSR Act waiting period, the Antitrust Division or
any state could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin consummation of
the Merger, or seeking divestiture of substantial assets of the Company and TAC.
Private parties also may seek to take legal action under the antitrust laws
under certain circumstances.
29
DISSENTERS' RIGHTS
Sections 302A.471 and 302A.473 of the MBCA entitle any shareholder who
objects to the Merger and who follows the procedures prescribed by Section
302A.473 to receive in lieu of the Merger Consideration cash equal to the "fair
value" of such shareholder's shares of Vaughn Common Stock. Set forth below is a
summary of the procedures relating to the exercise of such dissenters' rights.
This summary does not purport to be a complete statement of dissenters' rights
and is qualified in its entirety by reference to Sections 302A.471 and 302A.473
of the MBCA, which are reproduced in full as Annex C to this Proxy Statement,
and to any amendments to such provisions as may be adopted after the date of
this Proxy Statement.
ANY SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE MERGER
SHOULD CAREFULLY REVIEW THE TEXT OF ANNEX C (PARTICULARLY THE SPECIFIED
PROCEDURAL STEPS REQUIRED TO PERFECT DISSENTERS' RIGHTS, WHICH ARE COMPLEX) AND
SHOULD ALSO CONSULT LEGAL COUNSEL. SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL
REQUIREMENTS OF SECTION 302A.473 OF THE MBCA ARE NOT FULLY AND PRECISELY
SATISFIED.
Under the MBCA, any shareholder who (i) files with the Company before the
Special Meeting written notice of his or her intent to demand the fair value for
his or her shares of Vaughn Common Stock if the Merger is consummated and
becomes effective and (ii) does not vote his or her shares of Vaughn Common
Stock at the Special Meeting in favor of the proposal to approve the Merger
shall be entitled, if the Merger is approved and effected, to receive a cash
payment equal to the fair value of such shareholder's shares of Vaughn Common
Stock upon compliance with the applicable statutory procedural requirements.
While a shareholder who votes for the Merger will have no dissenters' rights
under the MBCA, the failure by any shareholder to vote against the proposal to
approve the Merger will not in and of itself constitute a waiver of such rights.
Written notice of a shareholder's intent to demand payment for such
shareholder's shares of Common Stock must be filed with the Company at: 5050
West 78th Street, Minneapolis, Minnesota 55435, Attn: Corporate Secretary,
before the vote on the Merger at the Special Meeting. A vote against the Merger
at the Special Meeting will not constitute the notice required under the MBCA. A
shareholder who does not satisfy each of the requirements of Sections 302A.471
and 302A.473 of the MBCA is not entitled to payment for such shareholder's
shares of Vaughn Common Stock under the dissenters' rights provisions of the
MBCA and will be bound by the terms of the Merger Agreement if the Merger is
consummated.
If the Merger is approved at the Special Meeting, the Company must send
written notice to all shareholders who have given written notice of dissent and
not voted in favor of the Merger a notice containing: (i) the address where the
demand for payment and certificates must be sent and the date by which they must
be received, (ii) any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received, (iii) a form to be used to
certify the date on which the shareholder, or the beneficial owner on whose
behalf the shareholder dissents, acquired the shares (or an interest in them)
and to demand payment, and (iv) a copy of the provisions of the MBCA set forth
in Annex C with a brief description of the procedures to be followed under those
provisions. A shareholder who is sent such a notice and who wishes to assert
dissenters' rights must demand payment and deposit his or her certificates with
the Company within 30 days after such notice is given. Prior to the Effective
Time, a shareholder exercising dissenters' rights retains all other rights of a
shareholder. From and after the Effective Time, dissenting shareholders will no
longer be entitled to any rights of a shareholder, including, but not limited
to, the right to receive notice of meetings, to vote at any meetings or to
receive dividends, and will only be entitled to any rights of appraisal as
provided by the MBCA. If any such holder of Vaughn Common Stock shall have
failed to perfect or shall have effectively withdrawn or lost such right, his or
her shares of Vaughn Common Stock shall thereupon be deemed to have been
converted into the right to receive the Merger Consideration pursuant to the
Merger Agreement.
After the Effective Time or upon receipt of a valid demand for payment,
whichever is later, the Company must remit to each dissenting shareholder who
complied with the requirements of the MBCA the amount the Company estimates to
be the fair value of such shareholder's shares of Vaughn Common
30
Stock, plus interest accrued from the Effective Time to the date of payment. The
payment also must be accompanied by certain financial data relating to the
Company, the Company's estimate of the fair value of the shares and a
description of the method used to reach such estimate, and a copy of the
applicable provisions of the MBCA with a brief description of the procedures to
be followed in demanding supplemental payment. If a dissenting shareholder
believes that the amount remitted is less than the fair value of such shares
plus interest, such dissenting shareholder may give written notice to the
Company of his or her own estimate of the fair value of the shares, plus
interest, within 30 days after the Company mails its remittance, and demand
payment of the difference.
If the Company receives a demand from a dissenting shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with the Company or file in court a petition
requesting that the court determine the fair value of the shares.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court shall determine whether the dissenting shareholder has complied with the
requirements of Section 302A.473 of the MBCA and shall determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its
discretion, sees fit to use. The fair value of the shares as determined by the
court is binding on all dissenting shareholders.
Costs of the court proceeding shall be determined by the court and assessed
against the Company, except that part or all of the costs may be assessed
against any dissenting shareholders whose actions in demanding supplemental
payments are found by the court to be arbitrary, vexatious or not in good faith.
If the court finds that the Company did not substantially comply with the
relevant provisions of the MBCA, the court may assess the fees and expenses, if
any, of attorneys or experts as the court deems equitable against the Company.
Such fees and expenses may also be assessed against any party in bringing the
proceedings if the court finds that such party has acted arbitrarily,
vexatiously or not in good faith, and may be awarded to a party injured by those
actions. The court may award, in its discretion, fees and expenses of an
attorney for the dissenting shareholders out of the amount awarded to such
shareholders, if any.
A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial shareholder
and notifies the Company in writing of the name and address of each person on
whose behalf he or she asserts dissenters' rights. The rights of such a partial
dissenting shareholder are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of different
shareholders.
Under Subdivision 4 of Section 302A.471 of the MBCA, a shareholder has no
right, at law or in equity, to set aside the approval of the Merger Agreement or
the consummation of the Merger except if such adoption or consummation was
fraudulent with respect to such shareholder or the Company.
FINANCING
Allied, directly or indirectly through ADI, expects to make an equity
investment of up to $15 million in TAC, which amount will be used to partially
fund the payment of the cash consideration and expenses incurred in connection
with the Merger.
Vaughn anticipates that approximately $50 million of additional financing
will be arranged through senior secured loans from a syndicate of banks led by
Fleet National Bank, N.A. ("Fleet") or a comparable financial institution (the
"Bank Lenders"). The proceeds of the loans will be used to provide the balance
of the funds required to consummate the Transactions, to pay fees and expenses
incurred in connection with the Merger, to refinance certain indebtedness of ADI
under existing credit facilities and to provide for capital expenditures,
working capital and the general business purposes of ADI and its subsidiaries.
The
31
approximately $50 million of financing is in addition to ADI's existing $100
million senior credit facility led by Fleet.
At the Effective Time, it is anticipated that ADI and Vaughn as co-borrowers
will enter into an amended and restated loan agreement with the Bank Lenders
providing for availability under a revolving credit facility of up to $40
million and a $55 million Term A facility, each maturing on December 31, 2003,
and a $55 million Term B facility maturing on December 31, 2004 (collectively,
the "Bank Facilities"). It is expected that loans under the revolving credit
facility and Term A facility will bear interest for an initial period at the
applicable LIBOR rate plus 3% and, thereafter, all loans under the revolving
credit facility and Term A facility will bear interest at applicable margins
over the LIBOR or Fleet's Prime Rate, as applicable, determined on the basis of
Vaughn's ratio of total debt to 12 months trailing earnings before interest,
taxes, depreciation and amortization. Loans under the Term B facility will bear
interest at LIBOR plus 3.75%.
It is also anticipated that at the Effective Time ADI will enter into a loan
agreement with Citicorp Mezzanine Partners, L.P. ("CMP") providing for an
approximately $15 million senior subordinated debt facility (the "Senior
Subordinated Facility") having a maturity date of June 30, 2007 and an annual
interest rate of 12%. Pursuant to an Amended and Restated Senior Subordinated
Loan Agreement between CMP and ADI, it is anticipated that CMP will be entitled
to receive warrants to purchase an amount when combined with existing warrants
held by CMP and Fleet Corporate Finance, Inc. ("FCF") that equals 10% of common
stock of Allied, par value $.01 per share ("Allied Common"), on a fully diluted
basis outstanding as of the Effective Time, at an exercise price of $.01 per
share. In the event that the new loan and the existing loans between ADI and CMP
are voluntarily prepaid in full prior to September 24, 1999, the number of
shares of Allied Common issuable upon exercise of the new warrants and warrants
previously issued to CMP and FCF by Allied shall automatically be reduced by
50%.
It is anticipated that all indebtedness under each of the following loan
agreements and/or notes will be fully satisfied prior to the Effective Time:
[(a) Revolving Credit Note, dated August 29, 1997, issued by Vaughn in favor of
Firstar Bank of Minnesota, N.A. ("Firstar"), (b) Equipment Term Note, dated
August 1, 1998, issued by Vaughn in favor of Firstar, (c) Acquisition Term Note
dated August 29, 1997 issued by Vaughn in favor of Firstar, (d) Term Note, dated
September 3, 1996 issued by Vaughn in favor of American Bank N.A. (later
assigned to Firstar), (e) Term Note, dated March 31, 1995, issued by Vaughn in
favor of American Bank, N.A. (later assigned to Firstar), (f) Promissory Notes,
dated February 2, 1998, issued by Vaughn in favor of each of Wayne Ripke, David
Mark and John West, (g) Promissory Note, dated July 31, 1997, issued by Vaughn
in favor of Certified Media Corporation, (h) Promissory Notes, dated July 31,
1997, issued by Vaughn in favor of each of Alan Gill, John Coyle, Perry Hovanic
and Ernest Wong, (i) Promissory Note, dated January 5, 1996, issued by Vaughn in
favor of Advanced Audio, (j) Promissory Note, dated August 3, 1993, issued by
Vaughn in favor of Cranberry Novelty Manufacturing, Inc. and (k) Mortgage Loan
between Vaughn and the Canada Life Assurance Company, dated February 26, 1988.]
EXPENSES OF THE TRANSACTION
As a result of the proposed Merger, the Company will incur various costs,
currently estimated at $[ ], in connection with consummating the Merger.
These costs consist of approximately $[ ] of professional fees and costs,
approximately $[150,000] of printing costs and filing fees and approximately
$[808,000] of advisory fees payable to EVEREN as financial advisor (inclusive of
out-of-pocket expenses). The exact timing, nature and amount of these costs are
subject to change. See "Special Factors--Opinion of the Company's Financial
Advisor" and "Interests of Certain Persons in the Merger--Fees Payable to
Special Committee and Financial Advisor" for a description of the fees to be
paid to EVEREN in connection with its engagement.
32
THE MERGER AGREEMENT
The following is a brief summary of all material provisions of the Merger
Agreement. This summary does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement, which is attached to this Proxy
Statement as Annex A and is incorporated herein by reference.
THE MERGER
The Merger Agreement contemplates that as soon as practicable after
satisfaction or waiver of all conditions to the Merger, Vaughn and TAC will file
a certificate of merger with the Secretary of State of the State of Minnesota
and make all other filings or recordings required by the MBCA in connection with
the Merger. The Merger will become effective at such time as the certificate of
merger is duly filed with the Secretary of State of the State of Minnesota or at
such later time as is specified in the certificate of merger. At the Effective
Time, TAC will be merged with and into Vaughn, with Vaughn being the Surviving
Corporation. From and after the Effective Time, the Surviving Corporation will
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of Vaughn and TAC, except as
provided under the MBCA.
THE SURVIVING CORPORATION
At the Effective Time, the Articles of Incorporation of Vaughn will become
the Articles of Incorporation of the Surviving Corporation. At the Effective
Time, the by-laws of TAC will become the by-laws of the Surviving Corporation to
read as set forth in Exhibit A to the Merger Agreement until thereafter amended
as provided by law and such by-laws. From and after the Effective Time, all
directors of Vaughn designated by TAC will resign from the Board. Neither Vaughn
nor TAC has any present intention to change management of Vaughn. See
"--Directors and Officers of Vaughn Following the Merger." It is anticipated
that after the Effective Time, Vaughn will be reincorporated as a Delaware
corporation.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, by virtue of the Merger and without any action on the
part of the holder of any shares of Vaughn Common Stock, each share of Vaughn
Common Stock issued and outstanding immediately prior to the Effective Time,
other than any Dissenting Shares (as defined below), will be canceled and will
be converted automatically into the right to receive an amount equal to $10.00
in cash, payable, without interest, to the holder of a share of Vaughn Common
Stock upon surrender of the certificate evidencing the share of Vaughn Common
Stock.
Other than pursuant to the Willette Option Termination and Grant Agreement,
each option to purchase Vaughn Common Stock, outstanding immediately prior to
the Effective Time (whether or not the option is vested or exercisable) will be
canceled and in exchange therefor, each holder of an option to purchase Vaughn
Common Stock will receive a cash payment equal to the product of (a) the excess
of the cash consideration in the Merger over the exercise price of the option
multiplied by (b) the number of shares subject to the option, less any
applicable withholding taxes.
At the Effective Time, except as described above, all shares of Vaughn
Common Stock outstanding immediately prior to the Effective Time will no longer
be outstanding and will automatically be canceled and retired and each holder of
a stock certificate representing shares of Vaughn Common Stock outstanding
immediately prior to the Effective Time will cease to have any rights with
respect thereto, except the right to receive the cash consideration in the
Merger, upon surrender of such certificates in accordance with the terms of the
Merger Agreement.
No conversion will be made in respect of any shares of Vaughn Common Stock
as to which a Vaughn shareholder has elected to exercise dissenters' rights
until such time, if any, as such shareholder will have effectively lost
dissenters' rights.
33
Shares which are issued and outstanding immediately prior to the Effective
Time and which are held by a holder who has not voted such shares in favor of
the Merger, who has delivered a written demand exercising dissenters' rights in
the manner provided by the MBCA and who, as of the Effective Time, has not
effectively withdrawn or lost such right to dissent, will not be converted into
a right to receive the cash consideration in the Merger ("Dissenting Shares").
The holders of Dissenting Shares will be entitled only to such rights as are
granted by Sections 302A.471 and 302A.473 of the MBCA. Each holder of Dissenting
Shares who becomes entitled to payment for such shares pursuant to the MBCA will
receive payment therefor from Vaughn in accordance with the MBCA; provided,
however, that (i) if any such holder of Dissenting Shares will have failed to
establish his entitlement to dissenters' rights as provided in the MBCA, (ii) if
any such holder of Dissenting Shares will have effectively withdrawn his demand
to exercise dissenters' rights or lost his right to payment for his shares under
the MBCA, or (iii) if neither any holder of Dissenting Shares nor Vaughn will
have filed a petition demanding a determination of the value of all Dissenting
Shares within the time provided in Sections 302A.471 and 302A.473 of the MBCA,
such holder will forfeit the right to exercise dissenters' rights for such
shares and each such share will be treated as if its holder had not elected
dissenters' rights and it had been converted, as of the Effective Time, into a
right to receive the cash consideration in the Merger, without interest thereon,
from the Surviving Corporation. Prior to the Effective Time, Vaughn will give
TAC prompt notice of any demands received by Vaughn for exercising of
dissenters' rights, and TAC will have the right to participate in all
negotiations and proceedings with respect to such demands. Prior to the
Effective Time, Vaughn will not, except with the prior written consent of TAC,
make any payment with respect to, or settle or offer to settle, any such
demands.
SURRENDER AND PAYMENT OF SHARES
Chase Mellon has been designated to act as paying agent for the benefit of
the holders of shares of Vaughn Common Stock in connection with the Merger to
receive the $10.00 per share cash consideration to which holders of shares of
Vaughn Common Stock will become entitled. TAC will deposit with Chase Mellon the
proceeds of the Financing required in order to pay the Merger Consideration.
Such funds will be invested by Chase Mellon as directed by the Surviving
Corporation, and any interest and other income resulting from such investment
will be paid to the Surviving Corporation. Promptly after the Effective Time,
Chase Mellon will send to each holder of shares of Vaughn Common Stock
outstanding immediately prior to the Effective Time a Letter of Transmittal and
instructions for use in effecting the surrender of certificates. The Letter of
Transmittal will specify that the delivery will be effected, and that risk of
loss and title will pass, only upon delivery of the certificates representing
shares of Vaughn Common Stock to Chase Mellon.
Each holder of shares of Vaughn Common Stock that have been converted into
the right to receive the cash consideration in the Merger, upon surrender to
Chase Mellon of a certificate or certificates representing such shares, together
with a properly completed Letter of Transmittal covering such shares, will be
entitled to receive the cash consideration payable in respect of such shares.
Until so surrendered, each such certificate will, after the Effective Time,
represent for all purposes, only the right to receive such cash consideration.
No interest will be paid or will accrue on any cash payable as cash
consideration in the Merger.
If any portion of the cash consideration is to be paid to a person other
than the registered holder of the shares of Vaughn Common Stock represented by
the certificate or certificates surrendered in exchange therefor, it will be a
condition to such payment that the certificate or certificates so surrendered
will be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such payment will pay to Chase Mellon any transfer or
other taxes required as a result of such payment to a person other than the
registered holder of such shares or establish to the satisfaction of the
Surviving Corporation or Chase Mellon that such tax has been paid or is not
applicable.
34
At any time following the sixth months after the Effective Time, the
Surviving Corporation will be entitled to require Chase Mellon to deliver to it
any funds made available to Chase Mellon and not disbursed to holders of Vaughn
Common Stock, and thereafter such holders will be entitled to look to the
Surviving Corporation only as general creditors thereof for payment of their
claim for cash. Notwithstanding the foregoing, to the fullest extent permitted
by law, neither the Surviving Corporation nor Chase Mellon will be liable to any
holder of a share of Vaughn Common Stock or to any other person for any Merger
Consideration delivered in respect of such share to a public official pursuant
to any applicable abandoned property, escheat or similar law.
If any certificates representing shares of Vaughn Common Stock have not been
surrendered before the fifth anniversary of the Effective Time, any cash in
respect of such certificates will, to the extent permitted by applicable law,
become the property of the Surviving Corporation. In addition, if any cash in
respect of certificates representing shares of Vaughn Common Stock would, prior
to the fifth anniversary of the Effective Time, otherwise escheat to or become
the property of a governmental entity, such cash will, to the extent permitted
by applicable law, become the property of the Surviving Corporation.
At and after the Effective Time, there will be no further registration of
transfers of Vaughn Common Stock on the records of Vaughn or its transfer agent.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Vaughn relating, with respect to Vaughn and its subsidiaries, to, among other
things: (a) organization, standing and similar corporate matters; (b) Vaughn's
capital structure; (c) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement; (d) the need to obtain any third party
consents; (e) documents filed by Vaughn with the SEC and the accuracy of
information contained therein; (f) Vaughn's financial statements; (g) material
adverse changes with respect to Vaughn; (h) the absence of material undisclosed
liabilities; (i) brokers' fees and expenses; (j) the absence of certain changes
or events since December 31, 1997; (k) pending or threatened material
litigation; (l) filing of tax returns and payment of taxes; (m) compliance with
applicable laws; (n) possession of required permits; (o) material contracts; (p)
ownership of or rights to use Vaughn intellectual property; (q) the approval by
the Board of the Merger and the receipt of the opinion of EVEREN as to the
fairness of the transaction to Vaughn shareholders from a financial point of
view; (r) benefit plans and other matters relating to the Employee Retirement
Income Security Act of 1974, as amended, and employment matters; (s) certain
labor matters; (t) matters relating to leased real property; (u) Vaughn's
material compliance with all environmental laws; (v) Vaughn's interest in any
corporation, partnership, joint venture, business, trust or entity; (w) certain
business practices; (x) Vaughn's maintenance of insurance on its assets; and (y)
the accuracy of information supplied by Vaughn in connection with this Proxy
Statement. In addition, the Merger Agreement contains representations and
warranties of Vaughn that (a) it has no subsidiaries and that it owns no
ownership interest in any entity and (b) its Board of Directors has by unanimous
vote of all directors in office determined that the Merger Agreement and the
transactions contemplated thereby are fair and in the best interests of Vaughn's
shareholders and resolved to recommend that Vaughn's shareholders approve the
Merger Agreement and the transactions contemplated therein.
The Merger Agreement also contains customary representations and warranties
of TAC relating to, among other things: (a) organization, standing and similar
corporate matters; (b) the ability of TAC to provide adequate financing in
connection with the Merger; (c) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters; (d)
the need to obtain any third party consents; (e) brokers' fees and expenses; (f)
pending or threatened material litigation; (g) the accuracy of information
supplied by TAC in connection with this Proxy Statement; and (h) confirmation
that Allied and TAC are not an "interested shareholder" within the meaning of
Section 302A.011, Subd. 49(a) of the MBCA.
35
CERTAIN COVENANTS
Pursuant to the Merger Agreement, Vaughn and TAC have agreed that:
(a) TAC and Vaughn will use their respective reasonable best efforts to
obtain any necessary authorizations, consents and approvals of any governmental
or regulatory body; (b) Vaughn will prepare and file with the SEC proxy
materials ("Proxy Materials") under the Exchange Act relating to the Merger; (c)
Vaughn will call the Special Meeting as soon as reasonably practicable in order
that Vaughn shareholders may consider and vote upon the adoption of the Merger
Agreement and the approval of the Merger in accordance with the MBCA, and mail
the Proxy Materials to Vaughn shareholders as soon as reasonably practicable,
which Proxy Materials will contain the affirmative recommendation of the Board
of Directors of Vaughn in favor of the adoption of the Merger Agreement and the
approval of the Merger; provided, however, that Vaughn will not have any
obligation to call the Special Meeting of Vaughn shareholders or mail the Proxy
Materials to Vaughn shareholders if such action would require any director or
officer of Vaughn either to violate any requirement imposed by law or violate
such director's or officer's fiduciary duty; (d) Vaughn will not engage in any
practice, take any action or enter into any transaction outside the ordinary
course of business, including, but not limited to, those actions relating to
effecting a change to its articles of incorporation or by-laws, granting any
rights to purchase capital stock, paying any dividends, incurring indebtedness
or encumbering assets (except as provided in the Merger Agreement), making
material changes in the employment terms of any officer or director, making any
capital or other investments, adopting any employee benefit plan, revaluing any
significant portion of assets, paying any material liabilities, making any tax
election and taking actions with respect to accounting policies; (e) subject to
the terms and conditions of the Confidentiality Agreement (as defined in the
Merger Agreement), Vaughn will permit representatives of TAC and its affiliates
to have full access at all reasonable times, and in a manner so as not to
interfere with the normal business operations of Vaughn, to all premises,
properties, personnel, books, records (including tax records), contracts and
documents of or pertaining to Vaughn; (f) each of Vaughn and TAC will give
prompt written notice to the other of any event which could reasonably be
expected to cause a breach of its respective representations, warranties or
covenants contained in the Merger Agreement and Vaughn will give prompt written
notice to TAC of any change or event which could reasonably be expected to have
a material adverse effect on the financial condition or the business operation
of Vaughn; (g) Vaughn and its Board of Directors will grant such approvals and
take such actions as are reasonably necessary to eliminate or minimize the
effect of any "fair price," "moratorium," "control share acquisition" or other
form of antitakeover statute or regulation that shall become applicable to the
Merger and the transactions contemplated by the Merger Agreement; (h) prior to
the Effective Time, Vaughn will take such action as may be necessary to amend
the terms of Vaughn's Option Plans and the outstanding options to purchase
Vaughn Common Stock to provide that such options shall be canceled at the
Effective Time and holders of such options shall only be entitled to the cash
payment specified in the Merger Agreement; (i) Vaughn and its Board of Directors
will cause each holder of an option to acquire Vaughn Common Stock to consent to
the cancellation of the option in exchange for the cash payment specified in the
Merger Agreement; and (j) in the event that Fleet or CMP notifies ADI that
either Fleet or CMP is withdrawing its commitment contemplated by the applicable
Bank Commitment Letter (as defined in the section entitled "The
Merger--Financing"), TAC shall promptly notify Vaughn in writing of such event.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that Vaughn will not (whether directly or
indirectly through advisors, agents or other intermediaries) authorize or
knowingly permit any of its or their officers, directors, agents,
representatives, advisors or subsidiaries to solicit, initiate or knowingly
encourage the submission of inquiries, proposals or offers from any third party
relating to (a) any acquisition of 5% or more of the consolidated assets of
Vaughn or of over 5% of any class of equity securities of Vaughn; (b) any tender
offer (including a self-tender offer) or exchange offer that if consummated
would result in any third party
36
beneficially owning 5% or more of any class of equity securities of Vaughn; (c)
any merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving Vaughn, other than the acquisition
of Vaughn by TAC and the Transactions; or (d) any other transaction, the
consummation of which would, or could reasonably be expected to, impede,
interfere with, prevent or materially delay the Merger or which would, or could
reasonably be expected to, materially dilute the benefits to TAC of the
Transactions (collectively, the "Transaction Proposals" and which, if
consummated, will be an "Acquisition Transaction"), or enter into or participate
in any discussions (except as may be necessary to inform a third party of the
no-solicitation provisions of the Merger Agreement or negotiations regarding any
of the foregoing) or furnish to any third party any information with respect to
the business, properties or assets of Vaughn in connection with the foregoing,
or otherwise cooperate in any way with, or knowingly assist or participate in,
facilitate or encourage, any effort or attempt by any third party to do or seek
any of the foregoing.
The non-solicitation provisions contained in the Merger Agreement will not
limit or prohibit Vaughn from (a) furnishing information pursuant to an
appropriate and customary confidentiality agreement (which shall not be
substantially less restrictive than the Confidentiality Agreement entered into
by TAC in connection with the Merger) concerning Vaughn and its businesses,
properties or assets to a third party who has made an unsolicited Transaction
Proposal; (b) engaging in discussions or negotiations with such a third party
who has made an unsolicited Transaction Proposal; (c) taking a position on a
tender offer by a third party, as required by Rules 14e-2 and 14d-9 under the
Exchange Act (provided no such position will constitute a recommendation of such
transaction if it does not constitute a Transaction Proposal that the Vaughn
Board of Directors determines in good faith, and after consultation with and
advice from its financial advisors, is reasonably likely to be subject to
completion and would, if consummated, result in a Superior Acquisition Proposal)
or complying with its duties of disclosure under applicable state law; or (d)
following receipt of an unsolicited Transaction Proposal, failing to make,
modifying or withdrawing the recommendation of the Vaughn Board of Directors to
approve the Merger; provided, that Vaughn may undertake the actions set forth in
the foregoing clauses (a) through (d) only if and to the extent that the Vaughn
Board of Directors shall have concluded in good faith, after consulting with
financial advisors and considering the advice of outside counsel, that (i) such
action is required by the Vaughn Board of Directors in the exercise of its
fiduciary duties to the shareholders of the Company and (ii) such action is
reasonably likely to be subject to completion and would, if consummated result
in a Superior Acquisition Proposal; and provided, further, that the Vaughn Board
of Directors shall not take any of the foregoing actions referred to in clauses
(a) through (d) until after giving at least one business day's advance written
notice to TAC with respect to such actions. In addition, if the Vaughn Board of
Directors receives a Transaction Proposal, then the Company shall promptly
inform TAC in writing of the material terms of such proposal and the identity of
the third party making it. As of December 11, 1998, the Company ceased any
existing activities, discussions or negotiations with any parties with respect
to any Transaction Proposals. Any violation of the restrictions set forth in the
Merger Agreement by any director or executive officer of the Company or by any
investment banker, financial adviser, attorney, accountant, or other
representative of the Company shall be deemed to be a breach of the Merger
Agreement by the Company.
DIRECTORS AND OFFICERS OF VAUGHN FOLLOWING THE MERGER
The officers of Vaughn immediately prior to the Effective Time will be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified. The Directors
of the Surviving Corporation shall be the persons designated by TAC immediately
prior to the Effective Time, each to hold office in accordance with the Articles
of Incorporation and the by-laws of the Surviving Corporation. As a condition to
TAC's obligation to consummate the Merger, Vaughn shall have received and
accepted the resignations of all directors of Vaughn designated by TAC. See "The
Merger--Conduct of Vaughn's Business After the Merger."
37
INDEMNIFICATION
Pursuant to the terms of the Merger Agreement, for a period of six years
after the Effective Time, and subject to any limitation imposed from time to
time under applicable law, the Surviving Corporation will indemnify and hold
harmless the present and former officers and directors of Vaughn and its former
subsidiaries in respect of acts or omissions occurring prior to the Effective
Time to the maximum extent provided under Vaughn's Articles of Incorporation and
By-laws or any of its former subsidiaries' certificate of incorporation or
By-laws, in either case, as in effect on the date of the execution of the Merger
Agreement.
For a period of six years after the Effective Time, the Surviving
Corporation will provide officers' and directors' liability insurance in respect
of acts or omissions occurring prior to the Effective Time covering each such
person currently covered by Vaughn's or any of its former subsidiaries'
officers' and directors' liability insurance policy on terms with respect to
coverage and amount no less favorable than those of such policy in effect on the
date hereof, provided that, in satisfying its obligation to provide liability
insurance, the Surviving Corporation will not be obligated under the Merger
Agreement, to pay premiums in excess of 150% of the amount per annum Vaughn paid
in its last full fiscal year.
FINANCING
Allied has received a commitment letter, dated December 1, 1998 (the "Equity
Commitment Letter"), from the Allied Stockholder pursuant to which the Allied
Stockholder has agreed to provide up to $15 million (the "Equity Financing") for
purposes of consummating the Transactions.
In addition to the Equity Financing, ADI has also received commitment
letters from Fleet, dated December 1, 1998 (the "Fleet Commitment Letter"), and
from CMP, dated December 9, 1998, (the "CMP Commitment Letter" and together with
the Fleet Commitment Letter, the "Bank Commitment Letters") pursuant to which
Fleet has committed to provide the Bank Facilities and CMP has committed to
provide the Senior Subordinated Facility which collectively constitutes,
together with the Equity Financing, all of the financing required in order to
consummate the Transactions and to fund what TAC reasonably believes to be the
working capital needs of the Surviving Corporation following the Closing Date.
See "The Merger--Financing."
In the event that Fleet or CMP notifies ADI that either Fleet or CMP is
withdrawing its commitment contemplated by the applicable Bank Commitment
Letter, TAC shall promptly notify Vaughn in writing of such event.
COOPERATION AND REASONABLE EFFORTS
Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and to use their respective reasonable best efforts to take all action
under the terms of the Merger Agreement and to do all things necessary, proper
or advisable in order to consummate and make effective the Transactions.
CONDITIONS TO CONSUMMATION OF MERGER
The respective obligations of Vaughn and TAC to consummate the Merger are
subject to the satisfaction or waiver of the following conditions: (i) the
representations and warranties made by each party contained in the Merger
Agreement will be true and correct in all respects at and as of the Effective
Time, except for those representations and warranties which address matters only
as of a particular date (which will have been true and correct as of such date);
(ii) the Merger Agreement will have been adopted by the shareholders of Vaughn
and TAC in accordance with the MBCA; (iii) each of Vaughn and TAC will have
performed and complied with all of its respective covenants under the Merger
Agreement in all material respects; (iv) there will not be any judgment, order,
decree or injunction in effect preventing
38
consummation of the Transactions; (v) Vaughn and TAC will have each delivered to
the other a certificate to the effect that the representations and warranties
are true and correct and each of the covenants required to be satisfied by it
has been satisfied in all respects; (vi) all applicable waiting periods (and any
extensions thereof) under the HSR Act, shall have expired or otherwise been
terminated and the parties shall have received all other authorizations,
consents and approvals of governmental or regulatory bodies in connection with
the execution, delivery and performance of the Merger Agreement; and (vii) TAC
will have received an opinion of Gray Plant, counsel to Vaughn, in the form
specified in the Merger Agreement, and Vaughn will have received an opinion of
Oppenheimer, Wolff and Donnelly LLP, special Minnesota counsel to TAC, in the
form specified in the Merger Agreement.
In addition, the obligations of TAC to consummate the Merger are further
subject to the satisfaction by Vaughn or waiver by TAC of the following
conditions:
(i) the holders of not more than 10% of the outstanding shares of
Vaughn Common Stock shall have exercised dissenters' rights in accordance
with the MBCA;
(ii) Vaughn shall have delivered to TAC written consents to the
transactions from persons who are parties to contracts set forth in the
schedules to the Merger Agreement;
(iii) total Debt (as defined in the Merger Agreement) of Vaughn
determined on a consolidated basis in accordance with GAAP as of the
Effective Time will not exceed $20.5 million;
(iv) TAC shall have received the proceeds of the Financing on terms
reasonably satisfactory to TAC to enable TAC to consummate the
Transactions; such terms and conditions to be deemed reasonably
satisfactory to TAC if they are substantially similar to the Bank
Commitment Letters or the Equity Commitment Letter, as the case may be;
(v) Vaughn shall have received and accepted the resignations of all
directors of Vaughn designated by TAC;
(vi) Vaughn shall have delivered written evidence of the termination
of certain contracts designated by TAC;
(vii) there will not be instituted or pending any action or
proceeding by any governmental or regulatory body, or any action or
proceeding by any other person, that has a reasonable likelihood of
success before any governmental or regulatory body, (A) challenging or
seeking to make illegal, to delay materially or otherwise directly or
indirectly to restrain or prohibit the consummation of the Merger or
seeking to obtain material damages or otherwise directly or indirectly
relating to the Transactions, (B) seeking to restrain or prohibit the
ownership or operation by TAC of all or any material portion of the
business or assets of Vaughn, taken as a whole, (C) seeking to impose or
confirm material limitations on the ability of TAC to effectively control
the business or operations of Vaughn, taken as a whole, or effectively to
exercise full rights of ownership of the shares of Vaughn Common Stock,
or (D) requiring divestiture by TAC of any shares of Vaughn Common Stock,
and no governmental or regulatory body will have issued any judgment,
order, decree or injunction, and there will not be any statute, rule or
regulation, that, in the reasonable judgment of TAC is likely, directly
or indirectly, to result in any of the consequences referred to in the
preceding clauses (A) through (D);
(viii) TAC will have received an opinion of Gray Plant, counsel to
Vaughn, in the form specified in the Merger Agreement;
(ix) Vaughn shall have paid all applicable real property transfer
taxes in connection with the Merger and the transactions contemplated by
the Merger Agreement;
(x) Vaughn shall have delivered to TAC (A) certified copies of the
Articles of Incorporation of Vaughn, and (B) certain good standing
certificates for Vaughn;
39
(xi) there shall have been no material adverse change in the business
or condition of Vaughn and its subsidiaries taken as a whole since
December 31, 1997;
(xii) Vaughn shall have delivered a written consent from each holder
of an option to acquire Vaughn Common Stock authorizing cancellation of
the option in exchange for the cash payment specified in the Merger
Agreement and waiving all rights of such holder under the Company option
plans;
(xiii) The Transactions contemplated by the Willette Option
Termination and Grant Agreement and the Willette Subscription Agreement
shall have been consummated; and
(xiv) The Employment and Noncompetition Agreement, dated December
11, 1998, by and between ADI and Douglas Olzenak, the Employment and
Noncompetition Agreement, as amended by Amendment No. 1, dated December
11, 1998, by and among Reinhart, Vaughn and ADI and the Employment and
Noncompetition Agreement, as amended by Amendment No. 1, dated December
11, 1998, by and among Willette, Vaughn and ADI shall be in full force
and effect.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time (notwithstanding any approval of the Merger Agreement by the shareholders
of Vaughn): (a) by mutual written consent of Vaughn and TAC; (b) any time after
the Special Meeting, by either Vaughn or TAC, in the event that the Merger fails
to receive requisite shareholder approval; (c) by either Vaughn or TAC, (i) if
the other party at any time prior to the Effective Time has breached any
material representation, warranty or covenant contained in the Merger Agreement
when made or at any time prior to the consummation of the Merger in any material
respect, the non-breaching party has given notice to the breaching party, and
the breach remains uncured for 30 days after notice has been given, or (ii) if
the consummation of the Merger will not have occurred on or before March 31,
1999 (unless the failure results from a breach by the party seeking to terminate
the Merger Agreement of any of its representations, warranties or covenants);
(d) by either Vaughn or TAC, if there will be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or if any judgment,
injunction, order or decree enjoining Vaughn or TAC from consummating the Merger
is entered and such judgment, injunction, order or decree will become final and
nonappealable; (e) by TAC, if (i) the Board of Directors of Vaughn will have
withdrawn or modified or amended, in a manner adverse to TAC, either its
approval or recommendation of the Merger Agreement or its recommendation that
the Vaughn shareholders adopt and approve the transactions contemplated by the
Merger Agreement, (ii) the Board of Directors of Vaughn will have approved,
recommended or endorsed any Superior Acquisition Proposal, or (iii) Vaughn has
failed to duly call the Special Meeting of Vaughn shareholders; (f) by Vaughn,
if a third party has made a Superior Acquisition Proposal; or (g) by Vaughn, if
TAC delivers a written notice to Vaughn that either Fleet or CMP is withdrawing
its commitment contemplated by either or both of the Bank Commitment Letters,
and within five business days following the delivery of such written notice, TAC
has not delivered to Vaughn either (i) a substitute commitment letter or letters
on substantially the same terms and conditions as the applicable Bank Commitment
Letter or Bank Commitment Letters which has been withdrawn or (ii) a written
notice setting forth a waiver by TAC of the financing closing condition set
forth in the Merger Agreement with respect to that portion of the financing to
be provided under the applicable Bank Commitment Letter or Bank Commitment
Letters.
The party desiring to terminate the Merger Agreement will give written
notice of such termination to the other party in accordance with the terms
thereof.
In the event of termination of the Merger Agreement by either Vaughn or TAC
as provided for in the Merger Agreement, all rights and obligations set forth in
the Merger Agreement will terminate and the
40
Merger Agreement shall become void and have no effect; provided however, the
Confidentiality Agreement shall survive any such termination.
TERMINATION FEES
In accordance with the terms of the Merger Agreement, Vaughn must pay TAC
$1.9 million, and reimburse TAC for its reasonable out-of-pocket expenses up to
a maximum of $900,000 if the Merger Agreement is terminated for any of the
following reasons:
(i) Vaughn's Board of Directors notifies TAC that it has determined,
in good faith, and after consultation with and advice from its financial
advisors, that another Transaction Proposal is reasonably likely to be
subject to completion, and would, if consummated, result in a transaction
more favorable from a financial point of view to the Company's
shareholders than the Merger;
(ii) Vaughn's Board of Directors approves, recommends or endorses a
Superior Acquisition Proposal;
(iii) Vaughn breaches any material representation, warranty,
covenant, agreement or other obligation under the Merger Agreement and
the breach continues without cure for 30 days after notice by TAC,
another Transaction Proposal has been made and, within 12 months after
termination of the Merger Agreement by TAC pursuant to the terms and
conditions thereof, Vaughn consummates any Transaction Proposal (whether
or not proposed prior to the Special Meeting and whether or not it
involves the same third party making any other Transaction Proposal);
(iv) Vaughn's Board of Directors withdraws or modifies its approval
or recommendation of the Merger in a manner adverse to TAC, another
Transaction Proposal has been made and, within 12 months after
termination of the Merger Agreement by TAC pursuant to the terms and
conditions thereof, Vaughn consummates any Transaction Proposal (whether
or not proposed prior to the Special Meeting and whether or not it
involves the same third party making any other Transaction Proposal); or
(v) Vaughn fails to call a Special Meeting to consider and vote upon
the Merger, another Transaction Proposal has been made and within 12
months after termination of the Merger Agreement by TAC pursuant to the
terms and conditions thereof, Vaughn consummates any Transaction Proposal
(whether or not proposed prior to the Special Meeting and whether or not
it involves the same third party making any other Transaction Proposal).
AMENDMENT AND WAIVER
The Merger Agreement may be amended or its conditions precedent to closing
waived if, and only if, such amendment or waiver is in writing and signed by
both Vaughn and TAC, subject to applicable law.
EXPENSES
Except as otherwise described in "--Termination Fees" and "--Surrender and
Payment of Shares" above, costs and expenses incurred in connection with the
Merger will be paid by the party incurring such cost or expense. In the event
the Merger is consummated, the Surviving Corporation will be responsible for the
payment of all of the expenses incurred by or fees due to EVEREN, legal counsel
and independent auditors.
GUARANTY
ADI agrees to guarantee the performance of the obligations of TAC under the
Merger Agreement.
41
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, Vaughn shareholders should be aware that the
directors, officers and certain members of management of the Company have
interests in the Merger in addition to their interests solely as shareholders of
the Company, as described below. See also "Special Factors--Conflicts of
Interest."
WILLETTE SUBSCRIPTION AGREEMENT
Pursuant to the terms of the Willette Subscription Agreement, Willette will
purchase 22,820 shares of Allied Class A Common, at a price of $5.00 per share,
for $114,100 plus an additional 4,500 shares as his allocation under Allied's
management equity program, at a price of $5.00 per share, for $22,500, for a
total purchase of 27,320 shares of Allied Class A Common for $136,600. Willette
will also purchase 4,289 shares of Allied Series B Preferred, at a price of
$100.00 per share, for a total purchase price of $428,900. The closing of the
purchase and sale of the Willette Shares shall take place immediately prior to
the Effective Time on the Closing Date.
WILLETTE OPTION TERMINATION AND GRANT AGREEMENT
Pursuant to the terms and conditions of the Willette Option Termination and
Grant Agreement, immediately prior to the Effective Time, Willette shall cancel
all of the Vaughn Stock Options held by him to purchase 128,500 shares of Vaughn
Common Stock, and, in consideration for such cancellation, acquire a
non-qualified option consisting of the right to purchase 10,000 shares of Allied
Series C Preferred at an exercise price of $543,634.20, subject to the terms and
conditions set forth in the Option Certificate. The cancellation of the Willette
Options and grant of the Allied Option shall take place immediately prior to the
Effective Time on the Closing Date.
TREATMENT OF OPTIONS
Other than as expressly set forth in the Willette Option Termination and
Grant Agreement, Vaughn shall adjust the terms of all Vaughn Stock Options to
provide that, at the Effective Time, each Vaughn Stock Option outstanding
immediately prior to the Effective Time, whether or not then vested or
exercisable, shall be canceled and thereafter the former holder thereof shall be
entitled by having held such Vaughn Stock Option only to a payment from the
Surviving Corporation (subject to any applicable withholding taxes, as the case
may be) equal to the product of (i) the total number of shares of Vaughn Common
Stock subject to such Vaughn Stock Option and (ii) the excess of $10.00 over the
exercise price per share of Vaughn Common Stock subject to such Vaughn Stock
Option, payable in cash immediately following the Effective Time.
42
Of the outstanding Vaughn Stock Options to purchase 453,378 shares of Vaughn
Common Stock which are to be canceled and exchanged for cash in connection with
the Merger, executive officers and directors of Vaughn, other than Willette,
hold Vaughn Stock Options to purchase the following number of shares of Vaughn
Common Stock and will receive the following amounts of cash as a result of the
exchange:
CASH AMOUNT
NUMBER OF TO BE
NAME OF EXECUTIVE OFFICER OR DIRECTOR OPTIONS RECEIVED
- ------------------------------------------------------------------- ----------- -------------
Rodney P. Burwell.................................................. 14,000 $ 78,250
Donald J. Drapeau.................................................. 56,500 $ 171,813
Roger F. Heegaard.................................................. 4,000 $ 13,250
Jeffrey Johnson.................................................... 12,000 $ 42,000
M. Charles Reinhart................................................ 31,700 $ 101,250
Michael R. Sill.................................................... 14,000 $ 50,750
William D. Smith................................................... 6,000 $ 29,250
Harold G. Wahlquist................................................ 6,000 $ 28,750
EMPLOYMENT OF VAUGHN'S EXECUTIVE OFFICERS
Prior to the Merger, Vaughn had employment agreements with Willette,
Reinhart and Drapeau. In connection with the Merger, Willette's and Reinhart's
employment agreements have been amended. Effective from and after the
consummation of the Merger, ADI will assume all rights and obligations of the
amended agreements. Drapeau's employment agreement with Vaughn was not amended
in connection with the Merger. See "Special Factors--Conflicts of Interest."
FEES PAYABLE TO THE SPECIAL COMMITTEE AND FINANCIAL ADVISOR
The Special Committee of the Company's Board of Directors was formed on
February 19, 1998 to, among other things, evaluate and negotiate the Merger
Agreement and related transactions on behalf of the Board of Directors (see
"Special Factors--Background of the Merger"). Messrs. Burwell, Heegaard,
Johnson, Sill, Smith and Wahlquist, who are not employees or officers of the
Company, were unanimously appointed by the Board of Directors to serve as the
members of the Special Committee. Each member of the Special Committee is
entitled to the payment of $500 cash for each meeting of the Special Committee
attended by such member. The payment of this compensation is not contingent upon
the consummation of the Merger. The members of the Special Committee have been
paid the following cash amounts in connection with their service on the Special
Committee:
TOTAL CASH
NAME OF SPECIAL COMMITTEE MEMBER COMPENSATION RECEIVED
- ----------------------------------------------------------------------- ---------------------
Rodney P. Burwell...................................................... $ 3,500
Roger F. Heegaard...................................................... $ 3,000
Jeffrey Johnson........................................................ $ 3,000
Michael R. Sill........................................................ $ 3,000
William D. Smith....................................................... $ 3,500
Harold G. Wahlquist.................................................... $ 2,500
As compensation for its services as financial advisor to the Company, the
Company has paid EVEREN a retainer in the amount of $75,000 and will be paid a
fee of $783,000 (equal to 1 1/4% of the aggregate Merger Consideration) upon the
consummation of the Merger less the $75,000 retainer amount previously paid. In
addition, the Company will reimburse EVEREN for its reasonable out-of-pocket
expenses incurred in connection with the performance of its services not to
exceed $25,000 in the aggregate. See "Special Factors--Opinion of the Company's
Financial Advisor."
43
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of December 11, 1998
concerning the Company's directors and executive officers:
NAME AGE POSITION WITH COMPANY
- --------------------------------- --- ----------------------------------------------------
E. David Willette................ 62 Chairman of the Board, Chief Executive Officer and
Director
Donald J. Drapeau................ 44 President, Chief Operating Officer and Director
M. Charles Reinhart.............. 47 Chief Financial Officer and Secretary
Rodney P. Burwell................ 59 Director
Roger F. Heegaard................ 71 Director
Jeffrey Johnson.................. 52 Director
Michael R. Sill.................. 66 Director
William D. Smith................. 47 Director
Harold G. Wahlquist.............. 59 Director
Unless otherwise noted below, each person discussed below has engaged in his
principal occupation for more than the past five years.
E. DAVID WILLETTE has served as 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, President and Chief Operating Officer, joined the Company
in 1986 as General Manager of Sales and Marketing for the rental and duplication
departments of the Company's Communications Group. In 1987 he was promoted to
General Manager of the rental division and in 1988 to General Manager of the
Company's Communications Division, becoming Vice President in 1989. He was
promoted to President and Chief Operating Office in 1995. Mr. Drapeau has been a
director of the Company since 1995.
M. CHARLES REINHART is a certified public accountant and joined the
Company's accounting staff in 1982. He became Controller in 1983 and Secretary
in 1987. Mr. Reinhart was promoted to Chief Financial Officer in 1996.
RODNEY P. BURWELL has served as a Director of the Company since 1993. Mr.
Burwell is Chairman of the Board, Xerxes Corporation, a manufacturer of
fiberglass underground fuel storage tanks, located in Minneapolis, Minnesota.
ROGER F. HEEGAARD has served as a Director of the Company since 1973. Mr.
Heegaard is Chairman of Homestyles Publishing & Marketing, a magazine publisher,
based in Minneapolis, Minnesota.
JEFFREY JOHNSON has served as a Director of the Company since 1995. Mr.
Johnson is the retired former Vice President of Centercom, a videotape
duplicator, located in Milwaukee, Wisconsin.
MICHAEL R. SILL has served as a Director of the Company since 1990. Mr. Sill
is Chairman and Chief Executive Officer of Road Machinery & Supplies Co., a
distributor of construction equipment and services, located in Minneapolis,
Minnesota.
WILLIAM D. SMITH has served as a Director of the Company since 1983. Mr.
Smith is currently Chief Operating Officer of Viromed Laboratories, Inc., a
laboratory testing and products company located in Minneapolis, Minnesota. From
1991 to 1996, Mr. Smith was Vice President and Chief Operating Officer of Pace,
Inc., an environmental testing company based in Minneapolis, Minnesota.
HAROLD G. WAHLQUIST has served as a Director of the Company since 1983. Mr.
Wahlquist is the founder, Chairman and Chief Executive Officer of MidWest
Bancorporation, Inc., a regional multi-bank holding company located in
Minneapolis, Minnesota.
44
BUSINESS AND OPERATIONS OF VAUGHN
GENERAL
The Company was founded under the name Vaughn Displays, Inc. in 1943 and
changed its name to VAUGHN COMMUNICATIONS, INC. in 1987. Through November 16,
1998, the Company was engaged in two business segments: the Vaughn
Communications Division (the "Communications Division") and the Vaughn Products
Division (the "Products Division"). The Vaughn Communications Division is a
multimedia business services provider providing high volume videotape
duplication and digital media (compact disc and magnetic floppy disk)
replication for the corporate, educational and institutional user, accounting
for approximately 84% of the Company's sales in fiscal 1998. The Vaughn Products
Division was sold in November, 1998 (see "--Discontinued Operations--Vaughn
Products Division" below). The Vaughn Products Division was a manufacturer and
distributor of gifts, leather products, and custom designed soft goods sold by
gift shops and western stores, and accounted for approximately 16% of the
Company's sales in fiscal 1998.
During the fiscal years ended January 31, 1998, 1997 and 1996, the
percentage of sales of the Communications Division and the Products Division as
compared to total sales of the Company were as follows:
YEAR ENDED JANUARY 31,
-------------------------------
DIVISION 1998 1997 1996
- ------------------------------------------------------------------------------------------- --------- --------- ---------
Communications Division.................................................................... 84% 80% 88%
Products Division.......................................................................... 16% 20% 12%
The Company's strategic objective is to grow and expand its business through
internal growth and acquisitions. (See "--Discontinued Operations--Vaughn
Products Division," "--Former Businesses" and "--Recent Acquisitions" below.)
The Company's principal executive offices are located at 5050 West 78th Street,
Minneapolis, Minnesota 55435, and its telephone number is (612) 832-3200.
VAUGHN COMMUNICATIONS DIVISION
The Company's operations in the multimedia business services industry are
conducted through the Communications Division. The Communications Division
currently has videotape duplication facilities in Minneapolis (MN), Milwaukee
(WI), Phoenix (AZ), Tampa (FL), Portland (OR), Atlanta (GA), Dallas (TX),
Houston (TX), Raleigh (NC), Chicago (IL), Denver (CO) and Seattle (WA) and has a
facility in Fremont (CA), which replicates CDs and floppy disks. Additional
sales offices are located in St. Louis (MO), New York (NY), Irvine (CA), Orlando
(FL), Knoxville (TN), Baltimore (MD) and Ft. Lauderdale (FL). It serves markets
that are principally located in the United States.
PRIMARY PRODUCTS AND SERVICES OF THE COMMUNICATIONS DIVISION
GENERAL--The Communications Division is a major provider of multimedia
related business services for corporate, educational, and institutional
customers. The Company believes it is the second largest provider of videotape
duplication services for the business-to-business market. In addition to
videotape duplication, the Company provides digital media services through the
replication of CDs and magnetic disks ("floppys") for software developers and
computer equipment manufacturers. As part of its business, the Company also
provides various related services such as order fulfillment, video editing,
graphics design, international standards conversion, MPEG compression, and the
rental of video production and editing equipment on a short-term basis.
VIDEOTAPE DUPLICATION SERVICES--The Company offers its videotape duplication
services to corporations that utilize videotape to promote their products,
instruct their customers on the use of their products, train their sales force
on new products or communicate with their employees. The Company has continued
to
45
expand its facilities for videotape duplication. On July 31, 1997 the Company
acquired certain assets of Dub South Acquisition, LLC ("Dub South"), a videotape
duplicator located in Atlanta, Georgia. The operations of Dub South were merged
with those of the Company's existing facility in Atlanta. In addition to
acquisitions, the Company spent approximately $1,900,000 to expand video
duplication facilities. Expansion has been financed by cash flow generated from
operations, equipment leasing and bank financing.
DIGITAL MEDIA SERVICES--In order to better meet the current and long-term
needs of its business customers, the Company entered the digital media
replication business with the acquisition of Certified Media Corporation
("Certified") in July 1997. Certified, which commenced operations in 1986, was a
diskette duplicator in the California market serving the computer-based
entertainment market. In 1996, Certified entered the CD replication business. In
February 1998, the Company acquired a second Fremont, California based digital
media duplicator, Copywise, Inc. The Company is currently in the final stages of
integrating these two businesses.
The Company's digital media services are primarily focused on CD-ROM
products used to transfer data. The Company's digital media services are
currently sold to business customers which include: (i) computer equipment
manufacturers (e.g., modems, printers, scanners, etc.) that distribute driver
software programs to consumers; and (ii) software developers, such as game
authors.
Going forward, the Company intends to focus its marketing efforts on
existing corporate customers that do, or could, utilize digital based media to
distribute information to customers and internal representatives. Examples
include aircraft manufacturers and industrial supply houses that distribute
parts catalogs to customers and insurance companies that distribute policy
information to agents on CD or floppy disks. As part of its overall digital
media services, the Company also provides a complete range of custom packaging,
fulfillment and design services.
The Company intends to continue to invest in additional capacity for CD
replication as the demand warrants. In fiscal 1998, approximately $2,400,000 was
invested in expanding production capabilities.
MANUFACTURING
VIDEOTAPE DUPLICATION--The Company's videotape duplication facilities are
geographically distributed throughout the United States so that high volume
duplication can be accomplished at four facilities: Minneapolis (MN); Milwaukee
(WI); Atlanta (GA); and Tampa (FL). The Company also has eight other facilities
for smaller volume video manufacturing: Chicago (IL); Raleigh (NC); Dallas (TX);
Houston (TX); Phoenix (AZ); Denver (CO); Portland (OR); and Seattle (WA).
The manufacturing process for videocassettes generally utilizes duplicating
machines that copy from a master in "real time" speed (i.e., the regular speed
of the videocassette being duplicated). In this process, high speed tape winders
are used to wind blank tape loaded to specific program lengths into video
shells. The video shells are then loaded into the duplicating machines which
receive the program being copied from a master transport. In addition, the
Company utilizes high speed machines, which allow it to duplicate a master 150
times faster than in "real time" speed. Real time duplicating machines are used
to duplicate videocassettes in standard play mode. High speed duplicating
machines are capable of duplicating videocassettes in either the extended play
mode or the standard play mode. The extended play format utilizes less tape than
regular speed machines require for the same program content.
The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process.
Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by the Company and the industry. The videocassettes are
then released to the packaging department where they are labeled, inserted into
sleeves
46
or boxes and processed through high speed shrink-wrapping machines for
distribution to the Company's customers.
DIGITAL MEDIA SERVICES--The Company's production of CD products in Fremont
(CA) utilizes an injection molding process using high grade, optical quality
polycarbonate. The polycarbonate is pressed against a metal stamper to create a
replica of the CD Master at a rate of approximately one every four seconds. The
clear polycarbonate disc containing all of the data is then covered with a
metallic coating to provide for reflection of the reading laser beam in the CD
player. A thin layer of lacquer is applied over the metal to protect it and to
serve as a base for printing on the disc.
As a result of a recent expansion, the Company has increased its annual
capacity to approximately 30 million units.
LICENSES
CD PRODUCTS--The Company, like most other CD manufacturers, uses patented
technology primarily under nonexclusive licenses from the holders of patents
which generally provide for the payment of royalties based upon the number of CD
units sold. On March 1, 1998, the Company signed a license agreement with U.S.
Philips Corporation.
VIDEOTAPE PRODUCTS--The Company, like most other manufacturers of
videocassettes, uses patented technology under a nonexclusive license from the
holder of the patents (Macrovision Corporation) which provides for the payment
of various fees based on the number of videocassettes produced. The Company
entered into a licensed duplicator agreement with Macrovision Corporation dated
June 1, 1993.
SIGNIFICANT CUSTOMERS
The Communications Division sells to more than 6,500 accounts in any given
year. Approximately 13% of its sales come from ten customers, none of which
amount to more than 3% of net sales.
Illustrative of the Communications Division's video duplication customers
are companies that use videotape to promote their products or instruct their
customers on the use of their products, financial service companies which
produce videotapes to present new financial products to sales personnel and
customers, high technology companies which use videotapes to train sales and
service personnel and corporations with many employees or locations that wish to
communicate a significant Company development to all employees simultaneously.
Such high volume customers are generally those who need 100 or more duplicate
videotapes reproduced, addressed to individual locations and forwarded for
delivery, often within a few hours or on an overnight basis.
Illustrative of the Company's CD replication customers are software
developers and computer hardware manufacturers.
MARKETING
The Communications Division markets its products nationally through the use
of 45 field sales personnel who operate throughout the United States. To a
lesser degree, the Company also uses advertising in trade publications and
participation in trade shows.
SEASONALITY
The Communications Division's products are used consistently throughout the
year except for a slight rise in demand in September, October, and November to
supply extra requirements to customers for the holiday selling season.
47
COMPETITION
Though it is not possible to reliably state the Communications Division's
relative position in the absence of published statistics, based upon data
generated by its own management, the Company believes it is one of the largest
duplicators of videotape for the non-theatrical, non-music video segment of the
U.S. market. This market is comprised of exercise, educational, corporate,
promotional and instructional videos, etc. The Company does not hold a dominant
position in the CD replication industry.
The primary competitive factors in the videotape duplication and CD
replication business are price, quality of service and range of products. The
Communications Division attempts to compete by offering high-volume videotape
duplication services, at a competitive price, emphasizing service and customer
support.
The Company's principal competitors are Allied Digital Technologies
(formerly Allied Film and Video Company) and The Duplication Factory. The video
duplication business is highly competitive, not only with these competitors, but
also with many smaller duplicators.
The Company believes that its regional locations, its wide range of product
offerings, and national marketing capabilities are competitive advantages over
many others in the industry. While selling prices have been declining in recent
years as competitors continue to seek market share by lowering prices, the
Company has been reasonably successful in maintaining its margins by lowering
its material costs and achieving unit volume increases.
DISCONTINUED OPERATIONS--VAUGHN PRODUCTS DIVISION
On November 16, 1998, the Company sold substantially all of the assets of
its Products Division to Gift Connections, Inc. (the "Buyer") for a selling
price of $1,432,775 which included $300,000 of cash, a short-term note in the
principal amount of $932,775 and the assumption of $200,000 of liabilities. The
Products Division was engaged in the manufacture and sale of a line of soft
goods, including custom-designed, silk-screened T-shirts and sweatshirts,
souvenir leather products, and gift items sold primarily to retail merchants
located in the United States and Canada. The Products Division's manufacturing
facilities were located in the Company's Minneapolis, Minnesota plant where it
produced a line of over 200 leather items such as billfolds, purses, and
personal accessory items, and in Seattle, Washington, where it designed and
produced its soft goods products. The Products Division corporate headquarters
were also located in Seattle. The gift products were sold at wholesale prices
for resale, primarily by gift shops, and are marketed under the "Bloom Brothers"
and "Indian Arts and Crafts" names. The Products Division employed 52
manufacturing, sales and administrative personnel. The Buyer reemployed
substantially all of these employees.
FORMER BUSINESSES
The Company originally operated as a manufacturer of seasonal decorative
displays. In addition to this business, the Products Division business and its
current business segment, from 1986 through 1991 the Company also operated six
radio broadcasting stations.
In 1990 the Company began to focus its corporate and personnel resources on
the video duplication business operated by the Communications Division. In 1990
and 1991, the Company sold its radio station interests and its audio and video
equipment sales and engineering businesses.
By March 1, 1994, the Company sold its remaining seasonal decorative display
businesses to a Minnesota based corporation. These businesses previously
occupied approximately 5,000 square feet of the Company's principal
manufacturing plant in Minneapolis, Minnesota and its 12,000 square foot
manufacturing plant in Tampa, Florida, and employed 21 manufacturing, sales and
administrative personnel.
48
BACKLOG
Order backlog is not generally a significant factor in the Company's
business. The Company relies primarily on current selling efforts coupled with
near term delivery or performance.
EMPLOYEES
On November 30, 1998, the Company had 786 employees, including 134 in sales
and marketing, 585 in manufacturing and 67 in executive, finance and
administrative positions. Seventy-nine of the Company's manufacturing and
clerical employees are part-time employees. The Company's employees are not
represented by a union. The Company considers its employee relations to be
satisfactory.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The costs associated with the Company's compliance with Federal, state and
local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.
RECENT ACQUISITIONS
PURCHASE OF COPYWISE, INC.
On February 1, 1998, the Company completed the acquisition of the assets of
Copywise, Inc. ("Copywise"), a floppy disk replicator located in Fremont,
California. The acquisition was accounted for by the purchase method of
accounting. Goodwill associated with the purchase will be amortized over 15
years. The noncontingent purchase price was approximately $1,670,000 in cash and
the assumption of approximately $667,000 of liabilities. The purchase price may
be increased by an additional $1,560,000 depending upon the attainment of
certain financial objectives by the acquired business through January 31, 2000.
PURCHASE OF CERTIFIED MEDIA CORPORATION
On July 31, 1997, the Company completed the acquisition of certain assets
and assumed certain liabilities of Certified, a California Subchapter S
Corporation. The Company accounted for the acquisition as a purchase.
The noncontingent price of $5,500,000 was paid to the four shareholders of
Certified. The Company paid $2,800,000 in cash, issued 171,210 shares of Vaughn
Common Stock valued at approximately $7.01 per share ($1,200,000 in the
aggregate), equal to the average closing sale price on the Nasdaq for the 10
days prior to July 31, 1997, and issued $1,500,000 of long-term debt to the
Sellers. The long-term debt is payable in five equal annual installments
starting on July 31, 1998. The interest rate is at the prime rate.
The purchase price may be increased to a maximum of $7,500,000 depending
upon the financial performance of Certified through January 31, 1999.
The Company also entered into a five-year consulting and noncompete
agreement with Alan Gill, the former president of Certified. The agreement calls
for annual payments of $86,641. In addition, noncompete agreements signed with
the remaining three shareholders for terms of three to five years call for
annual payments ranging from $906 to $8,641.
FINANCING THE ACQUISITION--The Company used its revolving credit facility to
fund the $2,800,000 cash portion of the purchase price. The credit facility
provided a $2,800,000 term loan due July 31, 2002, payable in consecutive
quarterly principal installments of $140,000 commencing October 31, 1997, plus
interest at the bank's prime rate.
49
DESCRIPTION OF CERTIFIED MEDIA'S BUSINESS--Certified Media's business
consists primarily of the replication of CDs utilizing an injection molding
process. Located in Fremont, California, Certified's customers include computer
software developers and computer hardware manufacturers. Certified Media's
business has been merged with the Communications Division.
The Company believes that the Certified acquisition has assisted the
Company's transformation from a videotape duplication specialist to a total
media solutions provider and that using the Company's existing sales force will
provide significant growth for the business acquired through the acquisition of
Certified.
For Certified's fiscal years ended December 31, 1996 and 1995, it had annual
sales of $4,459,000 and $7,958,000, respectively. Net income (loss) for the
respective periods was ($1,189,000) and $1,047,000. The net income numbers do
not include the effect of any income taxes since Certified was a Subchapter S
Corporation.
PURCHASE OF DUB SOUTH
On July 31, 1997, the Company acquired certain of the assets and assumed
certain of the liabilities of Dub South, a Georgia limited liability company.
The Company accounted for the acquisition as a purchase.
The noncontingent purchase price for the assets included approximately
$311,000 in cash and the assumption of approximately $439,000 of liabilities.
The purchase price may be increased by an additional $1,200,000, depending on
profit performance through January 31, 2002.
Dub South is a regional videotape duplicator with its facility in Atlanta,
Georgia. Its business is substantially similar to the videotape duplication
business of the Communications Division, and its operations have been merged
into the Company's pre-existing facilities in Atlanta.
For Dub South's fiscal year ended December 31, 1996, sales were $1,907,000
and had a net loss of $520,000.
MERGER OF SATASTAR CORPORATE SERVICES, INC.
Pursuant to a Plan and Agreement of Merger dated June 7, 1996, on June 28,
1996 Satastar Corporate Services, Inc. (dba PVS Corporate Services)
("Satastar"), an Illinois corporation, was merged into the Company. The Company
accounted for the transaction as a pooling of interests. The merger was effected
by the issuance of 165,357 shares of Vaughn Common Stock valued at $13.75 per
share or approximately $2,274,000 in the aggregate, in exchange for all the
common stock of Satastar.
The Company also entered into employment and noncompete agreements with the
former owners of Satastar. The agreements are for terms ranging from two to
three years and call for compensation of $130,000 to $162,000 per year.
DESCRIPTION OF SATASTAR'S BUSINESS--Satastar is a regional videotape
duplicator whose business, with the exception of specific customer identity, is
substantially similar to the videotape duplication business of the Company's
Communications Division of which Satastar has become part. Satastar has a
videotape duplication facility in Chicago, Illinois, and the Company merged its
pre-existing facility in Chicago into that of Satastar.
For Satastar's years ended December 31, 1996 and 1995, it had annual sales
of $4,056,000 and $3,868,000, respectively. Net income for the respective
periods was $102,000 and $342,000.
At the time of the merger, Satastar had 39 employees, including 3 in sales,
10 in administration and support, and 26 in operations. A majority of these
persons are currently employees of the Communications Division. These employees
are not represented by a union. The Company considers Satastar's employee
relations to be satisfactory, and there have been no work stoppages.
50
PURCHASE OF CENTERCOM AND RELATED TRANSACTIONS
On April 4, 1995, the Company completed the acquisition of all of the
capital stock of Centercom, Inc., a Wisconsin corporation, and Centercom South,
Inc., a Florida corporation (collectively "Centercom") pursuant to a Stock
Purchase Agreement of even date (for the purposes of this section, the "Purchase
Agreement"). The effective date of the acquisition is April 1, 1995. The Company
accounted for the acquisition as a purchase.
The purchase price for the capital stock of Centercom was $6,420,000, which
was paid equally to the two equal former shareholders of Centercom, Jeffrey
Johnson and Robert Harmon (for purposes of this subsection referred to as the
"Sellers"). The Company paid $5,250,000 in cash and issued 180,000 shares of
Vaughn Common Stock, valued at $6.50 per share ($1,170,000 in the aggregate),
equal to the closing sale price of the stock on Nasdaq on April 3, 1995.
Pursuant to the terms of the Purchase Agreement, the Sellers have been elected
as directors of the Company and appointed as members of the Company's Audit
Committee. However, Mr. Harmon resigned as a director of Vaughn for personal
reasons effective as of June 23, 1998.
The Sellers receive $100,000 each per year for a period of seven years under
consulting and noncompete agreements. In addition, the Company has entered into
two ten-year leases for the videotape duplication facilities totaling
approximately 38,000 square feet owned by a partnership of the Sellers in
Milwaukee, Wisconsin, at an aggregate annual net rent of $186,353 for the first
three years and $199,225 for the remaining seven years of the lease term.
Management of the Company believes that the facilities leased from the Sellers
are necessary for its videotape duplication business and that the lease terms
and conditions are no less favorable to the Company than could be obtained from
an unrelated third party (see "Description of Centercom's Business" below).
FINANCING FOR THE ACQUISITION--The Company borrowed the cash consideration
for the Centercom acquisition from a bank under a loan agreement. The loan
agreement provided a $5,000,000 term loan due March 31, 2000, payable in
consecutive quarterly principal installments of $250,000 commencing July 1,
1995, plus interest at one-quarter percent over the bank's prime rate. The Loan
Agreement also provided a revolving credit facility of up to $8,000,000. On
February 1, 1996, the Company entered into an amended agreement with its bank
which reduced the interest rate on the term loans to the prime rate.
DESCRIPTION OF CENTERCOM'S BUSINESS--Centercom is a national videotape
duplicator whose business, with the exception of specific customer identity and
geographic concentration, is substantially similar to the videotape duplication
business of the Communications Division of which Centercom has become a part.
Centercom has videotape duplication facilities in Milwaukee, Wisconsin, Chicago,
Illinois and Tampa, Florida. The Company has merged its preexisting facilities
in Milwaukee, Chicago and Tampa into those of Centercom. Centercom, Inc. and
Centercom South, Inc. initially following the acquisition operated as
wholly-owned subsidiaries of the Company, but are now merged into the Company.
For Centercom's fiscal years ended June 30, 1994 and 1993, it had annual
sales of $8,700,000 and $7,700,000, respectively. Net income for the same
periods was $645,000 and $412,000.
Centercom's operations involve the use of several hundred real time
videotape duplicating machines and three high-speed (150 times real time rates)
duplicating machines similar to those used by the Company.
The Company believes that the Centercom acquisition has enabled the Company
to be a dominant competitor in the Milwaukee market, enhanced the Company's
already dominant position in the Tampa market and increased the Company's
presence in the Chicago market.
51
PURCHASE OF ADVANCED AUDIO/VIDEO PRODUCTIONS, INC.
Pursuant to a Purchase and Sale Agreement dated December 29, 1995, on
January 1, 1996 the Company acquired substantially all the assets and assumed
substantially all the liabilities of Advanced Audio/Video Productions, Inc.
("Advanced Video"), a Colorado corporation. The Company accounted for the
acquisition as a purchase.
The purchase price for the assets of Advanced Video in the amount of
approximately $282,000 included $182,000 of cash and $100,000 of long-term debt
to the seller. The note is payable in three annual installments of $33,333.33
starting January 5, 1997, plus interest at the prime rate adjusted on the
anniversary date.
Advanced Video is a regional videotape duplicator with its facility located
in Denver, Colorado. Its business is substantially similar to the videotape
duplication business of the Company's Communications Division of which Advanced
Video has become a part.
For Advanced Video's fiscal year ended December 31, 1995, it had annual
sales of $1,204,000 and net income of $60,000.
PURCHASE OF INDIAN ARTS AND CRAFTS, INC.
Pursuant to a Purchase and Sale Agreement dated January 31, 1996, the
Company acquired substantially all the assets and assumed substantially all the
liabilities of IAAC, a Washington corporation. The Company accounted for the
acquisition as a purchase.
The purchase price of approximately $2,332,000 was paid to the five
shareholders of IAAC (for purposes of this subsection, the "Sellers"). The
Company paid approximately $82,000 in cash, issued 145,138 shares of Vaughn
Common Stock valued at $8.6125 per share ($1,250,000 in the aggregate), equal to
the average closing sale price of the stock on Nasdaq for the 10 days prior to
January 31, 1996, and issued $1,000,000 of long-term debt to the Sellers. The
long-term debt consists of two promissory notes: one in the principal amount of
$250,000 payable in three equal annual installments beginning January 31, 1997,
and the other in the principal amount of $750,000 payable in seven equal annual
installments starting on January 31, 1997. The interest rate on both notes is
8.5% per annum.
The Company also entered into a three-year employment agreement with Howard
Lowen, the president and largest shareholder of IAAC. This employment agreement
terminated in July, 1998. In addition, the Company entered into two leases with
the Sellers. One lease is for a production facility in Seattle totaling
approximately 42,300 square feet at an aggregate annual rent of $250,000. The
term of this lease is 44 months starting February 1, 1996. The second lease is
for a sales office in Anchorage, AK (1,400 square feet) at an annual rental of
$14,400 and has a three-year term. Management of the Company believed that the
facilities leased from the Sellers were necessary for the business of the
Products Division and that the terms of the leases were no less favorable to the
Company than could be obtained from an unrelated third party. The leases were
assumed by the buyer of the Products Division. See "Business and Operations of
Vaughn--Discontinued Operations--Vaughn Products Division" above.
FINANCING FOR THE ACQUISITION--The Company used its revolving credit
facility to fund the $82,000 cash portion of the purchase price. To fund the
anticipated increase in working capital needs, the Company entered into an
Amended and Restated Loan Agreement with a bank on February 1, 1996 (the
"Amended Agreement"). The Amended Agreement increased the total credit facility
from $13,000,000 to $17,000,000 and provided for long-term financing to finance
acquisitions and equipment purchases, and a revolving credit facility to finance
working capital. The interest rate on the long-term debt and the revolving debt
is at the prime rate.
52
DESCRIPTION OF IAAC'S BUSINESS--IAAC's business consists primarily of the
manufacture and sale of gift and souvenir products. Its principal products are
custom-designed soft goods, including T-shirts, sweatshirts and hats sold
primarily in Alaska and the Pacific Northwest. The Company has an art department
which develops custom designs that are silk-screened on apparel and then sold to
retailers by direct salespeople or independent manufacturer's representatives.
IAAC also resells other gift and souvenir products through the same sales
channels. IAAC was merged into the Products Division, and the Company moved the
majority of the operations of the Products Division to Seattle during fiscal
1997.
For IAAC's fiscal years ended December 31, 1995 and 1994, it had annual
sales of $7,543,000 and $7,593,000, respectively. Net income for the same
periods was $227,000 and $360,000, respectively.
PROPERTIES
The Company owns its executive and administrative offices and principal
manufacturing plant consisting of approximately 67,000 square feet located on a
4.1 acre site at 5050 West 78th Street, Minneapolis, Minnesota. Approximately
2,500 square feet is devoted to packaging and warehousing of the Products
Division's products and raw materials. This space is currently under lease to
the buyer of the Products Division. See "Business and Operations of
Vaughn--Discontinued Operations--Vaughn Products Division" above. Approximately
57,600 square feet is used for the Communications Division's separate
administrative and sales offices, showrooms, videotape duplication, shipping,
warehouse and handling. The remaining space of approximately 4,400 square feet
houses the Company's executive and administrative offices. These facilities
include a separate adjacent building of approximately 10,600 square feet. See
the Notes to the audited financial statements of the Company incorporated by
reference for a description of the mortgage term loan to the Company secured by
these facilities.
The Company leases its Communications Division's facilities in Fremont,
California; Milwaukee, Wisconsin; Phoenix, Arizona; Tampa and Orlando, Florida;
Portland, Oregon; Atlanta, Georgia; Dallas, Texas; Houston, Texas; Raleigh,
North Carolina; Chicago, Illinois; Seattle, Washington; and Denver, Colorado for
sales offices and manufacturing, totaling approximately 280,000 square feet
under leases expiring from 1998 through 2003, at a current total annual rental
of approximately $1,560,000.
The Company is presently utilizing approximately 75% of its manufacturing
plant capacity measured on a five-day week/three shift per day basis. Production
capacity, however, can be expanded by adding additional personnel or acquiring
additional manufacturing equipment. Management believes its manufacturing
facilities are generally sufficient for the Company's immediately foreseeable
needs.
LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company or
its properties which, in the opinion of management, will have a material adverse
effect upon the Company's financial position or results of operations.
53
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company, as restated to give effect to the sale of the Products
Division which has been treated as a discontinued operation. The Products
Division was sold by the Company as of November 16, 1998. The selected
historical consolidated financial data and the unaudited condensed consolidated
financial statements of the Company should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section appearing elsewhere in this Proxy Statement. Such interim
data, in the opinion of management of the Company, contains all adjustments
necessary for a fair presentation of such information. The results of operations
for interim periods should not be taken as indicative of future operating
results or financial position for the full year.
VAUGHN COMMUNICATIONS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
YEAR ENDED JANUARY 31, NINE MONTHS ENDED
----------------------------------------------------- ------------------------
OCTOBER 31 OCTOBER 31
1998 1997 1996 1995 1994 1998 1997
--------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales................................... $ 62,291 $ 55,040 $ 52,365 $ 38,270 $ 29,145 $ 60,234 $ 45,593
Net income from continuing operations....... 2,153 1,922 2,200 1,847 995 2,058 1,609
Net income (loss) from discontinued
operations................................ (215) 93 47 539 161 (2,319) 135
Basic Earnings per shares:
Continuing operations....................... 0.54 0.53 0.68 0.62 0.36 0.50 0.42
Discontinued operations..................... (0.05) 0.03 0.01 0.17 0.06 (0.57) 0.03
Diluted Earnings per shares:
Continuing operations....................... 0.53 0.49 0.60 0.54 0.30 0.50 0.40
Discontinued operations..................... (0.05) 0.02 0.01 0.15 0.04 (0.56) 0.03
Working Capital............................. 9,093 9,268 7,559 4,186 2,420 5,986 8,981
Total assets................................ 44,312 34,751 32,816 22,186 19,573 45,875 43,823
Long-term obligations (excluding current
portion).................................. 9,075 5,603 7,778 3,626 4,024 8,222 9,126
Total liabilities........................... 23,993 17,903 19,298 13,681 13,646 25,906 23,923
Total shareholders' equity.................. $ 20,319 $ 16,848 $ 13,518 $ 8,505 $ 5,927 $ 19,969 $ 19,900
- ------------------------
The following tables set forth the condensed consolidated unaudited
financial statement data as of and for the three months and nine months ended
October 31, 1998 and 1997, as restated to give effect to the sale of the
Products Division which has been treated as a discontinued operation. The
Products Division was sold by the Company as of November 16, 1998. These
financial statements are to be read in conjunction with the notes immediately
following the financial statements.
54
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCTOBER 31
-------------
1998
-------------
ASSETS
Current assets
Trade accounts receivable less allowance of $1,449,000 at October 31, 1998 and $1,126,000 at
January 31, 1998............................................................................. $ 15,809,929
Inventories.................................................................................... 5,488,901
Net realizable value of business discontinued.................................................. 1,253,179
Other.......................................................................................... 1,117,589
-------------
Total current assets......................................................................... 23,669,598
Property, plant and equipment...................................................................... 35,013,923
Less accumulated depreciation.................................................................. 22,329,893
-------------
12,684,030
Intangible and Other Assets........................................................................ 9,521,559
-------------
$ 45,875,187
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................................... $ 5,939,977
Notes payable to bank.......................................................................... 6,372,011
Salaries, wages and payroll taxes.............................................................. 15,480
Current portion of long-term debt and capital lease obligations 3,839,074
Other.......................................................................................... 1,517,214
-------------
Total current liabilities.................................................................... 17,683,756
Long-term debt (less current portion) 5,053,688
Capital lease obligations (less current portion)................................................... 3,114,427
Deferred taxes..................................................................................... 54,326
Shareholders' equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and outstanding
October 31, 1998 - 4,082,226 shares; January 31, 1998--4,088,582 shares.................. 408,222
Additional paid-in capital 8,985,912
Retained earnings.............................................................................. 10,574,856
-------------
Total shareholders' equity................................................................... 19,968,990
$ 45,875,187
-------------
-------------
See notes to condensed consolidated financial statements.
55
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
NET SALES........................................... $ 20,864,752 $ 17,762,785 $ 60,234,011 $ 45,593,091
COST AND EXPENSES:
Costs of goods sold............................... 14,003,723 11,776,726 40,318,867 30,031,764
Selling and administrative........................ 5,068,423 4,273,883 15,170,213 11,975,542
Interest.......................................... 413,008 356,803 1,268,357 871,359
Other expense (income)............................ (15,622) (25,377) (69,878) (62,955)
------------- ------------- ------------- -------------
19,469,532 16,382,035 56,687,559 42,815,710
INCOME BEFORE INCOME TAXES.......................... 1,395,220 1,380,750 3,546,452 2,777,381
Income taxes........................................ 585,000 578,000 1,488,000 1,168,000
------------- ------------- ------------- -------------
Income from continuing operations................... 810,220 802,750 2,058,452 1,609,381
Income (loss) from discontinued
operations net of taxes........................... (380,391) (403,969) 71,877 134,618
Loss on sale of Products Division................... (2,391,162) 0 (2,391,162) 0
------------- ------------- ------------- -------------
NET INCOME (LOSS)................................... ($ 1,961,333) $ 398,781 ($ 260,833) $ 1,743,999
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER SHARE
Basic
Continuing operations................. $ 0.20 $ 0.20 $ 0.50 $ 0.42
Discontinued operations............... (0.67) (0.10) (0.57) 0.03
--------- --------- --------- ---------
($ 0.47) $ 0.10 ($ 0.07) $ 0.45
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted
Continuing operations................. $ 0.20 $ 0.20 $ 0.50 $ 0.40
Discontinued operations............... (0.67) (0.10) (0.56) 0.03
--------- --------- --------- ---------
($ 0.47) $ 0.10 ($ 0.06) $ 0.43
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to condensed consolidated financial statements.
56
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED OCTOBER
31
---------------------------
1998 1997
------------- ------------
OPERATING ACTIVITIES
Net income......................................................................... ($260,833) $ 1,743,999
Adjustments to reconcile net income to cash provided by operations
Add loss on discontinued business................................................ 2,391,162
Depreciation and amortization.................................................... 3,776,559 2,874,746
Receivables...................................................................... (2,332,926) (2,699,890)
Inventories...................................................................... (194,039) 145,230
Other assets..................................................................... (497,564) 1,023,500
Accounts payable................................................................. 2,464,191 1,545,576
Other liabilities................................................................ 1,780,197 268,155
------------- ------------
Net cash provided by (used in) operating activities............................ 7,126,747 4,901,316
INVESTING ACTIVITIES
Additions to property, plant, and equipment........................................ (4,870,171) (3,393,075)
Purchase of business less cash acquired............................................ (1,580,528) (5,811,009)
Other.............................................................................. 82,185 234,118
------------- ------------
Net cash used in investing activities.......................................... (6,368,514) (8,969,966)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (4,209,039) (2,829,506)
Borrowings under revolver.......................................................... 611,575 (598,202)
Lease financing of equipment....................................................... 2,577,978 1,888,655
Increase in long term debt......................................................... 350,000 4,300,000
Common stock issued in purchase of business........................................ 1,200,000
Other.............................................................................. (88,747) 107,703
------------- ------------
Net cash provided by financing activities...................................... (758,233) 4,068,650
Change in cash....................................................................... -- --
Cash and cash equivalents at beginning of year....................................... -- --
------------- ------------
Cash and cash equivalents at end of period........................................... $ -- $ --
------------- ------------
------------- ------------
See notes to condensed consolidated financial statements.
57
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1998
NOTE A--BASIS OF PRESENTATIONS
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended October
31, 1998 are not necessarily indicative of the results that may be expected for
the year ending January 31, 1999.
NOTE B--EARNINGS PER SHARE
THREE MONTHS ENDED
OCTOBER 31
----------------------------
1998 1997
------------- -------------
Basic net income (loss) per share:
Net income from continuing operations............................................. $810,220 $802,750
Net income (loss) from discontinued operations.................................... ($2,741,553) ($403,969)
Weighted average shares outstanding............................................... 4,082,110 4,045,378
Net income per share from continuing operations..................................... $0.20 $0.20
Net income (loss) per share from discontinued operations............................ ($0.67) ($0.10)
Diluted net income (loss) per share:
Net income from continuing operations............................................. $810,220 $802,750
Net income (loss) from discontinued operations.................................... ($2,741,553) ($403,969)
Shares used in calculation:
Weighted average shares outstanding............................................... 4,082,110 4,045,378
Common shares issuable under stock option plans................................... 62,205 123,010
------------- -------------
4,082,110 4,045,378
------------- -------------
------------- -------------
Net income per share from continuing operations..................................... $0.20 $0.20
Net income (loss) per share from discontinued operations............................ ($0.67) ($0.10)
58
NINE MONTHS ENDED OCTOBER
31
---------------------------
1998 1997
------------- ------------
Basic net income (loss) per share:
Net income from continuing operations.............................................. $2,058,452 $1,609,381
Net income (loss) from discontinued operations..................................... ($2,319,285) $134,618
Weighted average shares outstanding................................................ 4,085,660 3,852,068
Net income per share from continuing operations...................................... $0.50 $0.42
Net income (loss) per share from discontinued operations............................. ($0.57) $0.03
Diluted net income per share:
Net income from continuing operations.............................................. $2,058,452 $1,609,381
Net income (loss) from discontinued operations..................................... ($2,319,285) $134,618
Shares used in calculation:
Weighted average shares outstanding................................................ 4,085,660 3,852,068
Common shares issuable under stock option plans.................................... 71,208 139,000
------------- ------------
4,156,868 3,991,068
------------- ------------
------------- ------------
Net income per share from continuing operations...................................... $0.50 $0.40
Net income (loss) per share from discontinued operations............................. ($0.56) $0.03
NOTE C--ACQUISITIONS
On February 1, 1998, the Company completed the acquisition of the assets of
Copywise, a floppy disk replicator located in Fremont, California. The
acquisition will be accounted for by the purchase method of accounting. Goodwill
associated with the purchase will be amortized over 15 years. The noncontingent
purchase price was approximately $1,670,000 of cash and the assumption of
approximately $667,000 of liabilities. The purchase price may be increased by an
additional $1,560,000 depending upon the attainment of certain financial
objectives by the acquired business through January 31, 2000.
In July, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified, a CD replicator located in Fremont, California. The
initial purchase price was $5,500,000, including $2,800,000 of cash, 171,210
shares of Vaughn Common Stock valued at $1,200,000, and long-term debt to the
sellers of $1,500,000. The purchase price may be increased to a maximum of
$7,500,000 depending upon Certified's attainment of specific financial
objectives through January 31, 1999. Goodwill recorded in this transaction is
being amortized over 15 years using the straight-line method.
In July, 1997, the Company also acquired certain assets of Dub South, a
videotape duplicator located in Atlanta, Georgia. The noncontingent purchase
price included $311,000 of cash and the assumption of approximately $439,000 of
liabilities. The purchase price may be increased by an additional $1,200,000,
depending on the profit performance for the next five years. There was no
goodwill recorded on this transaction.
All the acquisitions have been accounted for by the purchase method of
accounting, and the consolidated financial statements for the period ended July
31, 1998, reflect the purchase of the businesses and include any results from
operations subsequent to the closing date of the respective transactions.
59
The following unaudited pro forma information presents the consolidated
results of continuing operations of the Company as if the acquisitions had been
completed as of February 1, 1997.
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, 1997 OCTOBER 31, 1997
------------------- ------------------
Net sales........................................... $19,848,000 $54,864,000
Net income.......................................... 997,000 1,567,000
Net income per common share
Basic............................................. $.24 $.38
Diluted........................................... $.24 $.38
NOTE D--DISCONTINUED EARNINGS
During the third quarter of 1998, the Company developed a plan to dispose of
the assets and operations of the Products Division, the operating unit of the
Company involved in the manufacture and sale of gift and souvenir products. The
financial statements have been restated to reflect the Products Division's
results of operations as discontinued operations, and the assets of the division
were restated to reflect their estimated realizable value, which resulted in a
pretax loss of approximately $4,123,000. The estimated realizable value was
based upon an offer the Company received to purchase the business. On November
16, 1998, the Company reached an agreement with a buyer for the sale of the
assets and operations of the Products Division. The selling price of $1,432,775
included $300,000 of cash, a short-term note of $932,775, and the assumption of
$200,000 of liabilities by the buyer.
Summarized results of operations and financial position data of discontinued
operations were as follows (in thousands):
NINE MONTHS
ENDED OCTOBER 31
--------------------
1998 1997
--------- ---------
Net sales................................................................ 9,160 10,708
Net income from discontinued operations.................................. 72 134
THREE MONTHS
ENDED OCTOBER 31
--------------------
1998 1997
--------- ---------
Net sales................................................................. 1,115 1,092
Net loss from discontinued operations..................................... (380) (403)
JANUARY 31, 1998
-----------------
Working capital.............................................................. $ 4,541
Total assets................................................................. 6,195
Long-term debt............................................................... 498
Total liabilities............................................................ 1,179
60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Vaughn's consolidated financial statements represent the combined results of
the Company's continuing business, the Communications Division, which represents
84% of the Company's sales in fiscal 1998, and its discontinued gift products
business, the Products Division. The Communications Division is a national
multimedia business services company providing videotape duplication and digital
media (CD and magnetic floppy disk) replication and related services throughout
the United States.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this proxy statement and other written reports and oral
statements made from time to time by the Company may contain so-called
"forward-looking statements," all of which are subject to risks and
uncertainties. These forward-looking statements are identified by their use of
words such as "expects," "plans," "will," "estimates," and other words of
similar meaning, and by the fact that they do not relate strictly to historical
or current facts. These statements are likely to address the Company's growth
strategy, financial results, or acquisition strategies. One must carefully
consider any such statement and should understand that many factors could cause
actual results to differ from the Company's forward-looking statements. These
factors include inaccurate assumptions and a broad variety of other risks and
uncertainties, including some that are known and some that are not. No
forward-looking statement can be guaranteed and actual results may vary
materially.
YEAR 2000 COMPLIANCE
Computer programs which were written using two digits (rather than four) to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000, a result commonly referred to as the "Year 2000"
problem. This could result in a system failure, or miscalculation.
In 1997, Vaughn initiated a program to evaluate whether internally developed
and purchased computer programs may experience operational problems when the
year 2000 is reached. The scope of this effort included internal computer
systems and supplier capabilities. The Company is completing this review to
determine whether its computer programs are Year 2000 compliant, as well as
determining what remedial action is required, and the costs associated with
required modification or replacements. A significant amount of information has
been collected and analyzed, however, the process will not be completed until
calendar year 1999. The Company plans to complete all remediation efforts for
its systems prior to the year 2000. Based on its evaluation to date, management
believes that, while the Company will incur internal and possibly external costs
to address the Year 2000 problem, such costs will not have a material impact on
the operations, cash flows, or financial condition of Vaughn.
RESULTS OF OPERATIONS--NINE MONTH PERIOD ENDED OCTOBER 31, 1998 COMPARED TO NINE
MONTH PERIOD ENDED OCTOBER 31, 1997
DISCONTINUED OPERATIONS
On November 16, 1998, the Company sold the Products Division for
approximately $300,000 cash paid at closing, a short-term note in the principal
amount of $932,775 and the assumption of $200,000 of liabilities. The Products
Division, which was engaged in the sale and manufacture of gift and souvenir
products, no longer met the Company's long-term strategic direction. The
transaction, which involved the sale of selected assets including approximately
$758,000 of accounts receivable, $3,880,000 of inventory, $380,000 of fixed
assets and $406,000 of other assets, and the assumption of approximately
$200,000 of liabilities by the buyer, resulted in a pretax loss of approximately
$4,123,000. The sale of the Products Division has been treated as a discontinued
operation, and prior financial information has been restated to reflect this
treatment.
61
For the first nine months of fiscal 1999, the Products Division's net sales
had declined 14.5% from $10,708,000 in fiscal 1998 to $9,160,000 in fiscal 1999.
The decrease was attributed in part to a transition in sales personnel. The
pretax income for the first nine months of fiscal 1999 of $72,000 was a 46.3%
decline from the previous year's pretax income of $134,000.
CONTINUING OPERATIONS
On February 1, 1998, the Company acquired the assets of Copywise, a floppy
disk replicator located in Fremont, California, for a non-contingent purchase
price of approximately $1,670,000 cash and the assumption of approximately
$667,000 of liabilities. The acquisition has been accounted for as a purchase,
and the operating results are included in the Company's results as of the date
of acquisition. The operations of Copywise have been merged into the Company's
pre-existing facility in Fremont.
For the first nine months net sales from continuing operations increased 32%
from $45,593,000 in fiscal 1998 to $60,234,000 in fiscal 1999. The increase is
attributable to a 12% increase in sales from pre-existing operations, and the
inclusion of sales from the Company's acquisitions of Copywise and Certified
Media (which was acquired on July 31, 1997).
Gross margins have decreased slightly from the previous year. Year-to-date
gross margins have declined from 34.1% to 33.1%. The decrease is due to the
lower margins being realized on the sale of CD replication.
Operating expenses as a percentage of sales for the first nine months of
fiscal 1999 have declined to 25.3% from 26.5% for the first nine months of
fiscal 1998. The decrease is a result of sales growth which increased the
leveraging of fixed costs and continued efforts to control expenses.
Interest expense for the first nine months of fiscal 1999 has increased 45%
from the previous year, from $871,000 in the first nine months of fiscal 1998 to
$1,268,000 in the first nine months of fiscal 1999. The increase was due to
additional borrowings associated with the acquisitions of Certified Media and
Copywise and increased working capital borrowings needed to support the sales
growth. For the first nine months of fiscal 1999 net income from continuing
operations increased 28% from $1,609,000 in the first nine months of fiscal 1998
to $2,058,000 in the first nine months of fiscal 1999.
RESULTS OF OPERATIONS--YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED
JANUARY 31, 1997
DISCUSSION OF COMBINED OPERATIONS BEFORE SELL-OFF OF PRODUCTS DIVISION
The Company's net sales, including net sales provided by acquired business
from the date of acquisition, increased 8% in fiscal 1998 to approximately
$74,488,000. The increase was attributable to a 13% increase in net sales from
the Communications Division which offset an 11% decrease in net sales from the
Products Division. Gross margins increased slightly in fiscal 1998, from 31.5%
to 31.9%. Selling, general and administrative expenses were approximately
$19,093,000, a 12% increase over the previous year, and represent 25.6% of net
sales, compared to 24.7% the previous year. Net interest expense increased
slightly from approximately $1,237,000 in fiscal 1997 to $1,295,000 in fiscal
1998. Pretax income in fiscal 1998 was approximately $3,338,000, a 4% decrease
from the prior year. The decrease was due to a $532,000 decrease in pretax
income from the Products Division (pretax income of $161,000 in fiscal 1997
compared to a pretax loss of $371,000 in fiscal 1998). This decrease was
partially offset by a 12% increase in pretax income from the Communications
Division. The Company's effective tax rate remained at approximately 42%.
Consolidated net income declined 4%, from approximately $2,015,000 in fiscal
1997 to approximately $1,938,000 in fiscal 1998.
COMMUNICATIONS DIVISION--CONTINUING OPERATIONS
The Communications Division's strategy is to grow through internally
generated growth and through strategic acquisitions. The Company continued to
implement this strategy in fiscal 1998 with two strategic
62
acquisitions. In order to better meet the current and long-term needs of its
business customers, the Company entered the digital media replication business
with the acquisition, on July 31, 1997, of Certified, a CD replicator located in
Fremont, California. The noncontingent purchase price of $5,500,000 included
$2,800,000 in cash, 171,210 shares of Vaughn Common Stock valued at $1,200,000
and a $1,500,000 note to the sellers. The purchase price may be increased an
additional $2,000,000 based upon Certified's attaining certain financial
objectives. The Company believes it is well positioned for strong sales growth
and market penetration in this business as it intends to capitalize on its
existing sales force to sell this new product offering. Also on July 31, 1997,
the Company acquired certain of the assets of Dub South, a videotape duplicator
located in Atlanta, Georgia. The operations of Dub South were merged into the
Company's pre-existing facility in Atlanta. The noncontingent purchase price of
$750,000 included approximately $311,000 in cash and the assumption of $439,000
of liabilities. The purchase price may be increased by an additional $1,200,000
depending on the financial performance of Dub South. Both acquisitions have been
accounted for as purchases and their operating results are included in the
Company's results for the period subsequent to their acquisition date.
The Communications Division's net sales increased 13% in fiscal 1998, from
approximately $55,000,000 in fiscal 1997 to approximately $62,300,000. The net
sales generated due to the acquisition of Certified and a 3% increase in the
sales from pre-existing facilities contributed to the sales growth. The Company
believes that although the growth of videotape duplicators has slowed, there
continues to be opportunities for growth in this market and there are
significant growth opportunities in the CD replication market, although there
can be no assurances that such growth will be experienced by the Company.
The gross profit margins increased from 32.9% in fiscal 1997 to 33.5% in
fiscal 1998. The improvement was the result of cost control measures instituted
at the beginning of the year and continued leveraging of fixed expenses. The
Company expects to be able to maintain its profit margins by continuing to
improve efficiencies, the continued leveraging of fixed costs with increased
volume, and continuing to utilize low cost providers of raw materials.
Selling, general and administrative expenses in fiscal 1998 were up 16.7%
over fiscal 1997 and represented 26% of net sales in fiscal 1998 compared to
25.2% in fiscal 1997. The increase in selling, general and administrative
expenses reflects additional expenses associated with the acquisitions
previously discussed, including goodwill amortization and noncompete payments.
Net interest increased to approximately $999,000 in fiscal 1998, an increase
of approximately $104,000 from the previous year. The increase was due to
interest associated with additional acquisition debt.
Pretax income for the Communications Division was $3,709,000, a 12% increase
over the previous year. Excluding the results of the acquisition of Certified,
pretax income increased by 15% in fiscal 1998. Certified's operating profit
after adding back amortization expense and interest on the acquisition debt was
approximately $260,000.
The Company invested approximately $4,432,000 on equipment and facilities to
expand its production capacity. This investment included approximately
$2,400,000 spent to expand the CD replication capacity. The investment in
capital equipment was funded by long-term financing and internally generated
funds.
PRODUCTS DIVISION--DISCONTINUED OPERATIONS
The Products Division, which manufactures and sells gift products throughout
the United States, struggled during fiscal year 1998. A decrease in sales from
the prior year, a change in senior management at mid-year, and continuing
difficulties in consolidating its operations in Seattle all contributed to the
disappointing results.
Net sales of approximately $12,196,000 were an 11% decrease from the prior
year. The decrease in sales also resulted in a decrease in the leveraging of
fixed costs, resulting in a reduction in gross margins
63
from 26% in fiscal 1997 to 23% in fiscal 1998. Although selling, general and
administrative expenses decreased from approximately $3,273,000 in fiscal 1997
to approximately $3,035,000, it was not enough to offset the decrease in net
sales and gross margins, and pretax income declined from $161,000 in fiscal 1997
to a pretax loss of $371,000 in fiscal 1998.
RESULTS OF OPERATIONS--YEAR ENDED JANUARY 31, 1997 COMPARED TO YEAR ENDED
JANUARY 31, 1996
The Company's strategy is to increase revenue and profitability through
growth in existing channels, through acquisitions, and through improvement in
efficiencies. In fiscal 1997 the Company was partially successful in
implementing this strategy. The Company merged with Satastar Corporate Services,
Inc., a videotape duplicator located in Chicago, expanded the Seattle operation
from a sales office to a full service duplication facility, and completed the
integration of IAAC (acquired January 31, 1996) into the Products Division by
consolidating the Division's operations in Seattle. In spite of these
accomplishments, the financial results for fiscal 1997 did not meet the
Company's expectations. Lower than expected sales, coupled with increased costs
associated with expanding the business, resulted in a decrease in net income
from the previous year. In response to these results, the Company implemented
cost containment measures during the year and expects these measures to have a
positive impact on next year's results.
DISCUSSION OF COMBINED OPERATIONS BEFORE SELL-OFF OF PRODUCTS DIVISION
The Company's net sales increased from $59,569,000 in fiscal 1996 to
$68,798,000 in fiscal 1997, a 15% increase, while gross margins remained at 32%.
Selling, general and administrative expenses for fiscal 1997 were up 21% over
the previous year and represented 25% of net sales, up one percentage point from
last year. Operating profit decreased 7% from last year to approximately
$4,712,000. Interest expense was down slightly from the previous year. The
Company's effective tax rate in fiscal 1997 was 42%. Net income decreased 10%
from $2,247,000 in fiscal 1996 to $2,015,000 in fiscal 1997.
The net contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION--CONTINUING OPERATIONS
On June 28, 1996, the Company acquired Satastar by issuing 165,357 shares of
Vaughn Common Stock in exchange for all the outstanding capital stock of
Satastar. The business combination has been accounted for as a pooling of
interest, and, accordingly, the financial statements and analysis include the
combined results of operations from the date Satastar commenced operations.
The Communications Division's sales of $55,040,000 in fiscal 1997 were a 5%
increase from the previous year's sales of $52,365,000. The slowdown in sales
growth in fiscal 1997 is attributed in part to a decrease in sales to the
Company's largest customers. While the Company added more new customers in
fiscal 1997 than in fiscal 1996, it was unable to offset the reduced sales to
its largest accounts. The Company believes that by refocusing its sales efforts,
the growth in sales will continue. There can be no assurance, however, that such
growth will be at or near historical levels, particularly since the growth of
the videotape duplication market may not be as great as historical levels.
The gross profit margin increased slightly to 32.9% in fiscal 1997 from
32.7% in fiscal 1996. Although the selling price of videotape duplication
continues to decline, the Company expects to maintain its profit margins by
improving efficiencies, leveraging fixed costs with increased volume, and
continuing to utilize low-cost providers of raw materials.
Selling, general and administrative expenses in fiscal 1997 increased 12%
from $12,384,000 in fiscal 1996 to $13,872,000 in fiscal 1997, and represented
25% of net sales in fiscal 1997 compared to 24% of net sales in fiscal 1996. The
increase in selling, general and administrative expenses can be attributed in
part to additional costs associated with the acquisition of Satastar, and
expenses incurred during the consolidation of the Company's existing facility in
Chicago with the facility used by Satastar.
64
Net interest expense decreased 14% in fiscal 1997 due to lower levels of
borrowing.
Pre-tax profit for the Communications Division was $3,314,000, a 11%
decrease from the previous year's pre-tax profit of $3,707,000. The decrease was
attributable primarily to the higher levels of operating expenses.
The Company spent approximately $2,750,000 on equipment and facilities to
expand its production capacity. The investment was funded by long-term financing
and internally generated hands. The Communications Division expects to spend
approximately $1,400,000 for equipment in fiscal 1998.
PRODUCTS DIVISION--DISCOUNTED OPERATIONS
The Products Division's sales of $13,758,000 in fiscal 1997 were up 91% from
the previous year. The increase was due entirely to the acquisition of IAAC on
January 31, 1996. The sales from the newly acquired product line offset a slight
decrease in sales of the pre-existing product line.
The fiscal 1997 gross profit margin of 26% remained approximately the same
as the previous year. A slight decrease in raw material costs was offset by
higher labor costs. The higher labor costs were associated with operating two
facilities prior to consolidating operations in Seattle in September, 1996. The
Company expects that the combined operations will result in improved
efficiencies next year.
Operating expenses for fiscal 1997 increased 85% to $3,270,000 due to the
acquisition of IAAC. As a percentage of sales, operating expenses decreased from
24.5% in fiscal 1996 to 23.8% in fiscal 1997.
Interest expense increased from $75,000 in fiscal 1996 to $195,000 in fiscal
1997 due primarily to higher debt associated with the acquisition.
Pre-tax income increased 100% in fiscal 1997, from $80,000 to $161,000.
LIQUIDITY AND SOURCES OF CAPITAL
Cash provided by operations and financing provided by banks and third
parties continue to be the Company's primary sources of funds to finance
operating needs and capital expenditures. In the first nine months of fiscal
1999, cash flow from operations of $7,126,000, along with borrowings from third
parties, was used to fund capital expenditures of approximately $4,870,000 and
to fund the $1,580,000 purchase price of Copywise.
Based on past performance and current expectations, the Company believes
that working capital levels, coupled with its ability to borrow additional funds
under its $17,000,000 credit facility with a bank (of which approximately
$3,138,000 is available at October 31, 1998), are adequate to meet the operating
requirements of the Company for the next six months.
Expenditures for new equipment are expected to be approximately $6,000,000
in fiscal 1999 and will be funded by leasing arrangements with third parties and
cash from operations. As part of the Company's strategic planning process, it
continues to explore alternative funding proposals.
65
OWNERSHIP OF VAUGHN COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of Vaughn Common Stock as of December 11, 1998, by (i) each person or
group that is known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Vaughn Common Stock, (ii) each of the executive
officers and directors of the Company and (iii) all executive officers and
directors of the Company as a group. Information with respect to beneficial
ownership is based upon information furnished by such persons to the Company.
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OUTSTANDING
NAME OWNERSHIP(1) SHARES(2)
- -------------------------------------------------------------------------------- ------------------ -------------
E. David Willette............................................................... 889,864(3) 21.34%
5050 West 78th Street
Minneapolis, Minnesota 55435
Donald J. Drapeau............................................................... 47,800(4) 1.16%
5050 West 78th Street
Minneapolis, Minnesota 55435
M. Charles Reinhart............................................................. 80,361(5) 1.95%
5050 West 78th Street
Minneapolis, MN 55435
Douglas Olzenak................................................................. 16,348(6) 0.4%
5050 West 78th Street
Minneapolis, MN 55435
Dimensional Fund Advisors....................................................... 227,800(7) 5.6%
1299 Ocean Avenue
Santa Monica, CA 90401
All directors and executive officers as a group (10 persons).................... 1,392,094(8) 32.90%
- ------------------------
* Less than 1%.
(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
February 11, 1999 for only the respective individual or group.
(3) Includes 66,700 shares issuable upon the exercise of currently exercisable
Vaughn Stock Options.
(4) Includes 26,900 shares issuable upon the exercise of currently exercisable
Vaughn Stock Options.
(5) Includes 17,500 shares issuable upon the exercise of currently exercisable
Vaughn Stock Options.
(6) Includes 9,535 shares issuable upon the exercise of currently exercisable
Vaughn Stock Options.
(7) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 227,800 shares of the
Company 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 serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
(8) Includes 176,635 shares issuable upon the exercise of currently exercisable
Vaughn Stock Options.
66
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 of the General Rules and Regulations promulgated
under the Exchange Act, shareholders may present proper proposals for inclusion
in Vaughn's Proxy Statement relating to, and for consideration at, the next
annual meeting of its shareholders by submitting such proposals to Vaughn in a
timely manner. The 1999 annual meeting will be held only if the Merger is not
consummated. In order to be included for the 1999 annual meeting, shareholder
proposals must be received by Vaughn no later than January 26, 1999, and must
otherwise have complied with all applicable legal requirements.
WHERE YOU CAN FIND MORE INFORMATION
Vaughn files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that Vaughn files at the SEC's public reference rooms which
are located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's regional offices located at: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such materials are also
available from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington D.C. 20549 at prescribed rates. Copies of such materials may
also be accessed through the SEC Internet web site at HTTP://WWW.SEC.GOV. Once
the Merger is completed, Vaughn will no longer be subject to the reporting
requirements of the Exchange Act.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote your shares of Vaughn Common Stock at
the Special Meeting. Neither Vaughn nor TAC has authorized anyone to provide you
with information that is different from what is contained in this Proxy
Statement.
This Proxy Statement is dated , 1999. You should not assume that
the information contained in this Proxy Statement is accurate as of any date
other than such date, and the mailing of this Proxy Statement to shareholders
will not create any implication to the contrary.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
intend to bring any other business before the Special Meeting of Vaughn
shareholders and, so far as is known to the Board of Directors, no matters are
to be brought before the Special Meeting except as specified in the notice of
Special Meeting. However, as to any other business that may properly come before
the Special Meeting, the proxy holders intend to vote the proxies in respect
thereof in accordance with the recommendation of the Board of Directors and the
Special Committee.
67
ANNEX A
- --------------------------------------------------------------------------------
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 11, 1998
AMONG
TWIN ACQUISITION CORP.,
ALLIED DIGITAL, INC.
AND
VAUGHN COMMUNICATIONS, INC.
TABLE OF CONTENTS
ARTICLE 1--THE MERGER................................................................ A-1
1.1 The Merger..................................................................... A-1
1.2 Closing........................................................................ A-1
1.3 Effective Time of the Merger................................................... A-1
1.4 Effects of the Merger.......................................................... A-2
1.5 Articles of Incorporation; Bylaws.............................................. A-2
1.6 Directors...................................................................... A-2
1.7 Officers....................................................................... A-2
ARTICLE 2--EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS....................................................................... A-2
2.1 Effect on Capital Stock........................................................ A-2
(a) Common Stock of Sub.......................................................... A-2
(b) Cancellation of Treasury Stock and Parent-Owned Company Common Stock......... A-2
(c) Conversion of Company Common Stock........................................... A-2
(d) Cancellation and Retirement of Company Common Stock.......................... A-2
2.2 Appointment of Exchange Agent.................................................. A-3
2.3 Payment of Merger Consideration................................................ A-3
(a) Persons Entitled to Merger Consideration..................................... A-3
(b) Dissenters' Rights........................................................... A-3
2.4 Stock Plans.................................................................... A-3
(a) Cancellation of Company Stock Options........................................ A-3
(b) Termination of Stock Plans................................................... A-3
2.5 Exchange of Certificates....................................................... A-4
(a) Deposit Cash with Exchange Agent............................................. A-4
(b) Exchange Procedures.......................................................... A-4
(c) Lost Certificates............................................................ A-4
(d) No Further Ownership Rights in Company Common Stock.......................... A-4
(e) Termination of Exchange Fund................................................. A-5
(f) No Liability................................................................. A-5
(g) Investment of Exchange Fund.................................................. A-5
ARTICLE 3--REPRESENTATIONS AND WARRANTIES............................................ A-5
3.1 Representations and Warranties of the Company.................................. A-5
(a) Organization, Standing and Corporate Power................................... A-5
(b) Subsidiaries................................................................. A-5
(c) Capital Structure............................................................ A-5
(d) Authority; Noncontravention.................................................. A-6
(e) SEC Documents; Undisclosed Liabilities; Financial Statements................. A-7
A-i
(f) Information Supplied......................................................... A-8
(g) Absence of Certain Changes or Events......................................... A-8
(h) Litigation; Labor Matters; Compliance with Laws.............................. A-8
(i) Employee Matters............................................................. A-8
(j) Tax Returns and Tax Payments................................................. A-9
(k) State Antitakeover Laws and Company Articles of Incorporation Not
Applicable...................................................................... A-10
(l) Environmental Matters........................................................ A-10
(m) Personal Property; Real Property............................................. A-11
(n) Brokers...................................................................... A-13
(o) Opinion of Financial Advisor................................................. A-13
(p) Board Recommendation......................................................... A-13
(q) Required Company Vote........................................................ A-13
(r) Insurance.................................................................... A-13
(s) Permits...................................................................... A-13
(t) Intellectual Property Rights................................................. A-14
(u) Contracts.................................................................... A-14
(v) Certain Business Practices................................................... A-15
(w) Year 2000.................................................................... A-15
(x) No Other Representations and Warranties...................................... A-15
3.2 Representations and Warranties of Sub.......................................... A-15
(a) Organization, Standing and Corporate Power................................... A-15
(b) Subsidiaries................................................................. A-15
(c) Authority; Noncontravention.................................................. A-15
(d) Information Supplied......................................................... A-16
(e) Absence of Certain Changes or Events......................................... A-16
(f) Brokers...................................................................... A-16
(g) Financing.................................................................... A-16
(h) Certain Anti-takeover Provisions Not Applicable.............................. A-17
(i) No Other Representations and Warranties...................................... A-17
ARTICLE 4--COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER................. A-17
4.1 Conduct of Business of the Company............................................. A-17
ARTICLE 5--ADDITIONAL AGREEMENTS..................................................... A-19
5.1 Preparation of Proxy Statement; Special Meeting................................ A-19
(a) Proxy Statement.............................................................. A-19
(b) Special Meeting.............................................................. A-19
(c) Stock Records................................................................ A-19
5.2 Access to Information.......................................................... A-19
A-ii
(a) Access....................................................................... A-19
(b) Report of Developments....................................................... A-19
(c) Commitment Notice............................................................ A-20
5.3 Best Efforts................................................................... A-20
5.4 Indemnification................................................................ A-20
(a) Obligation................................................................... A-20
(b) Insurance.................................................................... A-20
(c) Scope........................................................................ A-20
5.5 Expenses....................................................................... A-20
(a) Obligation................................................................... A-20
(b) Obligation Upon Consummation of Merger....................................... A-20
5.6 Public Announcements........................................................... A-20
5.7 Takeover Statutes.............................................................. A-21
5.8 No Solicitation................................................................ A-21
5.9 Certain Agreements............................................................. A-22
5.10 Employee Benefits............................................................. A-22
5.11 Certain Actions............................................................... A-23
5.12 Debt.......................................................................... A-23
ARTICLE 6--CONDITIONS PRECEDENT...................................................... A-23
6.1 Conditions to Each Party's Obligation to Effect the Merger..................... A-23
(a) Company Shareholder Approval................................................. A-23
(b) HSR Act and other Authorizations............................................. A-23
(c) No Injunctions or Restraints................................................. A-23
6.2 Conditions to Obligation of Sub................................................ A-24
(a) Representations and Warranties............................................... A-24
(b) Performance of Obligations of the Company.................................... A-24
(c) Consents, etc................................................................ A-24
(d) Dissenters' Rights........................................................... A-24
(e) Opinion of Counsel to the Company............................................ A-24
(f) Contract Consents............................................................ A-24
(g) Debt......................................................................... A-24
(h) Resignations................................................................. A-24
(i) Pending Action............................................................... A-24
(j) Taxes........................................................................ A-25
(k) Good Standing Certificates................................................... A-25
(l) No Material Adverse Change................................................... A-25
(m) Financing.................................................................... A-25
(n) Consent of Option Holders.................................................... A-25
(o) Certain Transactions......................................................... A-25
A-iii
(p) Agreement.................................................................... A-25
6.3 Conditions to Obligation of the Company........................................ A-25
(a) Representations and Warranties............................................... A-25
(b) Performance of Obligations of Sub............................................ A-26
(c) Opinion of Counsel to Sub.................................................... A-26
ARTICLE 7--TERMINATION, AMENDMENT AND WAIVER......................................... A-26
7.1 Termination.................................................................... A-26
7.2 Effect of Termination.......................................................... A-27
7.3 Amendment...................................................................... A-27
7.4 Extension; Waiver.............................................................. A-27
ARTICLE 8--GENERAL PROVISIONS........................................................ A-27
8.1 Nonsurvival of Representations and Warranties.................................. A-27
8.2 Notices........................................................................ A-27
8.3 Definitions.................................................................... A-28
8.4 Interpretation................................................................. A-34
8.5 Counterparts................................................................... A-34
8.6 Entire Agreement; No Third-Party Beneficiaries................................. A-34
8.7 Governing Law.................................................................. A-34
8.8 Assignment..................................................................... A-34
8.9 Enforcement.................................................................... A-34
8.10 Severability.................................................................. A-34
8.11 Guaranty...................................................................... A-35
A-iv
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of
December 11, 1998, by and among Twin Acquisition Corp., a Minnesota corporation
("Sub") and a direct wholly owned subsidiary of Allied Digital, Inc., a New York
corporation ("ADI"), Vaughn Communications, Inc., a Minnesota corporation (the
"Company"), and ADI (for purposes of Section 8.11 only).
RECITALS
A. The Boards of Directors of Sub and the Company have approved, and deem it
advisable and in the best interests of their respective companies and
shareholders to consummate, a merger of Sub with and into the Company (the
"Merger"), with the Company as the surviving corporation (the "Surviving
Corporation") in the Merger, upon the terms and subject to the conditions set
forth in this Agreement, pursuant to which each share of Common Stock, par value
$.10 per share, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time, other than (i) shares of Company Common
Stock owned by the Company or by Sub or (ii) shares of Company Common Stock held
by shareholders who properly exercise, preserve and protect their dissenters'
rights under Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act ("MBCA") ("Dissenters' Rights"), will be converted into the
right to receive, subject to the terms hereof, $10.00 per share in cash.
B. The Merger and this Agreement require the vote of a majority of the
outstanding shares of Company Common Stock entitled to vote thereon for the
approval thereof (the "Company Shareholder Approval") at a special meeting of
the shareholders of the Company (the "Special Meeting").
C. Certain capitalized terms shall have the meanings ascribed to them in
Section 8.3.
AGREEMENT
In consideration of the above recitals, and of the representations,
warranties, covenants and agreements contained in this Agreement, the parties
agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the MBCA, Sub shall be merged with and
into the Company at the Effective Time. Upon the Effective Time, the separate
existence of Sub shall cease, and the Company shall continue as the Surviving
Corporation having the name Vaughn Communications, Inc.
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1, and subject to the satisfaction or waiver of the conditions set forth in
Article 6, the closing of the Merger (the "Closing"), will take place at 10:00
a.m. Eastern time on the second Business Day after satisfaction of the
conditions set forth in Article 6 (or, if not satisfied or waived at that time,
as soon as practicable thereafter following satisfaction or waiver of the
conditions set forth therein (the "Closing Date")) at the offices of Morgan,
Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178 unless another
date, time or place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME OF THE MERGER. On the Closing Date, the parties shall
file a certificate of merger or other appropriate documents (in any such case,
the "Certificate of Merger") executed in accordance with the relevant provisions
of the MBCA and shall make all other filings or recordings required under the
MBCA. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with the Secretary of State of the State of Minnesota, or
at such other time as is permissible in accordance with the
A-1
MBCA and as Sub and the Company shall agree should be specified in the
Certificate of Merger (the time the Merger becomes effective being the
"Effective Time").
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the MBCA.
1.5 ARTICLES OF INCORPORATION; BYLAWS.
(a) The Articles of Incorporation of the Company as they may be amended
or restated (the "Articles") as in effect at the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable Law.
(b) At the Effective Time, the bylaws attached hereto as Exhibit A shall
be the bylaws of the Surviving Corporation until thereafter amended as
provided by Law and such bylaws.
1.6 DIRECTORS. The directors of the Surviving Corporation shall be the
Persons designated by Sub immediately prior to the Effective Time, each to hold
office in accordance with the Articles of Incorporation and the bylaws of the
Surviving Corporation.
1.7 OFFICERS. The officers of the Surviving Corporation shall be the
officers of the Company immediately prior to the Effective Time, in each case
until their respective successors are duly elected or appointed and qualified.
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of Company
Common Stock or any shares of capital stock of Sub:
(a) COMMON STOCK OF SUB. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
one share of common stock of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND SUB-OWNED COMPANY COMMON
STOCK. Each share of the Company Common Stock that is owned by the Company
and each share of Company Common Stock that is owned by Sub shall
automatically be canceled and retired and shall cease to exist, and no cash
or other consideration shall be delivered or deliverable in exchange
therefor.
(c) CONVERSION OF COMPANY COMMON STOCK. Except as otherwise provided
herein and subject to Sections 2.3 and 2.5, each issued and outstanding
share (or any fraction thereof) of Company Common Stock, except for shares
of Company Common Stock held by shareholders who validly exercise, preserve
and protect their Dissenters' Rights, shall be converted into the right to
receive $10.00 in cash from the Surviving Corporation (the "Merger
Consideration").
(d) CANCELLATION AND RETIREMENT OF COMPANY COMMON STOCK. As of the
Effective Time, all shares of Company Common Stock (other than shares
canceled pursuant to Section 2.1(b)) issued and outstanding immediately
prior to the Effective Time shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares of Company Common Stock
shall cease to have any rights with respect thereto, except the right to
receive the Merger Consideration in accordance with Section 2.1(c) upon
surrender of such certificate in accordance with Section 2.5, and except for
those holders who validly exercise, preserve and protect their Dissenters'
Rights whose entitlement to receive any form of
A-2
consideration under this Agreement shall be governed by Section 302A.473 of
the MBCA ("Section 302A.473").
2.2 APPOINTMENT OF EXCHANGE AGENT. Prior to the mailing of the Proxy
Statement, Sub shall appoint a bank or trust company designated by Sub and
reasonably satisfactory to the Company to act as exchange agent (the "Exchange
Agent") for the payment of the Merger Consideration.
2.3 PAYMENT OF MERGER CONSIDERATION.
(a) PERSONS ENTITLED TO MERGER CONSIDERATION. The manner in which each
share of Company Common Stock (other than shares of Company Common Stock to
be canceled as set forth in Section 2.1(b)) shall be converted as of the
Effective Time into the right to receive the Merger Consideration shall be
as set forth in this Section 2.3. All references to "outstanding shares of
Company Common Stock" in this Section 2.3 shall mean all shares of Company
Common Stock outstanding immediately prior to the Effective Time. Each
Person who is a record holder of shares of Company Common Stock as of the
record date for the meeting of the Company's shareholders called to approve
the Merger and this Agreement, and who has not validly exercised, preserved
and protected Dissenters' Rights and remains a record holder of such stock
until the Effective Time, will be entitled, with respect to all of his
shares, to receive the Merger Consideration.
(b) DISSENTERS' RIGHTS. Any holder of outstanding shares of Company
Common Stock (other than shares referred to in Section 2.1(b)) who has not
voted for the Merger and who has properly exercised, preserved and protected
Dissenters' Rights shall be entitled to receive only such consideration as
determined in accordance with Section 302A.473; PROVIDED, HOWEVER, that any
holder of outstanding shares of Company Common Stock (other than shares
referred to in Section 2.1(b)) who has not voted for the Merger, but has
failed to properly exercise, preserve and protect Dissenters' Rights, shall
be entitled to receive the Merger Consideration in accordance with the terms
and conditions of this Agreement in lieu of the rights of a dissenting
shareholder under Section 302A.473.
2.4 STOCK PLANS. Prior to the mailing of the Proxy Statement, the Board of
Directors of the Company (or, if appropriate, any committee administering the
Stock Plans (as defined below)) shall adopt such resolutions or take such other
actions as may be required to effect the following:
(a) CANCELLATION OF COMPANY STOCK OPTIONS. Other than as expressly set
forth in the Willette Option Termination Agreement, the Company shall adjust
the terms of all outstanding options to purchase shares of Company Common
Stock ("Company Stock Options") granted under the Company's 1983 Incentive
Stock Option Plan, the Company's 1985 Stock Option Plan, the Company's 1988
Stock Option Plan, the Company's 1990 Discounted Stock Option Plan, the
Company's 1990 Non-Employee Directors Stock Option Plan, the Company's 1990
Company Wide Stock Option Plan, the Company's 1995 Stock Option Plan, the
Company's 1995 Non-Employee Directors Stock Option Plan or the Company's
1998 Stock Option Plan and any other plan or arrangement providing for the
issuance or grant of any interest in respect of capital stock of the Company
or any former Subsidiary (collectively, the "Option Plans") to provide that,
at the Effective Time, each Company Stock Option outstanding immediately
prior to the Effective Time, whether or not then vested or exercisable,
shall be canceled and thereafter the former holder thereof shall be entitled
by having held such Company Stock Option only to a payment from the
Surviving Corporation (subject to any applicable withholding taxes, as the
case may be) equal to the product of (i) the total number of shares of
Company Common Stock subject to such Company Stock Option and (ii) the
excess of $10.00 over the exercise price per share of Company Common Stock
subject to such Company Stock Option, payable in cash immediately following
the Effective Time.
(b) TERMINATION OF STOCK PLANS. Except as otherwise agreed to in
writing by Sub, the Option Plans and any other plan, program or arrangement
providing for the issuance or grant of any interest in respect of the
capital stock of the Company or any former Subsidiary (collectively, the
"Stock
A-3
Plans") shall terminate as of the Effective Time, and the Company shall
ensure that following the Effective Time no holder of a Company Stock Option
nor any participant in any of the Stock Plans shall have any right
thereunder to acquire any equity securities of the Company or the Surviving
Corporation.
2.5 EXCHANGE OF CERTIFICATES.
(a) DEPOSIT CASH WITH EXCHANGE AGENT. As soon as reasonably
practicable as of or after the Effective Time, Sub shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article 2, the Merger
Consideration.
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of an outstanding
certificate or certificates which prior thereto represented shares of
Company Common Stock (other than certificates held of record or beneficially
by the Company or Sub and other than certificates held by a holder that has
properly exercised, preserved and protected Dissenters' Rights) (i) a letter
of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to such certificate shall pass, only upon delivery of
such certificates to such Exchange Agent), and (ii) instructions for use in
effecting the surrender of the certificates for the Merger Consideration.
Upon proper surrender to the Exchange Agent of such certificates for
cancellation, the holder of such certificates shall after the Effective Time
be entitled only to the amount of cash into which the aggregate number of
shares of Company Common Stock previously represented by such certificate or
certificates surrendered shall have been converted pursuant to this
Agreement. The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose
to effect an orderly exchange thereof in accordance with normal exchange
practices. After the Effective Time, there shall be no further transfer on
the records of the Company or its transfer agent of certificates
representing shares of Company Common Stock and if such certificates are
presented to the Company for transfer, they shall be canceled against
delivery of cash as hereinabove provided. If cash is to be remitted to a
Person other than that in which the certificate for Company Common Stock
surrendered for exchange is registered, it shall be a condition of such
exchange that the certificate so surrendered shall be properly endorsed,
with signature guaranteed, or otherwise in proper form for transfer and that
the Person requesting such exchange shall establish to the satisfaction of
the Surviving Corporation or its transfer agent that any transfer or other
taxes required by reason of payment of Merger Consideration to a Person
other than that of the registered holder of the certificate surrendered has
been paid or is not applicable. Until surrendered as contemplated by this
Section 2.5(b), each certificate for shares of Company Common Stock shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration. No interest will be
paid or will accrue on any cash payable as Merger Consideration.
(c) LOST CERTIFICATES. In the event that a certificate for shares of
Company Common Stock shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the holder claiming such certificate
to have been lost, stolen or destroyed, the amount to which such holder
would have been entitled under Section 2.5(b) but for failure to deliver
such certificate to the Exchange Agent shall nevertheless be paid to such
holder, provided that the Surviving Corporation may, in its sole discretion
and as a condition precedent to such payment, require such holder to give
the Surviving Corporation a bond in such sum as it may reasonably direct as
indemnity against any claim that may be had against the Surviving
Corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All cash paid
upon the surrender for exchange of certificates representing shares of
Company Common Stock in accordance with the terms of this Article 2
(including any cash paid pursuant to the valid exercise of Dissenters'
Rights)
A-4
shall be deemed to have been issued (and paid) in full satisfaction of all
rights pertaining to the shares of Company Common Stock theretofore
represented by such certificates.
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Merger
Consideration deposited with the Exchange Agent pursuant to this Section 2.5
(the "Exchange Fund") which remains undistributed to the holders of the
certificates representing shares of Company Common Stock for six months
after the Effective Time shall be delivered to the Surviving Corporation,
upon demand, and any holders of shares of Company Common Stock who have not
theretofore complied with this Article 2 shall thereafter look only to the
Surviving Corporation and only as general creditors thereof for payment of
their claim for cash.
(f) NO LIABILITY. To the fullest extent permitted by Law, none of Sub,
the Company or the Exchange Agent shall be liable to any Person in respect
of cash from the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law. If any
certificates representing shares of Company Common Stock shall not have been
surrendered prior to five years after the Effective Time (or immediately
prior to such earlier date on which any cash in respect of such certificate
would otherwise escheat to or become the property of any Governmental
Entity), any such cash in respect of such certificate shall, to the extent
permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any Person
previously entitled thereto.
(g) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest the
cash included in the Exchange Fund, as directed by the Surviving
Corporation, on a daily basis. Any interest and other income resulting from
such investments shall be paid to the Surviving Corporation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Sub as follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER. The Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate
power and authority to carry on its business as now being conducted and to
own, lease and operate all of its properties and assets. Except as set forth
in Section 3.1(a) of the disclosure schedule (the "Company Disclosure
Schedule") delivered to Sub by the Company at the time of execution of this
Agreement, the Company is duly qualified or licensed to do business and is
in good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties and assets makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the
aggregate) would not have a Material Adverse Effect with respect to the
Company. Attached as Section 3.1(a) of the Company Disclosure Schedule are
complete and correct copies of the Articles and Bylaws of the Company.
(b) SUBSIDIARIES. The Company has no Subsidiaries. The Company does
not own, directly or indirectly, any capital stock or other ownership
interest in any corporation, partnership, business association, joint
venture or other entity.
(c) CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock, par value $.10 per
share. Subject to any Permitted Changes as of the date of this Agreement,
there are (i) 4,082,226 shares of Company Common Stock issued and
outstanding; (ii) 320,824 shares of Company Common Stock issuable upon
exercise of outstanding Company Stock Options granted under the Option Plans
but not yet exercisable; and (iii) 203,095
A-5
shares of Company Common Stock issuable upon exercise of outstanding Company
Stock Options granted under the Option Plans and immediately exercisable.
Except as set forth above, no shares of capital stock or other equity
securities of the Company are issued, reserved for issuance or outstanding.
All outstanding shares of capital stock of the Company are, and all shares
which may be issued pursuant to the Stock Plans will be when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no outstanding bonds, debentures, notes or
other Debt instruments or other securities of the Company having the right
to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which shareholders of the Company may vote.
Except as set forth above, there are no outstanding securities, options,
warrants, preemptive rights, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company is a party or
by which it is bound obligating the Company to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock or
other equity or voting securities of the Company or obligating the Company
to issue, grant, extend or enter into any such security, option, warrant,
pre-emptive right, call, right, commitment, agreement, arrangement or
undertaking. Except as set forth in Section 3.1(c) of the Company Disclosure
Schedule and other than the Company Stock Options, (i) there are no
outstanding contractual obligations, commitments, understandings or
arrangements of the Company to repurchase, redeem or otherwise acquire or
make any payment in respect of or measured or determined based on the value
or market price of any shares of capital stock of the Company and (ii) to
the Knowledge of the Company, there are no irrevocable proxies with respect
to shares of capital stock of the Company. Other than as set forth in
Section 3.1(c) of the Company Disclosure Schedule, there are no agreements
or arrangements pursuant to which the Company is or could be required to
register shares of Company Common Stock or other securities under the
Securities Act of 1933, as amended (the "Securities Act").
(d) AUTHORITY; NONCONTRAVENTION. The Company has the requisite
corporate power and authority to enter into this Agreement and, subject to
the Company Shareholder Approval with respect to the consummation of the
Merger, to consummate the transactions contemplated hereby and to perform
its obligations hereunder. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this
Agreement or consummate the contemplated transactions, subject, in the case
of the Merger, to the Company Shareholder Approval. This Agreement has been
duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms. Except as disclosed in Section 3.1(d) of the
Company Disclosure Schedule, the execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or result in
any breach or violation of or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation
or acceleration of or "put" right with respect to any obligation or to loss
of a material benefit under, or result in the creation of any Lien upon any
of the properties or assets of the Company under, (i) the Articles or
bylaws, as they may be amended and restated (the "Bylaws"), of the Company,
(ii) any Contract or Permit applicable to the Company or its properties or
assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any Order, Laws, or arbitration award
applicable to the Company or its properties or assets; other than, in the
case of clauses (ii) and (iii), any such conflicts, breaches, violations,
defaults, rights, losses or Liens that individually or in the aggregate
could not have a Material Adverse Effect with respect to the Company or
could not prevent, hinder or materially delay the ability of the Company to
consummate the transactions contemplated by this Agreement. No consent,
approval, Order or authorization of, or registration, declaration or filing
with, or notice to, any Governmental Entity, is required by or with respect
to the Company in connection with the execution and delivery of this
A-6
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for (i) the filing of a premerger
notification and report form by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the
filing with the United States Securities and Exchange Commission (the "SEC")
of (y) a proxy statement relating to the Company Shareholder Approval (such
proxy statement as amended or supplemented from time to time, the "Proxy
Statement"), and (z) such reports under the Securities Exchange Act of 1934
(the "Exchange Act") as may be required in connection with this Agreement
and the transactions contemplated by this Agreement, (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Minnesota,
and appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business and (iv) such other consents,
approvals, Orders, authorizations, registrations, declarations, filings or
notices as are set forth in Section 3.1(d) of the Company Disclosure
Schedule. The Board of Directors (at a meeting duly called and held at which
a quorum was present), based upon the unanimous recommendation of a
committee (the "Special Committee") comprised solely of all of the Company's
disinterested directors (as such term is defined in Section 302A.673 of the
MBCA), has unanimously determined that the Merger is advisable and in the
best interests of the Company and has unanimously resolved to recommend
approval of the Merger and adoption of this Agreement by the holders of the
Company Common Stock.
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES; FINANCIAL STATEMENTS.
(i) The Company has filed all required reports, schedules, forms,
statements and other documents with the SEC since February 1, 1995
(collectively, and in each case including all exhibits and schedules
thereto and documents incorporated by reference therein, the "SEC
Documents"). As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such SEC Documents, and none of
the SEC Documents (including any and all financial statements included
therein) as of such dates contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
consolidated financial statements of the Company included in the SEC
Documents (the "SEC Financial Statements") comply as to form in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP (except, in the case of unaudited
consolidated quarterly statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto) and fairly present the consolidated
financial position of the Company and its former Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited
quarterly statements, to normal year-end audit adjustments).
(ii) The Company has furnished Sub with the unaudited consolidated
balance sheet of the Company as of November 30, 1998 (after giving effect
to the consummation of the disposition of the Products Division of the
Company) (the "Unaudited Financial Statement"). The Unaudited Financial
Statement fairly presents the consolidated financial position of the
Company as of November 30, 1998 (after giving effect to the consummation
of the disposition of the Products Division), and has been prepared in
conformity with GAAP, except as otherwise specifically noted in the notes
thereto.
(iii) Except for Liabilities which are accrued or reserved against in
the SEC Financial Statements (or reflected in the notes thereto) or which
were incurred after the date of the most recent SEC Financial Statements
in the ordinary course of business and consistent with past practices or
which are set forth in Section 3.1(e) of the Company Disclosure Schedule,
the Company does not have any material Liabilities (whether absolute,
accrued, contingent or otherwise).
A-7
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, at the date it is first mailed to the Company's
shareholders or at the time of the Special Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with
respect to statements made or incorporated by reference therein based on
information supplied by Sub for inclusion or incorporation by reference
therein.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
Section 3.1(g) of the Company Disclosure Schedule, since February 1, 1995,
the Company has conducted its business only in the ordinary course
consistent with past practice, and since December 31, 1997, there is not and
has not been: (i) any Material Adverse Change with respect to the Company;
(ii) any condition, event or occurrence which, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect or
give rise to a Material Adverse Change with respect to the Company; (iii)
any event which, if it had taken place following the execution of this
Agreement, would not have been permitted by Section 4.1 without the prior
consent of Sub; or (iv) any condition, event or occurrence which would
prevent, hinder or materially delay the ability of the Company to consummate
the transactions contemplated by this Agreement.
(h) LITIGATION; LABOR MATTERS; COMPLIANCE WITH LAWS.
(i) Except as set forth in Section 3.1(h) of the Company Disclosure
Schedule, there is no suit, action or proceeding or investigation pending
or, to the Knowledge of the Company, threatened against or affecting the
Company and no basis for any such suit, action, proceeding or
investigation that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect with respect to the Company or
prevent, hinder or materially delay the ability of the Company to
consummate the transactions contemplated by this Agreement, nor is there
any Order of any Governmental Entity or arbitrator outstanding against
the Company having, or which, insofar as reasonably could be foreseen by
the Company, in the future could have, any such effect.
(ii) The Company is not a party to, or bound by, any collective
bargaining agreement, Contract or other agreement or understanding with a
labor union or labor organization, and it is not the subject of any
proceeding asserting that it has committed an unfair labor practice or
seeking to compel it to bargain with any labor organization as to wages
or conditions of employment, nor is there any strike, work stoppage or
other labor dispute involving it pending or, to its Knowledge,
threatened, any of which could have a Material Adverse Effect with
respect to the Company.
(iii) The conduct of the Business substantially complies with all
statutes, Laws, regulations, ordinances, rules, judgments, Orders,
decrees or arbitration awards applicable thereto, except for violations
or failures so to comply, if any, that, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect with
respect to the Company.
(i) EMPLOYEE MATTERS. The Company has delivered to Sub full and
complete copies or descriptions of and Section 3.1(i) of the Company
Disclosure Schedule sets forth a list of each material employment,
severance, bonus, profit sharing, compensation, termination, stock option,
stock appreciation right, restricted stock, phantom stock, performance unit,
pension, retirement, deferred compensation, welfare or other employee
benefit agreement, trust fund or other arrangement and any union, guild or
collective bargaining agreement maintained or contributed to or required to
be contributed to by the Company or any of its ERISA Affiliates, for the
benefit or welfare of any director, officer, employee or former employee of
the Company or any of its ERISA Affiliates (such plans and
A-8
arrangements being collectively the "Company Benefit Plans"), whether or not
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Each of the Company Benefit Plans is in material compliance with
all applicable Laws including ERISA and the Code and all contributions have
been made on a timely basis. The Liabilities accrued under each Company
Benefit Plan are reflected on the latest balance sheet of the Company
included in the SEC Documents in accordance with GAAP applied on a
consistent basis. The Company has no Company Benefit Plan that is a
"multiemployer plan" as such term is defined in Section 3(37) of ERISA (a
"Multiemployer Plan"). The Company has no Company Benefit Plan that is
subject to Title IV of ERISA. There are no pending, threatened, or
anticipated claims (other than routine claims for benefits or immaterial
claims) by, on behalf of or against any of the Company Benefit Plans or any
trusts related thereto. Each Company Benefit Plan intended to qualify under
Section 401(a) of the Code has at all times since its adoption been so
qualified, and each trust which forms a part of any such plan has at all
times since its adoption been Tax-exempt under Section 501(a) of the Code.
Neither the Company, any former Subsidiary nor any ERISA Affiliate has
incurred any liability for any Tax imposed under Section 4971 through 4980B
of the Code or civil liability under Section 502(i) or (l) of ERISA. No
benefit under any Company Benefit Plan, including, without limitation, any
severance or parachute payment plan or agreement, will be established or
become accelerated, vested or payable by reason of any transaction
contemplated under this Agreement, other than as specifically set forth in
Section 2.4 hereof or in the employment agreements with Donald J. Drapeau
and M. Charles Reinhart. No Company Benefit Plan provides health or death
benefit coverage beyond the termination of an employee's employment, except
as required by Part 6 of Subtitle B of Title I of ERISA or Section 4980B of
the Code or any State Laws requiring continuation of benefits coverage
following termination of employment. "ERISA Affiliate" means, with respect
to any Person, any trade or business, whether or not incorporated, that
together with such Person would be deemed a "single employer" within the
meaning of Section 4001(a)(15) of ERISA.
(j) TAX RETURNS AND TAX PAYMENTS. The Company and each of its former
Subsidiaries has timely filed (or, as to former Subsidiaries, the Company
has filed on its behalf) all Tax Returns required to be filed by it, has
paid (or, as to former Subsidiaries, the Company has paid on its behalf) all
Taxes shown thereon to be due and has provided (or, as to former
Subsidiaries, the Company has made provision on its behalf of) specific
reserves in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. Except as set forth in
Section 3.1(j) of the Company Disclosure Schedule: (i) no claim for unpaid
Taxes has been asserted by a Tax authority or has become a Lien (except for
Liens for Taxes not yet due and payable) against the property of the Company
or any of its former Subsidiaries or is being asserted against the Company
or any of its former Subsidiaries; (ii) no audit, examination, investigation
or other proceeding in respect of any Tax or of any Tax Return of the
Company or any of its former Subsidiaries is being conducted, threatened or
pending by a Tax authority; (iii) no extension of the statute of limitations
on the assessment of any Taxes has been granted by the Company or any of its
former Subsidiaries and is currently in effect; (iv) all Tax Returns filed
with respect to the Company or any of its former Subsidiaries are complete
and accurate in all material respects; (v) none of the Company or any of its
former Subsidiaries has made an election under Section 341(f) of the Code;
(vi) none of the Company or its former Subsidiaries is a party to any
agreement or arrangement that could reasonably be expected to result,
separately or in the aggregate, in the actual or deemed payment by the
Company or a former Subsidiary of any "excess parachute payments" within the
meaning of Section 280G of the Code or any amount that is subject to Section
162(m) of the Code; (vii) none of the Company or its former Subsidiaries has
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code; (viii) all Taxes required to be
withheld, collected or deposited by or with respect to the Company and its
former Subsidiaries have been timely withheld, collected or deposited, as
the case may be, and, to the extent required, have been paid to the relevant
Tax authority, except, in each case,
A-9
to the extent that failing to so withhold, collect, deposit or pay would not
have a Material Adverse Effect; (ix) none of the Company or its former
Subsidiaries has issued or assumed (A) any obligations described in Section
279(b) of the Code, (B) any applicable high yield discount obligations, as
defined in Section 163(i) of the Code, or (C) any registration-required
obligations, within the meaning of Section 163(f)(2) of the Code, that are
not in registered form; (x) there are no requests for information currently
outstanding that could affect the Taxes of the Company and its former
Subsidiaries; and (xi) there are no proposed reassessments of any property
owned by the Company or any of its former Subsidiaries or other proposals
that could increase the amount of any Tax to which the Company or any of its
former Subsidiaries would be subject. Neither the Company nor any of its
former Subsidiaries is or has been a member of any consolidated, combined,
unitary or aggregate group for Tax purposes except such a group consisting
only of the Company and its former Subsidiaries. As used herein: "Tax
Return" shall mean any return, report or statement required to be filed with
any Governmental Entity with respect to Taxes; the "Code" shall mean the
Internal Revenue Code of 1986, as amended; and "Tax" or "Taxes" shall mean
all federal, state, local and foreign income, profits, franchise, gross
receipts, environmental, customs duty, capital stock, severance, stamp,
payroll, sales, employment, unemployment, disability, use, property,
withholding, excise, production, value added, occupancy and other taxes,
duties or assessments of any nature whatsoever together with all interest,
penalties, fines and additions to tax imposed with respect to such amounts
and any interest in respect of such penalties and additions to tax.
(k) STATE ANTI-TAKEOVER LAWS AND COMPANY ARTICLES OF INCORPORATION NOT
APPLICABLE. The Board of Directors of the Company and the Special Committee
(which Special Committee has been duly constituted pursuant to Section
302A.673 of the MBCA and consists only of, and includes all, disinterested
directors as defined in such Section) have approved this Agreement and the
transactions contemplated hereby and such approval constitutes approval of
the Merger and the other transactions contemplated hereby by the Board of
Directors of the Company and the Special Committee under the provisions of
Section 302A.673 of the MBCA and Article 12 of the Articles, such that
Section 302A.673 of the MBCA and Article 12 of the Articles do not apply to
this Agreement or the transactions contemplated hereby. The Merger does not
constitute a "control share acquisition" subject to the provisions of
Section 302A.671 of the MBCA, by virtue of Section 302A.011, Subd. 38(d) of
the MBCA. No other state takeover statute or similar statute or regulation
of the State of Minnesota applies or purports to apply to this Agreement or
the transactions contemplated hereby and no other provision of the Articles,
Bylaws or other governing instruments of the Company or the terms of any
agreement of the Company would, directly or indirectly, restrict or impair
the ability of ADI to vote, or otherwise to exercise the rights of a
shareholder with respect to, securities of the Company that may be acquired
or controlled by ADI by virtue of this Agreement or the transactions
contemplated hereby or permit any shareholder of the Company to acquire
securities of the Company on a basis not available to ADI in the event that
ADI were to acquire securities of the Company. The Company is not a party to
any rights or similar anti-takeover plan.
(l) ENVIRONMENTAL MATTERS. Except as disclosed in Section 3.1(l) of
the Company Disclosure Schedule: (i) to the Knowledge of the Company, the
Company has obtained and holds all necessary Environmental Permits and each
of the same are fully transferable to Sub; (ii) to the Knowledge of the
Company, the Company is in material compliance with all terms, conditions
and provisions of all applicable Environmental Permits and Environmental
Laws; (iii) there are no past, pending or, to the Knowledge of the Company,
threatened Environmental Claims against the Company, and the Company is not
aware of any facts or circumstances which could reasonably be expected to
form the basis for any Environmental Claim against the Company; (iv) to the
Knowledge of the Company, no Releases of Hazardous Materials have occurred
at, from, in, to, on, or under any Site and no Hazardous Materials are
present in, on, about or migrating to or from any Site that could give rise
to an Environmental Claim against the Company except in accordance with
applicable Laws; (v) to the Knowledge of the Company, neither the Company,
nor any predecessor of the Company, nor any
A-10
entity previously owned by the Company has transported or arranged for the
treatment, storage, handling, disposal, or transportation of any Hazardous
Material to any off Site location which could result in an Environmental
Claim against the Company; (vi) to the Knowledge of the Company, no Site is
a current, or, to the Knowledge of the Company, proposed, Environmental
Clean-up Site; (vii) to the Knowledge of the Company, there are no Liens
(other than Permitted Liens) arising under or pursuant to any Environmental
Law on any Site and there are no facts, circumstances, or conditions that
could reasonably be expected to restrict, encumber, or result in the
imposition of special conditions under any Environmental Law with respect to
the ownership, occupancy, development, use, or transferability of any Site;
(viii) to the Knowledge of the Company, there are no (A) underground storage
tanks, active or abandoned, (B) polychlorinated biphenyl-containing
equipment, or (C) asbestos-containing material at any Site; (ix) there have
been no environmental investigations, studies, audits, tests, reviews or
other analyses conducted by, on behalf of, or which are in the possession of
the Company with respect to any Site which have not been delivered to Sub
prior to execution of this Agreement; and (x) the Company is not subject to
any Order by or with any Governmental Entity imposing any material Liability
or obligations pursuant to or under any Environmental Law that would have or
would reasonably be expected to have a Material Adverse Effect on the
Company.
(m) PERSONAL PROPERTY; REAL PROPERTY.
(i) Except as disclosed in Section 3.1(m)(i) of the Company
Disclosure Schedule, the Company (A) has good, clear and marketable title
to all of the personal properties reflected in the latest audited balance
sheet included in the SEC Documents as being owned by the Company or
acquired after the date thereof which are, individually or in the
aggregate, material to the Business on a consolidated basis (except
properties sold or otherwise disposed of since the date thereof in the
ordinary course of business or in connection with the sale of the
Products Division), free and clear of (1) all Liens except (x) statutory
liens securing payments not yet due and (y) such imperfections or
irregularities of title or other Liens (other than real property
mortgages or deeds of trust) as do not materially affect the use of the
properties or assets subject thereto or affected thereby or otherwise
materially impair business operations at such properties, and (2) all
real property mortgages and deeds of trust and (B) is the lessee of all
leasehold estates reflected in the latest audited financial statements
included in the SEC Documents or acquired after the date thereof which
are material to the Business on a consolidated basis and is in possession
of the properties purported to be leased thereunder (except leaseholds
sold, assigned or otherwise disposed of in connection with the sale of
the Products Division), and each such lease is valid without default
thereunder by the lessee or, to the Company's Knowledge, the lessor.
(ii) Section 3.1(m)(ii) of the Company Disclosure Schedule contains a
true, correct and complete list (including, without limitation, legal
descriptions) of all real property owned by the Company (together with
all buildings, improvements and structures thereon and all easements,
rights of way, and appurtenances relating thereto, the "Owned Real
Property"). The Company owns the Owned Real Property in fee subject to no
Liens (including, without limitation, leases, occupancy agreements,
possessory rights, options and rights of first refusal) except as set
forth in Section 3.1(m)(ii) of the Company Disclosure Schedule (the
"Owned Real Property Permitted Liens").
(iii) Section 3.1(m)(iii) of the Company Disclosure Schedule contains
a true, correct and complete list of all leases and subleases (including,
without limitation, all modifications, extensions or amendments thereto)
under which the Company is tenant or subtenant (as so modified, extended
or amended, the "Real Property Leases"), including the date of each Real
Property Lease, the premises demised thereunder (the "Leased Real
Property," together with the Owned
A-11
Real Property, the "Real Property"). The Real Property Leases are subject
to no Liens (including, without limitation, leases, occupancy agreements,
possessory rights, options and rights of first refusal) except as set
forth in Section 3.1(m) of the Company Disclosure Schedule (the "Leased
Real Property Permitted Liens," together with the Owned Real Property
Permitted Liens, the "Permitted Liens").
(iv) Copies of the Real Property Leases and all mortgages, title
insurance policies and other title related documents with respect to the
Leased Real Property have been delivered to Sub by the Company. Subject
to the terms of the respective Real Property Leases and the Leased Real
Property Permitted Liens, to the Knowledge of the Company, the Company
has a valid and subsisting leasehold estate in and the right to quiet
enjoyment to each parcel of Leased Real Property for the full term of the
respective Real Property Lease. The Real Property Leases are in full
force and effect and are enforceable in accordance with their respective
terms, except as such enforceability may be subject to or limited by
bankruptcy, insolvency, reorganization or other similar Laws, now or
hereafter in effect, affecting the enforcement of creditors' rights
generally. The Company has not assigned, pledged, mortgaged, hypothecated
or otherwise transferred any Real Property Lease. Except as set forth in
Section 3.1(m)(iv) of the Company Disclosure Schedule, the Company has
not sublet all or any portion of any Leased Real Property. To the
Knowledge of the Company, there are no defaults by any tenant or landlord
under any Real Property Lease, and no event has occurred or failed to
occur which, with the giving of notice or the passage of time, or both,
would constitute a default under any Real Property Lease. There are no
disputes under any Real Property Lease. No penalties are accrued and
unpaid under any Real Property Lease. As of the date of this Agreement,
no landlord or tenant under any Real Property Lease has exercised any
option or right to (A) cancel or terminate such Real Property Lease or
shorten the term thereof, (B) lease additional premises, (C) reduce or
relocate the premises demised by such Real Property Lease or (D) purchase
any property. The Company does not owe nor will it owe any brokerage
commissions or finder's fees with respect to any Real Property Lease or
any renewal or extension thereof or the exercise of any right or option
thereunder.
(v) No assessments or special assessments have been levied, or, to
the Knowledge of the Company, are contemplated or pending, against any
parcel of Real Property.
(vi) The Company is not in default under, nor has it breached any of
the material terms of, any of the Permitted Liens.
(vii) To the Knowledge of the Company, the Real Property, including,
without limitation, all buildings, building systems, structural
components, roofs, and building equipment, are in good condition and
repair (reasonable wear and tear excepted), suitable for (A) their
intended purposes, (B) the purposes which they are currently being used
and (C) the operation of the Business.
(viii) Except for the Real Property, the Company does not own or hold
any interest in real property.
(ix) To the Knowledge of the Company, no portion of any parcel of
Real Property is located in an area designated as a flood zone by any
Governmental Entity.
(x) To the Knowledge of the Company, each parcel of Real Property is
in compliance with all applicable Laws in all material respects,
including, without limitation, the Americans with Disabilities Act and
all building, zoning, environmental and health Laws. To the Knowledge of
the Company, there are no notes or notices of violation of any Law
affecting or against any parcel of Real Property.
(xi) There are no condemnation or appropriation proceedings pending
or, to the Knowledge of the Company, threatened against any parcel of
Real Property.
A-12
(n) BROKERS. No broker, investment banker, financial advisor or other
Person, other than EVEREN Securities, Inc., (pursuant to fee agreements,
copies of which have been provided to Sub), is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
(o) OPINION OF FINANCIAL ADVISOR. The Company has received the opinion
of EVEREN Securities, Inc., dated the date of this Agreement (which opinion
shall be updated within five (5) days prior to the mailing of the Proxy
Statement), to the effect that the Merger Consideration to be received in
the Merger by the Company's shareholders is fair to the holders of the
Company Common Stock from a financial point of view, a signed copy of which
opinion has been delivered to Sub.
(p) BOARD RECOMMENDATION. The Board of Directors of the Company, at a
meeting duly called and held, has by unanimous vote of those directors
present (who constituted 100% of the directors then in office) (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to and in the best interests of the
shareholders of the Company, and (ii) resolved to recommend that the holders
of the shares of Company Common Stock approve this Agreement and the
transactions contemplated herein, including the Merger.
(q) REQUIRED COMPANY VOTE. The Company Shareholder Approval, being the
affirmative vote of a majority of the outstanding shares of the Company
Common Stock, is the only vote of the holders of any class or series of the
Company's securities necessary to approve this Agreement, the Merger and the
other transactions contemplated hereby.
(r) INSURANCE. Since January 1, 1993, the Company has obtained and
maintained in full force and effect insurance with responsible and reputable
insurance companies or associations in such amounts, on such terms, with
such deductibles and covering such risks, including fire and other risks
insured against by extended coverage, as is customarily carried by
reasonably prudent Persons conducting businesses or owning assets similar to
those of the Company, and the Company has maintained in full force and
effect liability insurance against claims for personal injury or death or
property damage occurring in connection with the Business activities of the
Company or any properties owned, occupied or controlled by the Company in
such amount as is customarily carried by reasonably prudent Persons
conducting businesses or owning assets similar to those of the Company.
There is no material default with respect to any provision contained in any
such policy or binder, nor has the Company failed to give any material
notice or to present any material claim under any such policy or binders in
due and timely fashion. There are no billed but unpaid premiums past due
under any such policy or binder, the failure of which to be paid would
result in the cancellation of such policy or binder. Except as otherwise set
forth in Section 3.1(r) of the Company Disclosure Schedule, (i) there are no
outstanding claims in excess of normal retentions that are not covered under
any such policy or binder and, to the Knowledge of the Company, there has
not occurred any event that might reasonably form the basis of any claim in
excess of normal retentions that is not covered against or relating to the
Company that is not covered by any such policy and binder; (ii) no notice of
cancellation or non-renewal of any such policy or binder has been received;
and (iii) except as set forth in Section 3.1(r) of the Company Disclosure
Schedule, there are no performance bonds outstanding with respect to the
Company.
(s) PERMITS. Except as set forth in Section 3.1(s) of the Company
Disclosure Schedule and except as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, (i) the Permits
are valid and in full force and effect, (ii) the Company is not in default
under, and no condition exists that with notice or lapse of time or both
would constitute a default under, the Permits and (iii) none of the Permits
will be terminated or impaired or become terminable, in whole or in part, as
a result of the transactions contemplated by this Agreement. The Company has
A-13
all Permits necessary to carry on its business as currently conducted or as
proposed to be conducted, except where the failure to have any Permit would
not have a Material Adverse Effect.
(t) INTELLECTUAL PROPERTY RIGHTS. The Company has interests in or uses
only the Intellectual Property disclosed in Section 3.1(t) of the Company
Disclosure Schedule in connection with the conduct of the Business. Except
as set forth in Section 3.1(t) of the Company Disclosure Schedule, the
Company either owns or has a valid and binding license to use each item of
Intellectual Property set forth in Section 3.1(t) of the Company Disclosure
Schedule. No other Intellectual Property is used or necessary in the conduct
of the Business. Except as disclosed in Section 3.1(t) of the Company
Disclosure Schedule, (i) the Company has the exclusive right to use the
Intellectual Property disclosed in Section 3.1(t) of the Company Disclosure
Schedule, (ii) all registrations with and applications to any Governmental
Entity in respect of such Intellectual Property are valid and in full force
and effect and are not subject to the payment of any Taxes or maintenance
fees or the taking of any other actions by the Company to maintain their
validity or effectiveness, (iii) there are no restrictions on the direct or
indirect transfer of any license, or any interest therein, held by the
Company in respect of such Intellectual Property, (iv) the Company has
delivered to Sub prior to the execution of this Agreement documentation with
respect to any invention, process, design, computer program or other
know-how or trade secret included in such Intellectual Property, which
documentation is accurate in all material respects and reasonably sufficient
in detail and content to identify and explain such invention, process,
design, computer program or other know-how or trade secret and to facilitate
its full and proper use without reliance on the special knowledge or memory
of any Person, (v) the Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of its trade secrets in
respect of the Business, (vi) the Company is not, nor has it received any
notice that it is, in default (or with the giving of notice or lapse of time
or both, would be in default) under any license to use such Intellectual
Property and (vii) the Company does not have any Knowledge that such
Intellectual Property is being infringed by any other Person. Except as set
forth in Section 3.1(t) of the Company Disclosure Schedule, the Company has
not received notice that the Company is infringing any Intellectual Property
of any other Person in connection with the conduct of the Business; no claim
is pending or, to the Knowledge of the Company, has been made to such effect
that has not been resolved, and, to the Knowledge of the Company, the
Company is not infringing any Intellectual Property rights of any other
Person in connection with the conduct of the Business.
(u) CONTRACTS. Section 3.1(u) of the Company Disclosure Schedule sets
forth a list of all material Contracts to which the Company is a party or by
or to which it or its assets are bound or subject, including, without
limitation, (i) Contracts relating to the borrowing of money; (ii) Contracts
with any current Affiliate or current or former officer or director of the
Company; (iii) joint venture agreements between the Company and an
unaffiliated third party; (iv) any Contracts providing for payments to or
from the Company of $100,000 or more per year; (v) any license agreements,
distribution agreements, franchise agreements or agreements in respect of
similar rights granted to or held by the Company; (vi) any Contract that
materially limits the freedom of the Company to compete in any line of
business or with any Person or in any geographical area or which would so
materially limit the freedom of the Company so to compete after the
Effective Time; (vii) any other Contract not made in the ordinary course of
business which Contract is material to the Company; (viii) any Tax sharing
or Tax indemnity agreement or other similar arrangement or (ix) any lease
(other than Real Property Leases). The Company has heretofore made available
to Sub true and complete copies of each of the Contracts set forth in
Section 3.1(u) of the Company Disclosure Schedule. Except for Contracts that
could not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect, all Contracts disclosed in Section 3.1(u) of the
Company Disclosure Schedule are valid and binding Contracts of the Company,
are in full force and effect (except for those that have terminated or will
terminate by their own terms), and the Company is not, nor, to the Knowledge
of the Company, is any other party thereto, in default in any material
respect under the terms of any such Contract.
A-14
(v) CERTAIN BUSINESS PRACTICES. Neither the Company nor any of its
directors, officers or employees or, to the Knowledge of the Company, agents
or representatives (in their capacity as directors, officers, agents,
representatives or employees) has: (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (ii) directly or indirectly paid or delivered any fee,
commission or other sum of money or item of property, however characterized,
to any finder, agent, or other Person acting on behalf of or under the
auspices of a governmental official or Governmental Entity, in the United
States or any other country, which is in any manner related to the Business,
that was illegal under any Federal, state or local laws of the United States
or any other country having jurisdiction; or (iii) made any payment to any
customer or supplier of the Company or any officer, director, partner,
employee or agent of any such customer or supplier for the unlawful sharing
of fees or to any such customer or supplier or any such officer, director,
partner, employee or agent for the unlawful rebating of charges, or engaged
in any other unlawful reciprocal practice, or made any other unlawful
payment or given any other unlawful consideration to any such customer or
supplier or any such officer, director, partner, employee or agent, in
respect of the Business.
(w) YEAR 2000. Except as set forth in Section 3.1(w) of the Company
Disclosure Schedule, the information systems (including all computer
hardware and software) and technology (including, but not limited to,
information technology, embedded systems, or any other electro-mechanical or
processor-based system), owned, licensed or otherwise used by the Company
are free of any "Year 2000 Problem" and any "9/9/99 Problem" such that such
systems and technology do not and will not, without requiring any
modifications, experience any malfunctions, premature cancellation or
expiration of contractual rights or deletion of data, or any other problems
in connection with (i) the year 2000 (and all subsequent years) as distinct
from 1900's years, (ii) the date February 29, 2000, and all subsequent leap
years, or (iii) the date September 9, 1999.
(x) NO OTHER REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants that it is not relying upon any representations and warranties
of Sub that are not contained in this Agreement or in the documents and
instruments delivered with this Agreement and agrees that there shall not be
deemed to be any other express or implied representations or warranties made
by or on behalf of Sub in connection with the Merger or the other
transactions contemplated by this Agreement (including the documents and
instruments delivered with this Agreement).
3.2 REPRESENTATIONS AND WARRANTIES OF SUB. Sub represents and warrants to
the Company as follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER. Sub is duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority
to carry on its business as now being conducted. Sub is a newly formed
Minnesota corporation and, except for activities incident to the acquisition
of the Company, has not engaged in any business activities. On the Closing
Date, all the outstanding shares of capital stock of Sub will have been
validly issued and are fully paid and nonassessable and will be owned (of
record and beneficially) by ADI, free and clear of all Liens. ADI is an
indirect, wholly owned subsidiary of ADT.
(b) SUBSIDIARIES. Sub has no Subsidiaries and during the period
commencing with the date hereof and ending at the Effective Time will have
no Subsidiaries.
(c) AUTHORITY; NONCONTRAVENTION. Sub has all requisite corporate power
and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of
this Agreement by Sub and the consummation by Sub of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of Sub. This Agreement has been duly executed
and delivered by and constitutes a valid and binding obligation of Sub,
enforceable against Sub in accordance with its terms. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated by this
A-15
Agreement and compliance with the provisions of this Agreement will not,
conflict with, or result in any breach or violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of or "put" right with respect to
any obligation or to any loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of Sub under, (i)
the Articles of Incorporation or bylaws of Sub, (ii) any Contract or Permit
applicable to Sub or its properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following
sentence, any Order, Laws or arbitration award applicable to Sub or its
respective properties or assets; other than, in the case of clauses (ii) and
(iii), any such conflicts, breaches, violations, defaults, rights, losses or
Liens that individually or in the aggregate could not have a Material
Adverse Effect with respect to Sub or could not prevent, hinder or
materially delay the ability of Sub to consummate the transactions
contemplated by this Agreement. No consent, approval, Order or authorization
of, or registration, declaration or filing with, or notice to, any
Governmental Entity is required by or with respect to Sub in connection with
the execution and delivery of this Agreement by Sub or the consummation by
Sub of any of the transactions contemplated by this Agreement, except for
(i) the filing of a premerger notification and report form under the HSR
Act, (ii) the filing with the SEC of such reports under the Exchange Act as
may be required in connection with this Agreement and the transactions
contemplated hereby, (iii) the filing of the Certificate of Merger with the
Secretary of State of the State of Minnesota, and (iv) such other consents,
approvals, Orders, authorizations, registrations, declarations, filings or
notices as may be required under the "takeover" or "blue sky" laws of
various states.
(d) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Sub for inclusion or incorporation by reference in the Proxy
Statement will, at the date the Proxy Statement is first mailed to the
Company's shareholders or at the time of the Special Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(e) ABSENCE OF CERTAIN CHANGES OR EVENTS. Sub has conducted its
business only in the ordinary course consistent with past practice, and
there is not and has not been (i) any Material Adverse Change with respect
to Sub; (ii) any condition, event or occurrence which, individually or in
the aggregate, could reasonably be expected to have a Material Adverse
Effect or give rise to a Material Adverse Change with respect to Sub; or
(iii) any condition, event or occurrence which could reasonably be expected
to prevent, hinder or materially delay the ability of Sub to consummate the
transactions contemplated by this Agreement.
(f) BROKERS. No broker, investment banker, financial advisor or other
Person is entitled to or may be paid any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Sub.
(g) FINANCING.
(i) Sub has provided to the Company true and complete copies of
commitment letters (the "Bank Commitment Letters"), in each case dated
December 1, 1998, from Fleet and CMP pursuant to which they have
committed to provide, together with the equity financing referred to in
clause (ii) below, all of the financing required in order to consummate
the transactions contemplated by this Agreement and to fund what Sub
reasonably believes to be the working capital needs of the Company
following the Closing. The financing to be provided pursuant to the
foregoing arrangements is hereinafter referred to as the "Financing." As
of the date hereof, the Bank Commitment Letters relating to the
Financing have not been withdrawn and are in full force and effect.
A-16
(ii) Sub has delivered to the Company a true and complete copy of a
commitment letter addressed to ADI ("399 Commitment Letter"), dated as
of December 1, 1998, from 399 Venture Partners, Inc. ("399") pursuant to
which 399 (together with its Affiliates) will have available up to $15
million, subject to the terms and conditions set forth therein, for
purposes of consummating the transactions contemplated by this
Agreement. As of the date hereof, the 399 Commitment Letter has not been
withdrawn and is in full force and effect.
(h) CERTAIN ANTI-TAKEOVER PROVISIONS NOT APPLICABLE. To the Knowledge
of Sub, neither Sub nor any Affiliate or associate was an "interested
shareholder" of the Company as defined in Section 302A.011, Subd. 49(a) of
the MBCA immediately prior to Sub's execution and delivery of this
Agreement.
(i) NO OTHER REPRESENTATIONS AND WARRANTIES. Sub represents and
warrants that it is not relying upon any representations and warranties of
the Company that are not contained in this Agreement or in the documents and
instruments delivered with this Agreement or in the Company Disclosure
Schedule and agrees that there shall not be deemed to be any other express
or implied representations or warranties made by or on behalf of the Company
in connection with the Merger or the other transactions contemplated by this
Agreement (which includes the documents and instruments delivered with this
Agreement and the Company Disclosure Schedule).
ARTICLE 4
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
4.1 CONDUCT OF BUSINESS OF THE COMPANY. From the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time (except as otherwise specifically required by the terms of this
Agreement), the Company shall act and carry on the Business in the usual,
regular and ordinary course of business consistent with past practice and, to
the extent consistent therewith, use its best efforts to preserve intact its
current business organizations, keep available the services of its current
officers and employees and preserve its relationships with customers, suppliers,
licensors, licensees, advertisers, distributors and others having business
dealings with it to the end that its goodwill and ongoing businesses shall not
be impaired in any material respect at the Effective Time. Without limiting the
generality of the foregoing, from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
the Company shall not directly or indirectly without the prior written consent
of Sub:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property or any combination
thereof) in respect of, any of its capital stock, (ii) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of
any other securities or property in respect of, in lieu of or in
substitution for shares of its capital stock, or (iii) purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities, except, in the case of clause (iii), for the
acquisition of shares of Company Common Stock from holders of Company Stock
Options in full or partial payment of the exercise price payable by such
holder or tax liability arising in connection therewith, upon exercise of
Company Stock Options outstanding on the date of this Agreement in
accordance with their present terms in the ordinary course of business;
(b) authorize for issuance, issue, deliver, sell, pledge or otherwise
encumber any shares of the capital stock of the Company, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire any such shares, voting securities or convertible
securities or any other securities or equity equivalents (including, without
limitation, stock appreciation rights), or contractual obligation valued or
measured by the value or market price of Company Common Stock
A-17
(other than the issuance of Company Common Stock upon the exercise of
Company Stock Options outstanding on the date of this Agreement and in
accordance with their present terms in the ordinary course of business, such
issuance, together with the acquisitions of shares of Company Common Stock
permitted under clause (a) above, being referred to herein as "Permitted
Changes");
(c) amend or otherwise modify its Articles, By-laws or other comparable
charter or organizational documents;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association, or other business organization or division thereof;
(e) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except in
the ordinary course of business consistent with past practice;
(f) (i) incur any Debt or issue or sell any Debt securities or warrants
or other rights to acquire any Debt securities of the Company, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing, except for short-term borrowings
incurred in the ordinary course of business consistent with past practice,
or (ii) make any loans, advances or capital contributions to, or investments
in, any other Person, other than to the Company;
(g) acquire or agree to acquire any assets, or make or agree to make any
capital expenditures except in the ordinary course of business consistent
with past practice;
(h) pay, discharge or satisfy any claims (including claims of
shareholders), Liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction, of (i) Liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as
in effect on the date hereof, or (ii) Liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated audited
financial statements (or the notes thereof) of the Company included in the
SEC Documents, or waive, release, grant, or transfer any rights of material
value or modify or change in any material respect any existing license,
lease, Contract or other document, other than in the ordinary course of
business consistent with past practice;
(i) adopt or amend in any material respect (except as may be required by
Law or by this Agreement) any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund or other arrangement
(including any Company Benefit Plan) for the benefit or welfare of any
employee, director or former director or employee or, other than increases
for individuals (other than officers and directors) in the ordinary course
of business consistent with past practice, increase the compensation or
fringe benefits of any director, employee or former director or employee,
pay any benefit not required by any existing plan, arrangement or agreement,
grant any new or modified severance or termination arrangement or increase
or accelerate any benefits payable under its severance or termination pay
policies in effect on the date hereof, other than any such increase or
acceleration provided for under such policies as in effect on the date of
this Agreement;
(j) change any material accounting principle used by it, except for such
changes as may be required to be implemented following the date of this
Agreement pursuant to GAAP or rules and regulations of the SEC promulgated
following the date hereof;
(k) take any action that would, or is reasonably likely to, result in
any of its representations and warranties in this Agreement becoming untrue,
or in any of the conditions to the Merger set forth in Article 6 not being
satisfied;
A-18
(l) except in the ordinary course of business and consistent with past
practice, make any Tax election, change any Tax accounting principle or
practice or settle or compromise any federal, state, local or foreign income
Tax Liability; and
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
In addition, from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, the Company
shall deliver to Sub a copy of any material notice related to any Real Property
or any Real Property Lease.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 PREPARATION OF PROXY STATEMENT; SPECIAL MEETING.
(a) PROXY STATEMENT. Promptly following the date of this Agreement,
the Company shall prepare and file with the SEC the Proxy Statement. The
Company will use its reasonable best efforts to cause the Proxy Statement to
be mailed to the Company's shareholders as promptly as practicable after it
has been filed with the SEC unless the SEC has elected to review and comment
upon the Proxy Statement, in which case the Company will use its reasonable
best efforts to cause the Proxy Statement to be mailed to the Company's
shareholders as promptly as practicable after the SEC has completed such
review.
(b) SPECIAL MEETING. The Company will, as promptly as practicable
following the date of this Agreement, duly call, give notice of, convene and
hold the Special Meeting. The Company will, through its Board of Directors,
recommend to its shareholders approval of the foregoing matters, as set
forth in Section 3.1(p). Such recommendation, together with a copy of the
fairness opinion referred to in Section 3.1(o), shall be included in the
Proxy Statement. The Company will use reasonable efforts to hold such
meeting as soon as practicable after the date hereof.
(c) STOCK RECORDS. The Company will cause its transfer agent to make
stock transfer records relating to the Company available to the extent
reasonably necessary to effectuate the intent of this Agreement.
5.2 ACCESS TO INFORMATION.
(a) ACCESS. From the date hereof through the Effective Time, the
Company shall, and shall cause its officers, employees, counsel, financial
advisors and other representatives to, afford to Sub and its representatives
reasonable access during normal business hours during the period prior to
the Effective Time to its properties, books, contracts, commitments,
personnel and records and, during such period, shall, and shall cause its
officers, employees and representatives to, furnish promptly to Sub (i) a
copy of each report, schedule, registration statement and other document
filed by it during such period pursuant to the requirements of Federal or
state securities laws and (ii) all other information concerning its
business, properties, financial condition, operations and personnel as Sub
may from time to time reasonably request. No investigation pursuant to this
Section 5.2 shall affect any representations or warranties of the Company
herein or the conditions to the obligations of the parties hereto. All
information obtained by Sub pursuant to this Section 5.2(a) shall be kept
confidential in accordance with the confidentiality agreement dated March
30, 1998 between Citicorp Venture Capital, Ltd. and EVEREN Securities, Inc.
(the "Confidentiality Agreement").
(b) REPORT OF DEVELOPMENTS. From the date hereof through the Effective
Time, the Company shall report on operational matters and promptly advise
Sub orally and in writing of any change or event having, or which, insofar
as can reasonably be foreseen, could have, a Material Adverse Effect on the
Company. Sub and the Company will give prompt written notice to the other of
any event
A-19
which could reasonably be expected to cause a breach of any of its own
respective representations, warranties, covenants or other agreements
contained in this Agreement.
(c) COMMITMENT NOTICE. In the event that Fleet or CMP notifies ADI
that any such Person is withdrawing its commitment contemplated by the
applicable Bank Commitment Letter addressed to ADI and delivered by such
Person, Sub shall promptly notify in writing the Company of such event.
5.3 BEST EFFORTS. Each of the parties agrees to use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement. Sub and the Company will use their best efforts
and cooperate with one another (i) in promptly determining whether any filings
are required to be made or consents, approvals, waivers, Permits or
authorizations are required to be obtained under any applicable Law or from any
Governmental Entity or other Person in connection with the transactions
contemplated by this Agreement and (ii) in promptly making any such filings, in
furnishing information required in connection therewith and in timely seeking to
obtain any such consents, approvals, waivers, Permits or authorizations.
5.4 INDEMNIFICATION.
(a) OBLIGATION. For a period of six years after the Effective Time,
the Surviving Corporation shall indemnify and hold harmless the present and
former officers and directors of the Company and its former Subsidiaries in
respect of acts or omissions occurring prior to the Effective Time to the
maximum extent provided under the Articles and Bylaws, or any of its former
Subsidiaries' certificate of incorporation or bylaws, in either case, as in
effect on the date hereof; provided that such indemnification shall be
subject to any limitation imposed from time to time under applicable law.
(b) INSURANCE. For a period of six years after the Effective Time, the
Surviving Corporation shall provide officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the Effective
Time covering each such Person currently covered by the Company's or any of
its former Subsidiaries' officers' and directors' liability insurance policy
on terms with respect to coverage and amount no less favorable than those of
such policy in effect on the date hereof (or, if such insurance policy
cannot be obtained, such insurance policy on terms with respect to coverage
and amount as favorable as can be obtained, subject to the proviso at the
conclusion of this sentence), provided that, in satisfying its obligation
under this Section 5.4(b), the Surviving Corporation shall not be obligated
to pay premiums in excess of 150% of the amount per annum the Company paid
in its last full fiscal year, which amount has been disclosed to Sub.
(c) SCOPE. The provisions of this Section 5.4 are intended to be for
the benefit of, and shall be enforceable by, each Person set forth in this
Section 5.4 and his or her heirs and representatives.
5.5 EXPENSES.
(a) OBLIGATION. Subject to Section 5.5(b), whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
(b) OBLIGATION UPON CONSUMMATION OF MERGER. In the event the Merger is
consummated, the Surviving Corporation shall be responsible for paying
expenses incurred by or fees due to EVEREN Securities, Inc., the Company's
financial advisor (excluding its fees for its fairness opinion); Gray,
Plant, Mooty, Mooty & Bennett, P.A., the Company's legal counsel; and Ernst
& Young LLP, the Company's independent auditors relating to the Merger and
the transactions contemplated by this Agreement.
5.6 PUBLIC ANNOUNCEMENTS. Sub, on the one hand, and the Company, on the
other hand, will consult with each other before issuing, and provide each other
the opportunity to review and comment upon, any press release or other public
statements with respect to the transactions contemplated by this
A-20
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable Law, court process or by obligations pursuant to any
listing agreement with any national securities exchange. The parties agree that
the initial press release or releases to be issued with respect to the
transactions contemplated by this Agreement shall be mutually agreed upon prior
to the issuance thereof.
5.7 TAKEOVER STATUTES. If any "fair price," "moratorium," "control share
acquisition" or other form of anti-takeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the members
of the Board of Directors of the Company shall grant such approvals and take
such actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.
5.8 NO SOLICITATION.
(a) From and after the date of this Agreement, until the earlier of the
Effective Time or the termination of this Agreement, the Company shall not,
and shall not authorize or permit any of its officers, directors, employees,
agents, representatives or advisors to, (A) solicit, initiate or encourage
(including by way of furnishing information), or take any other action to
facilitate the submission of inquiries, proposals or offers from any Person
relating to any acquisition or purchase of 5% or more of the consolidated
assets of the Company (other than in the ordinary course of business) or of
over 5% of any class of equity securities of the Company or any tender offer
(including a self tender offer) or exchange offer that if consummated would
result in any Person beneficially owning 5% or more of any class of equity
securities of the Company, or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization,
liquidation, dissolution or similar transaction involving the Company, other
than the transactions contemplated by this Agreement, or any other
transaction the consummation of which would or could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger or which
would or could reasonably be expected to materially dilute the benefits to
ADI or Sub of the transactions contemplated hereby (collectively,
"Transaction Proposals") or agree to or endorse any Transaction Proposal, or
(B) enter into or participate in any discussions or negotiations regarding
any of the foregoing, or furnish to any other Person any information with
respect to the Business, its properties or assets or any of the foregoing,
or otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other Person to do or
seek any of the foregoing; PROVIDED, HOWEVER, that the foregoing shall not
prohibit the Company from (i) furnishing information concerning the Company
and the Business or its properties or assets pursuant to an appropriate and
customary confidentiality agreement (which shall not be substantially less
restrictive than any confidentiality agreement entered into by Sub in
connection with the Merger) to a third party who has made an unsolicited
Transaction Proposal, (ii) engaging in discussions or negotiations with a
third party who has made an unsolicited Transaction Proposal, (iii)
following receipt of an unsolicited Transaction Proposal, taking and
disclosing to its shareholders a position contemplated by Rules 14d-9 and
14e-2 under the Exchange Act (provided no such position shall constitute a
recommendation of such transaction if it does not constitute a Superior
Acquisition Proposal) or otherwise complying with its duties of disclosure
under applicable state law, and/or (iv) following receipt of an unsolicited
Transaction Proposal, failing to make or withdrawing or modifying its
recommendation referred to in Section 3.1(p), but in each case referred to
in the foregoing clauses (i) through (iv) only if and to the extent that the
Board of Directors of the Company shall have concluded in good faith, after
consulting with financial advisors and considering the advice of outside
counsel, that (1) such action is required by the Board of Directors of the
Company in the exercise of its fiduciary duties to the shareholders of the
Company and (2) such action is reasonably likely to be subject to completion
and would, if consummated, result in a Superior Acquisition Proposal;
PROVIDED, FURTHER, that the Board of Directors of the Company shall not take
any of the foregoing actions referred to in clauses (i) through (iv) until
after giving at least one Business Day's advance written notice to Sub with
respect to the actions specified in the foregoing clauses
A-21
(i) through (iv) that it shall take. In addition, if the Board of Directors
of the Company receives a Transaction Proposal, then the Company shall
promptly inform Sub in writing of the material terms of such proposal and
the identity of the Person making it. As of the date hereof, the Company
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in this Section
by any director or executive officer of the Company or by any investment
banker, financial adviser, attorney, accountant, or other representative of
the Company shall be deemed to be a breach of this Section by the Company.
(b) If (i) this Agreement shall be terminated pursuant to Section 7.1(e)
or 7.1(f)(ii) or (ii) (1) a Person (other than Sub) shall have made a
Transaction Proposal, (2) the Agreement shall be terminated pursuant to
Section 7.1(g), 7.1(f)(i), or 7.1(f)(iii) and (3) any Transaction Proposal
(whether or not proposed prior to the Special Meeting to approve the Merger
and whether or not it involves the Person making the Transaction Proposal
referred to in Section 5.8(b)(ii)(1) above) shall have been consummated
within 12 months following the termination of this Agreement, the Company
shall pay to Sub, within twenty (20) Business Days following such
occurrence, a fee of $1.9 million together with reimbursement of all
reasonable out-of-pocket costs, fees and expenses, including, without
limitation, the reasonable fees and disbursements of banks, investment
banks, accountants or legal counsel and the expenses of any litigation
incurred in connection with collecting the fees and other amounts provided
for in this Section 5.8(b) up to a maximum amount of $900,000 in the
aggregate for all such costs, fees and expenses; provided, however, such fee
and reimbursed expenses shall be payable within sixty (60) days following
the termination of this Agreement pursuant to Section 7.1(e) or 7.1(f)(ii)
of this Agreement.
5.9 CERTAIN AGREEMENTS. The Company will not waive or fail to enforce any
provision of any confidentiality or standstill or similar agreement to which it
is a party without the prior written consent of Sub.
5.10 EMPLOYEE BENEFITS.
(a) The Surviving Corporation shall maintain the Vaughn Communications,
Inc. Flexible Spending Account from the Closing Date through March 31, 1999,
for the benefit of those individuals who were employees of the Company
immediately prior to the Closing Date and who participated in such account
as of such date, provided, however, that the Surviving Corporation may elect
to continue to maintain such account after such date in its sole discretion.
(b) The Surviving Corporation shall maintain the Vaughn Communications,
Inc. Retirement Savings Plan ("Savings Plan") after the Closing Date until
such time as it deems appropriate to terminate such plan, in its sole
discretion. Promptly after the termination of the Savings Plan, if any, the
Surviving Corporation shall cause coverage under a defined contribution plan
that is qualified under Section 401(a) of the Code to be extended to the
employees of the Surviving Corporation who were eligible to actively
participate in the Savings Plan as of the date of its termination. Such
employees shall be granted service credit (for eligibility and vesting
purposes only) under such defined contribution plan for service with the
Company prior to the Closing Date.
(c) The Surviving Corporation shall maintain the group health and dental
plans sponsored by the Company after the Closing Date for those individuals
who were employees of the Company immediately prior to the Closing Date, and
who participate in such plans as of such date; PROVIDED, HOWEVER, that the
Surviving Corporation may terminate such plans at any time after the Closing
Date, as it determines in its sole discretion. Promptly after the
termination of such plans, if any, such employees and their dependents shall
be enrolled in such medical, dental and vision, and other employee welfare
benefit plans that the Surviving Corporation shall offer to such employees
in its sole discretion.
A-22
(d) Nothing in this Section 5.10, express or implied, shall be construed
to prevent the Surviving Corporation from (i) terminating or modifying to
any extent the employment or the employment relationship of any employee at
any time for any reason, or (ii) terminating or modifying to any extent or
in any respect any employee benefit plan, program or arrangement that the
Surviving Corporation may contribute to, maintain, or establish for the
benefit of employees, directors, consultants, contractors or otherwise, at
any time for any reason.
(e) The Company and the Board of Directors shall cause the plan
administrator of (or under) each of the Option Plans, and/or shall take such
other steps as may be necessary or appropriate, to amend the Option Plans
and adjust the Company Stock Options so that the holders of such Company
Stock Options (the "Optionees"), upon consummation of the Merger, shall only
be entitled, with respect to each applicable Company Stock Option, to the
difference between (x) $10.00 MINUS (y) the applicable exercise price. In
addition, the Company and the Board of Directors shall cause each Optionee
(other than the Optionee who is a party to the Willette Option Termination
Agreement) to execute a written consent, which consent shall authorize the
cancellation of each Company Stock Option in exchange for an amount in cash
equal to the amount described herein, and shall waive all of such Optionee's
rights under the Option Plans and any related agreements, including but not
limited to the right to receive capital stock of the Company upon exercise
of the Company Stock Option.
5.11 CERTAIN ACTIONS. The Company shall use its best efforts to take, or
cause to be taken, the actions set forth in Section 5.11 of the Company
Disclosure Schedule prior to the Closing Date.
5.12 DEBT. The Company shall cause total Debt of the Company determined in
accordance with GAAP as of the Effective Time not to exceed $20.5 million.
ARTICLE 6
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) COMPANY SHAREHOLDER APPROVAL. The Company Shareholder Approval
shall have been obtained.
(b) HSR ACT AND OTHER AUTHORIZATIONS. All waiting periods (and any
extensions thereof) applicable to the Merger under the HSR Act shall have
been terminated or shall have expired and the parties shall have received
all other authorizations, consents and approvals of Governmental Entities
required in connection with the execution, delivery and performance of this
Agreement; and, further, all such authorizations, consents and approvals (i)
shall not impose any limitations or restrictions on Sub and (ii) shall not
be subject to the satisfaction of any condition that has not been satisfied
or waived. Sub may, in its sole discretion, waive the condition under
Section 6.1(b)(i) on behalf of both itself and the Company.
(c) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining Order,
preliminary or permanent injunction or other Order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; PROVIDED, HOWEVER, that
the parties hereto shall use their best efforts to have any such injunction,
Order, restraint or prohibition vacated.
A-23
6.2 CONDITIONS TO OBLIGATION OF SUB. The obligation of Sub to effect the
Merger is further subject to the satisfaction or waiver by Sub of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects with respect to representations and warranties not
qualified by materiality and in all respects with respect to representations
and warranties qualified by materiality, in each case as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date, except for those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such date). Sub shall have received a certificate signed on behalf of the
Company by the Chief Executive Officer and the Chief Financial Officer of
the Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed the covenants required to be performed by it under this Agreement
at or prior to the Closing Date (except for such failures to perform as have
not had or could not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect with respect to the Company or
adversely affect the ability of the Company to consummate the transactions
herein contemplated or perform its obligations hereunder), and Sub shall
have received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to such
effect.
(c) CONSENTS, ETC. Sub shall have received evidence, in form and
substance reasonably satisfactory to it, that such Permits and Orders of
Governmental Entities and other Persons as are necessary in connection with
the transactions contemplated hereby have been obtained, except such Permits
and Orders which are not, individually or in the aggregate, material to Sub
or the Company or the failure of which to have been received would not
materially dilute the aggregate benefits to ADI or Sub received in the
Merger.
(d) DISSENTERS' RIGHTS. Holders of not more than 10% of the shares of
Company Common Stock issued and outstanding immediately prior to the
Effective Time have exercised, preserved and protected their Dissenters'
Rights.
(e) OPINION OF COUNSEL TO THE COMPANY. Sub shall have received, on and
as of the Closing Date, an opinion of Gray, Plant, Mooty, Mooty & Bennett,
P.A., counsel to the Company, substantially in the form of Exhibit B.
(f) CONTRACT CONSENTS. The Company shall have delivered to Sub (i)
written consents from the Persons who are parties to the Contracts set forth
in Section 6.2(f)(i) of the Company Disclosure Schedule to (A) the
transactions contemplated hereunder and (B) the reincorporation, subsequent
to the Effective Time, of the Company in the State of Delaware pursuant to
the merger of the Company with and into Vaughn Communications, Inc., to be
formed as a Delaware corporation and wholly-owned Subsidiary of the Company
and (ii) written evidence of the termination of the Contracts set forth in
Section 6.2(f)(ii) of the Company Disclosure Schedule.
(g) DEBT. Total Debt of the Company determined on a consolidated basis
in accordance with GAAP as of the Effective Time shall not exceed $20.5
million.
(h) RESIGNATIONS. The Company shall have received and accepted the
resignations of the directors of the Company designated by Sub.
(i) PENDING ACTION. There shall not be instituted or pending any
Action or Proceeding by any Governmental Entity, or any Action or Proceeding
by any other Person, that has a reasonable likelihood of success before any
Governmental Entity, (i) challenging or seeking to make illegal, to delay
materially or otherwise directly or indirectly to restrain or prohibit the
consummation of the Merger or seeking to obtain material damages or
otherwise directly or indirectly relating to the
A-24
transactions contemplated by this Agreement, (ii) seeking to restrain or
prohibit the ownership or operation by Sub of all or any material portion of
the Business or the assets of the Company, (iii) seeking to impose or
confirm material limitations on the ability of Sub to effectively control
the Business or operations of the Company, or effectively to exercise full
rights of ownership of shares of Company Common Stock or (iv) requiring
divestiture by Sub of any shares of Company Common Stock, and no
Governmental Entity shall have issued any judgment, Order, decree or
injunction, and there shall not be any statute, rule or regulation, that in
the reasonable judgment of Sub is likely, directly or indirectly, to result
in any of the consequences referred to in the preceding clauses (i) through
(iv).
(j) TAXES. The Company shall have paid all applicable transfer, real
property transfer, documentary stamp and similar Taxes (and the Company
shall have properly executed all forms and Tax Returns required in
connection therewith) in connection with the transactions contemplated
hereby.
(k) GOOD STANDING CERTIFICATES. The Company shall have delivered to
Sub (i) copies of the Articles certified by the Minnesota Secretary of
State, (ii) certificates from the Minnesota Secretary of State to the effect
that the Company is in good standing or subsisting in the State of
Minnesota, listing all charter documents of the Company on file and
attesting to its payment of all franchise or similar Taxes, and (iii) a
certificate from the Secretary of State or other appropriate official in
each jurisdiction in which the Company is qualified or admitted to do
business to the effect that the Company is duly qualified or admitted and in
good standing in such jurisdiction.
(l) NO MATERIAL ADVERSE CHANGE. Other than the transactions
contemplated by the Asset Purchase Agreement, dated November 9, 1998,
between the Company and Gift Connections, Inc., there has been no Material
Adverse Change with respect to the Company taken as a whole since December
31, 1997.
(m) FINANCING. Sub shall have received the proceeds from the Financing
on terms reasonably satisfactory to Sub to enable Sub to consummate the
transactions contemplated hereby; such terms and conditions to be deemed
reasonably satisfactory to Sub if they are substantially similar to the
terms and conditions of the Bank Commitment Letters and 399 Commitment
Letter.
(n) CONSENT OF OPTION HOLDERS. The Company shall have received a
written consent of each Optionee, in the form satisfactory to Sub,
authorizing the cancellation of each Company Stock Option in exchange for a
payment in an amount described in Section 2.4 hereof, and waiving all of
such Optionee's rights under the Option Plans and any related agreements,
including but not limited to the right to receive capital stock of the
Company upon exercise of the Company Stock Option.
(o) CERTAIN TRANSACTIONS. The transactions contemplated by the
Willette Option Termination Agreement and the Willette Subscription
Agreement shall have been consummated.
(p) AGREEMENT. The Olzenak Employment Agreement, (ii) the Reinhart
Employment Agreement (as amended by Amendment No. 1, dated the date hereof)
and (iii) the Willette Employment Agreement (as amended by Amendment No. 1,
dated the date hereof) shall be in full force and effect.
6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company
to effect the Merger is further subjected to the satisfaction or waiver of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Sub set forth in this Agreement shall be true and correct in all material
respects with respect to representations and warranties not qualified by
materiality and in all respects with respect to representations and
warranties qualified by materiality, in each case as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date, except for those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such
A-25
date). The Company shall have received a certificate signed on behalf of Sub
by a duly authorized executive officer of Sub to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF SUB. Sub shall have performed the
covenants required to be performed by it under this Agreement at or prior to
the Closing Date (except for such failures to perform as have not had or
could not reasonably be expected, either individually or in the aggregate,
to have a Material Adverse Effect with respect to Sub or adversely affect
the ability of Sub to consummate the transactions herein contemplated or
perform its obligations hereunder), and the Company shall have received a
certificate signed on behalf of Sub by a duly authorized executive officer
of Sub to such effect.
(c) OPINION OF COUNSEL TO SUB. The Company shall have received, on and
as of the Closing Date, an opinion of Oppenheimer, Wolff and Donnelly LLP,
special Minnesota counsel to Sub, substantially in the form of Exhibit C.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time of the Merger, whether before or after approval
of the Merger by the shareholders of the Company, applicable by written notice
to the other party:
(a) by mutual written consent of Sub and the Company; or
(b) by either Sub or the Company, if any Governmental Entity shall have
issued an Order or taken any other action permanently enjoining, restraining
or otherwise prohibiting the Merger and such Order or other action shall
have become final and nonappealable; or
(c) by either Sub or the Company, if the Merger shall not have been
consummated on or before March 31, 1999 (other than due to the failure of
the party seeking to terminate this Agreement to perform its obligations
under this Agreement required to be performed at or prior to the Effective
Time); or
(d) by either Sub or the Company, if any required approval of the
shareholders of the Company shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held meeting
of shareholders or at any adjournment thereof; or
(e) by the Company, if at any time prior to the Effective Time, in the
event that a Person has made a Transaction Proposal that the Board of
Directors of the Company determines, in good faith, and after consultation
with and advice from its financial advisors, is reasonably likely to be
subject to completion and would, if consummated, result in a transaction
more favorable, from a financial point of view, to the Company's
shareholders than the transactions contemplated by this Agreement and the
Merger (a "Superior Acquisition Proposal"); or
(f) by Sub, if (i) the Board of Directors of the Company shall have
withdrawn or modified or amended, in a manner adverse to Sub, either its
approval or recommendation of this Agreement and the Merger or its
recommendation that the Company's shareholders adopt and approve the
transactions contemplated by this Agreement and the Merger, (ii) the Board
of Directors of the Company shall have approved, recommended or endorsed any
Superior Acquisition Proposal, or (iii) the Company has failed to duly call
the Special Meeting to approve the Merger; or
(g) by Sub, if the Company fails to perform any of its material
obligations under this Agreement or has breached any material
representation, warranty, or covenant contained herein when made or at any
time prior to the Closing in any material respect, and after having been
notified of such breach, the breach continues for thirty (30) days without
cure after such notice; or
A-26
(h) by the Company, if Sub fails to perform any of its respective
material obligations under this Agreement or has breached any material
representation, warranty or covenant contained herein when made or at any
time prior to the Closing in any material respect, and after having been
notified of such breach, the breach continues for thirty (30) days without
cure after such notice.
(i) by the Company, if Sub delivers the written notice to the Company
contemplated by Section 5.2(c) with respect to either or both of the Bank
Commitment Letters and, within 5 Business Days following the delivery of
such written notice, Sub has not delivered to the Company either (i) a
substitute commitment letter or letters on substantially the same terms and
conditions as the applicable Bank Commitment Letter or Bank Commitment
Letters which are the subject of the written notice contemplated by Section
5.2(c) or (ii) a written notice setting forth a waiver by Sub of the
condition set forth in Section 6.2(m) with respect to that portion of the
Financing to be provided under the relevant Bank Commitment Letter or Bank
Commitment Letters, as the case may be.
7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company or Sub as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any Liability or obligation on
the part of Sub or the Company, other than pursuant to the provisions of Section
5.5 and this Section 7.2 and provided, further, that the Confidentiality
Agreement shall survive any such termination. Nothing contained in this Section
shall, however, relieve any party for any breach of the representations,
warranties, covenants or agreements set forth in this Agreement prior to any
such termination.
7.3 AMENDMENT. This Agreement may be amended by the parties at any time
before or after required approval of the Merger by the shareholders of the
Company; provided, however, that after such approval, there shall be made no
amendment that by Law requires further approval by such shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties.
7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
A-27
(a) if to Sub, to:
Twin Acquisition Corp.
c/o Allied Digital Technologies Corp.
140 Fell Court
Hauppauge, New York 11788
Telecopy No.: (516) 232-5370
with a copy to:
399 Venture Partners, Inc.
399 Park Avenue
New York, New York 10043
Attention: Michael Delaney
Telecopy No.: (212) 888-2940
and
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Attention: Philip H. Werner, Esq.
Telecopy No.: (212) 309-6273
(b) if to the Company, to:
Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, Minnesota 55435
Attention: Chief Executive Officer
Telecopy No.: (612) 832-3241
with a copy to:
Gray, Plant, Mooty, Mooty & Bennett, P.A.
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Nevin R. Harwood, Esq.
Telecopy No.: (612) 333-0066
8.3 DEFINITIONS. For purposes of this Agreement:
(a) "399" has the meaning ascribed to it in Section 3.2(g)(ii).
(b) "399 Commitment Letter" has the meaning ascribed to it in Section
3.2(g)(ii).
(c) "Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
(d) "ADI" has the meaning ascribed to it in the Introduction.
(e) "ADT" means Allied Digital Technologies Corp., a Delaware
corporation
(f) an "Affiliate" with respect to any Person, means any other Person
that directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, such Person.
(g) "Agreement" has the meaning ascribed to it in the Introduction.
(h) "Articles" has the meaning ascribed to it in Section 1.5(a).
(i) "Bank Commitment Letters" has the meaning ascribed to it in Section
3.2(g)(i).
A-28
(j) "Business" means the business of the Company as presently conducted
or proposed to be conducted.
(k) "Business Day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings or, in the case of
determining a date when any payment is due, any day other than a day on
which banks in New York, New York are required or authorized to be closed.
(l) "Bylaws" has the meaning ascribed to it in Section 3.1(d).
(m) "Capital Lease Obligation" means, with respect to any Person and a
capital lease, the amount of the obligation of such Person as the lessee
under such capital lease which would, in accordance with GAAP, appear as a
Liability on a balance sheet of such Person.
(n) "Certificate of Merger" has the meaning ascribed to it in Section
1.3.
(o) "Closing" has the meaning ascribed to it in Section 1.2.
(p) "Closing Date" has the meaning ascribed to it in Section 1.2.
(q) "CMP" means Citicorp Mezzanine Partners, L.P.
(r) "Code" has the meaning ascribed to it in Section 3.1(j).
(s) "Company" has the meaning ascribed to it in the Introduction.
(t) "Company Benefit Plans" has the meaning ascribed to it in Section
3.1(i).
(u) "Company Common Stock" has the meaning ascribed to it in the
Recitals.
(v) "Company Disclosure Schedule" has the meaning ascribed to it in
Section 3.1(a).
(w) "Company Shareholder Approval" has the meaning ascribed to it in the
Recitals.
(x) "Company Stock Options" has the meaning ascribed to it in Section
2.4(a).
(y) "Confidentiality Agreement" has the meaning ascribed to it in
Section 5.2(a).
(z) "Contract" means any agreement, lease, evidence of indebtedness,
mortgage, indenture, license, security agreement or other contract (whether
written or oral).
(aa) "Debt" with respect to any Person means, at any time, without
duplication, (i) Liabilities for borrowed money and redemption obligations
in respect of mandatorily redeemable preferred stock; (ii) Liabilities for
the deferred purchase price of property acquired by such Person (excluding
accounts payable arising in the ordinary course of business but including
all Liabilities created or arising under any conditional sale or other title
retention agreement with respect to any such property); (iii) Capital Lease
Obligations of such Person; (iv) Liabilities for borrowed money secured by
any Lien with respect to any property owned by such Person (whether or not
such Person has assumed or otherwise become liable for such Liabilities);
(v) Liabilities in respect of letters of credit or instruments serving a
similar function issued or accepted for its account by banks and other
financial institutions (whether or not representing obligations for borrowed
money); (vi) Swap Obligations of such Person; (vii) any Tax Liability,
whether or not accrued or owing, arising from a taxable event occurring
before the Closing Date; and (viii) any Guaranty of such Person with respect
to Liabilities of a type described in any of clauses (i) through (viii)
hereof.
(bb) "Dissenters' Rights" has the meaning ascribed to it in the
Recitals.
(cc) "Effective Time" has the meaning ascribed to it in Section 1.3.
(dd) "Environment" means all air, surface water, groundwater, or land,
including land surface or subsurface, including all fish, wildlife, biota
and all other natural resources.
A-29
(ee) "Environmental Claim" means any and all administrative or judicial
actions, suits, orders, claims, Liens, notices, notices of violations,
investigations, complaints, requests for information, proceedings, or other
communication (written or oral), whether criminal or civil (collectively,
"Claims") pursuant to or relating to any applicable Environmental Law by any
Person (including but not limited to any Governmental Entity, private person
and citizens' group) based upon, alleging, asserting or claiming any actual
or potential (i) violation of or Liability under any Environmental Law, (ii)
violation of an Environmental Permit, or (iii) Liability for investigatory
costs, cleanup costs, removal costs, remedial costs, response costs, natural
resource damages, property damage, personal injury, fines, or penalties
arising out of, based on, resulting from, or related to the presence,
Release, or threatened Release into the Environment, of any Hazardous
Materials at any location, including but not limited to any off-Site
location to which Hazardous Materials or materials containing Hazardous
Materials were sent for handling, storage, treatment or disposal.
(ff) "Environmental Clean-up Site" means any location which is listed
or proposed for listing on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System, or on
any similar state list of sites requiring investigation or cleanup, or which
is the subject of any pending or threatened action, suit, proceeding, or
investigation related to or arising from any alleged violation of
Environmental Law, or at which there has been a Release, or a threatened or
suspected Release of a Hazardous Material.
(gg) "Environmental Law" means any and all federal, state, local,
provincial and foreign, civil and criminal Laws, statutes, ordinances,
Orders, codes, rules, regulations, Environmental Permits, policies, guidance
documents, judgments, decrees, injunctions, or agreements with any
Governmental Entity, relating to the protection of health and the
Environment, worker health and safety, and/or governing the handling, use,
generation, treatment, storage, transportation, disposal, manufacture,
distribution, formulation, packaging, labeling, or Release of Hazardous
Materials, whether now existing or subsequently amended or enacted,
including but not limited to: the Clean Air Act, U.S.C. Section 7401 et
seq.; the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, 42 U.S.C. Section 9601 et seq.; the Federal Water Pollution
Control Act, 33 U.S.C. Section 1251 et seq.; the Hazardous Material
Transportation Act, 49 U.S.C. Section 1801 et seq.; the Federal Insecticide,
Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq.; the Resource
and Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section 6901
et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.;
the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et
seq.; the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq.; and the
state analogies thereto, all as amended or superseded from time to time; and
any common law doctrine, including but not limited to, negligence, nuisance,
trespass, personal injury, or property damages related to or arising out of
the presence, Release, or exposure to a Hazardous Material.
(hh) "Environmental Permit" means any federal, state, local, provincial
or foreign Permits, licenses, approvals, consents or authorizations required
by any Governmental Entity under or in connection with any Environmental Law
and includes any and all Orders, consent orders or binding agreements issued
or entered into by a Governmental Entity under any applicable Environmental
Law.
(ii) "ERISA" has the meaning ascribed to it in Section 3.1(i).
(jj) "ERISA Affiliate" has the meaning ascribed to it in Section
3.1(i).
(kk) "Exchange Act" has the meaning ascribed to it in Section 3.1(d).
(ll) "Exchange Agent" has the meaning ascribed to it in Section 2.2.
(mm) "Exchange Fund" has the meaning ascribed to it in Section 2.5(e).
(nn) "Financing" has the meaning ascribed to it in Section 3.2(g)(i).
A-30
(oo) "Fleet" means Fleet National Bank, N.A.
(pp) "GAAP" shall mean U.S. generally accepted accounting principles
applied on a consistent basis throughout all applicable periods.
(qq) "Governmental Entity" means any government or political
subdivision thereof, whether foreign or domestic, federal, state,
provincial, county, local, municipal or regional, or any other governmental
entity, any agency, authority, department, division or instrumentality of
any such government, political subdivision, or other governmental entity or
other instrumentality of the United States, any foreign country or any
domestic or foreign state, county, city or other political subdivision, any
court, arbitral tribunal or arbitrator, and any nongovernmental regulating
body, to the extent that the rules, regulations or Orders of such body have
the force of Law.
(rr) "Guaranties" by any Person means all obligations (other than
endorsements in the ordinary course of business of negotiable instruments
for deposit or collection) of such Person guaranteeing, or in effect
guaranteeing, any Debt, cash dividend or other monetary obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, all obligations incurred through
an agreement, contingent or otherwise, by such Person: (i) to purchase such
Debt or obligation or any property or assets constituting security therefor;
(ii) to advance or supply funds for the purchase or payment of such Debt or
obligation; (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Debt or obligation of the ability of the primary obligor to make payment of
the Debt or obligation; or (iv) otherwise to assure the owner of the Debt or
obligation of the primary obligor against loss in respect thereof. For the
purposes of all computations made under this Agreement, a Guaranty in
respect of any Debt for borrowed money shall be deemed to be Debt equal to
the principal amount of such Debt for borrowed money which has been
guaranteed, and a Guaranty in respect of any other obligation or Liability
or any dividend shall be deemed to be Debt equal to the maximum aggregate
amount of such obligation, Liability or dividend unless such Guaranty is
limited.
(ss) "Hazardous Material" means petroleum, petroleum hydrocarbons or
petroleum products, petroleum by-products, radioactive materials,
asbestos-containing materials, gasoline, diesel fuel, pesticides, radon,
urea formaldehyde, lead or lead-containing material, polychlorinated
biphenyls, and any other chemicals, materials, substances or wastes in any
amount or concentration which are now or hereafter become defined as or
included in the definition of "hazardous substances," "hazardous materials,"
"hazardous wastes," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," "pollutants," "regulated
substances," "solid wastes," or "contaminants" or words of similar import,
under any Environmental Law.
(tt) "HSR Act" has the meaning ascribed to it in Section 3.1(d).
(uu) "Intellectual Property" shall mean all trademarks and trademark
rights, trade names and trade name rights, service marks and service mark
rights, service names and service name rights, copyrights and copyright
rights, patents and patent rights, brand names, trade dress, business and
product names, logos, slogans, trade secrets, inventions, processes,
formulae, industrial models, processes, designs, specifications, data,
technology, methodologies, computer programs (including all source codes),
confidential and proprietary information, whether or not subject to
statutory registration, and all related technical information,
manufacturing, engineering and technical drawings, know-how and all pending
applications for and registrations of patents, trademarks, service marks and
copyrights, and the right to sue for past payment, if any, in connection
with any of the foregoing, and all documents, disks and other media on which
any of the foregoing is stored.
(vv) "Knowledge" means actual or constructive knowledge without
independent investigation of any current officer.
A-31
(ww) "Laws" means all laws, statutes, rules, regulations, ordinances
and other pronouncements having the effect of law of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision or of any Governmental Entity.
(xx) "Leased Real Property" has the meaning ascribed to it in Section
3.1(m)(iii).
(yy) "Leased Real Property Permitted Liens" has the meaning ascribed to
it in Section 3.1(m)(iii).
(zz) "Liability" means all indebtedness, obligations and other
liabilities (or contingencies that have not yet become liabilities) of a
Person (whether absolute, accrued, contingent (or based upon any
contingency), fixed or otherwise, or whether due or to become due).
(aaa) "Liens" means all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever.
(bbb) "Material Adverse Change" or "Material Adverse Effect" means,
when used in connection with the Company or Sub, any change or effect that
either individually or in the aggregate with all other such changes or
effects is materially adverse to the business, assets, properties, condition
(financial or otherwise), prospects or results of operations of such party;
PROVIDED, HOWEVER, that, a decline in general economic conditions affecting
the Company or Sub shall not be deemed to be a "Material Adverse Change" or
to have a "Material Adverse Effect" with respect to either such party or its
Subsidiaries.
(ccc) "MBCA" has the meaning ascribed to it in the Recitals.
(ddd) "Merger" has the meaning ascribed to it in the Recitals.
(eee) "Merger Consideration" has the meaning ascribed to it in Section
2.1(c).
(fff) "Multiemployer Plan" has the meaning ascribed to it in Section
3.1(i).
(ggg) "Olzenak Employment Agreement" means the Employment Agreement,
dated the date hereof, between ADI and Douglas Olzenak.
(hhh) "Option Plans" has the meaning ascribed to it in Section 2.4(a).
(iii) "Optionees" has the meaning ascribed to it in Section 5.10(e).
(jjj) "Order" means any writ, judgment, decree, injunction or similar
order of any Governmental Entity (in each such case whether preliminary or
final).
(kkk) "Owned Real Property" has the meaning ascribed to it in Section
3.1(m)(ii).
(lll) "Owned Real Property Permitted Liens" has the meaning ascribed to
it in Section 3.1(m)(ii).
(mmm) "Permit" means any license, franchise, permit, certificate,
approval, consent or other similar authorization affecting, or relating in
any way to, the assets or Business of the Company.
(nnn) "Permitted Changes" has the meaning ascribed to it in Section
4.1(b).
(ooo) "Permitted Liens" has the meaning ascribed to it in Section
3.1(m)(iii).
(ppp) "Person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity.
(qqq) "Products Division" means the Company's division that
manufactures and sells gift products and collectibles to retailers in
various niche markets which has been sold to Gift Connections, Inc.
A-32
(rrr) "Proxy Statement" has the meaning ascribed to it in Section
3.1(d).
(sss) "RCRA" has the meaning ascribed to it in Section 8.3(ff).
(ttt) "Real Property" has the meaning ascribed to it in Section 3.1(m).
(uuu) "Real Property Leases" has the meaning ascribed to it in Section
3.1(m)(iii).
(vvv) "Reinhart Employment Agreement" means the Employment Agreement,
dated March 13, 1998, between Charles Reinhart and the Company.
(www) "Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping, or
disposing of a Hazardous Material into the Environment.
(xxx) "Savings Plan" has the meaning ascribed to it in Section 5.10(b).
(yyy) "SEC" has the meaning ascribed to it in Section 3.1(d).
(zzz) "SEC Documents" has the meaning ascribed to it in Section
3.1(e)(i).
(aaaa) "SEC Financial Statements" has the meaning ascribed to it in
Section 3.1(e)(i).
(bbbb) "Section 302A.473" has the meaning ascribed to it in Section
2.1(d).
(cccc) "Securities Act" has the meaning ascribed to it in Section
3.1(c).
(dddd) "Site" means any of the real properties currently or previously
owned, leased or operated by the Company, its former Subsidiaries, any
predecessors of the Company or its former Subsidiaries or any entities
previously owned by the Company or its former Subsidiaries, including all
soil, subsoil, surface waters and groundwater thereat.
(eeee) "Special Committee" has the meaning ascribed to it in Section
3.1(d).
(ffff) "Special Meeting" has the meaning ascribed to it in the
Recitals.
(gggg) "Stock Plans" has the meaning ascribed to it in Section 2.4(b).
(hhhh) "Sub" has the meaning ascribed to it in the Introduction.
(iiii) a "Subsidiary" of any Person means another Person, an amount of
the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its board
of directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interest of which) is owned directly or
indirectly by such first Person.
(jjjj) "Superior Acquisition Proposal" has the meaning ascribed to it
in Section 7.1(e).
(kkkk) "Surviving Corporation" has the meaning ascribed to it in the
Recitals.
(llll) "Swap Obligations" means, with respect to any Person, payment
obligations with respect to interest rate swaps, currency swaps and similar
obligations obligating such Person to make payments, whether periodically or
upon the happening of a contingency. For the purposes of this Agreement, the
amount of any Swap Obligation shall be the amount determined in respect
thereof as of the end of the then most recently ended fiscal quarter of such
Person, based on the assumption that such Swap Obligation had terminated at
the end of such fiscal quarter, and, in making such determination, if any
agreement relating to such Swap Obligation provides for the netting of
amounts payable by and to such Person thereunder or if any such agreement
provides for the simultaneous payment of amounts by and to such Person,
then, in each such case, the amount of such obligation shall be the net
amount so determined.
(mmmm) "Tax Return" has the meaning ascribed to it in Section 3.l(j).
A-33
(nnnn) "Tax(es)" has the meaning ascribed to it in Section 3.1(j).
(oooo) "Transaction Proposals" has the meaning ascribed to it in
Section 5.8(a).
(pppp) "Unaudited Financial Statement" has the meaning ascribed to it
in Section 3.1(e)(ii).
(qqqq) "Willette Employment Agreement" means the Employment Agreement,
dated March 13, 1998, between Willette and the Company.
(rrrr) "Willette Option Termination Agreement" means the Option
Termination and Grant Agreement, dated the date hereof, between ADT and E.
David Willette, in the form of Exhibit D attached hereto.
(ssss) "Willette Subscription Agreement" means the Subscription
Agreement dated the date hereof between ADT and E. David Willette, in the
form of Exhibit E attached hereto.
8.4 INTERPRETATION. A reference made in this Agreement to a Section,
Exhibit or Schedule, shall be to a Section of, or an Exhibit or Schedule to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
8.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
8.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement. Except as provided in Section 5.4, this
Agreement is not intended to confer upon any Person other than the parties any
rights or remedies.
8.7 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York (without regard to any
conflict of laws provisions that might indicate the applicability of the laws of
any jurisdiction other than the State of New York), except to the extent that
the MBCA applies as a result of the Company and Sub being incorporated in the
State of Minnesota, in which case the MBCA shall apply to the extent required
under applicable choice of law doctrines.
8.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of Law or otherwise, by any of the parties without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
8.9 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of New York
or of the United States located in the State of New York in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, and each party agrees (a) it will not attempt to deny or defeat
personal jurisdiction or venue in any such court by motion or other request for
leave from any such court and (b) it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any court
other than any such court.
8.10 SEVERABILITY. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable Law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect
A-34
under any applicable Law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or portion of
any provision in such jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been contained
herein, so long as the economic and legal substance of the transactions
contemplated hereby are not affected in a manner materially adverse to any party
hereto.
8.11 GUARANTY. ADI shall fully, completely and unconditionally guarantee
the performance of the obligations of Sub under this Agreement.
IN WITNESS WHEREOF, Sub, ADI and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
VAUGHN COMMUNICATIONS, INC.
By: /s/ E. DAVID WILLETTE
-----------------------------------------
E. David Willette
ITS CHIEF EXECUTIVE OFFICER
TWIN ACQUISITION CORP.
By: /s/ EMILY M. HILL
-----------------------------------------
Emily M. Hill
ITS VICE PRESIDENT
FOR PURPOSES OF SECTION 8.11 ONLY:
ALLIED DIGITAL, INC.
By: /s/ EMILY M. HILL
-----------------------------------------
Emily M. Hill
ITS SENIOR VICE PRESIDENT
GP:542298 v1
A-35
EXHIBIT A
BY-LAWS
OF
VAUGHN COMMUNICATIONS, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date, at such time and at such place within or
without the State of Minnesota as may be designated by the Board of Directors,
for the purpose of electing Directors and for the transaction of such other
business as may be properly brought before the meeting.
SECTION 2. SPECIAL MEETINGS. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors. Any special
meeting of the stockholders shall be held on such date, at such time and at such
place within or without the State of Minnesota as the Board of Directors or the
officer calling the meeting may designate. At a special meeting of the
stockholders, no business shall be transacted and no corporate action shall be
taken other than that stated in the notice of the meeting unless all of the
stockholders are present in person or by proxy, in which case any and all
business may be transacted at the meeting even though the meeting is held
without notice.
SECTION 3. NOTICE OF MEETINGS. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his or her address as it appears on the records of the Corporation.
The notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
SECTION 5. ADJOURNED MEETINGS. Whether or not a quorum shall be present in
person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; PROVIDED, HOWEVER, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting.
1
If the adjournment is for more than thirty days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
adjourned meeting.
SECTION 6. ORGANIZATION. The Chief Executive Officer, or, in the absence
of the Chief Executive Officer, the President, or, in the absence of the Chief
Executive Officer and the President, a Vice President shall call all meetings of
the stockholders to order, and shall act as Chairman of such meetings. In the
absence of the Chief Executive Officer, the President and all of the Vice
Presidents, the holders of a majority in number of the shares of stock of the
Corporation present in person or represented by proxy and entitled to vote at
such meeting shall elect a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as Secretary of the meeting. It shall be the duty of the
Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. VOTING. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him or her by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
When directed by the presiding officer or upon the demand of any stockholder,
the vote upon any matter before a meeting of stockholders shall be by ballot.
Except as otherwise provided by law or by the Certificate of Incorporation,
Directors shall be elected by a plurality of the votes cast at a meeting of
stockholders by the stockholders entitled to vote in the election and, whenever
any corporate action, other than the election of Directors is to be taken, it
shall be authorized by a majority of the votes cast at a meeting of stockholders
by the stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes.
SECTION 8. INSPECTORS. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by one or more Inspectors who may
be appointed by the Board of Directors before the meeting, or if not so
appointed, shall be appointed by the presiding officer at the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner. Each inspector, before entering upon the discharge
of his duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action required
to be taken at any annual or special meeting of stockholders of the Corporation,
or any action which may be taken at any annual or special meeting of the
stockholders, may be taken without a meeting, without prior notice and
2
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the Corporation by delivery to its
registered office in Minnesota, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be made by hand or by certified or registered mail,
return receipt requested.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the date
on which the earliest dated consent is delivered to the Corporation, a written
consent or consents signed by a sufficient number of holders to take action are
delivered to the Corporation in the manner prescribed in the first paragraph of
this Section.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be fixed from time to time by
resolution passed by a majority of the Board of Directors. The Directors shall,
except as hereinafter otherwise provided for filling vacancies, be elected at
the annual meeting of stockholders, and shall hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
SECTION 2. REMOVAL, VACANCIES AND ADDITIONAL DIRECTORS. The stockholders
may, at any special meeting, the notice of which shall state that it is called
for that purpose, remove, with or without cause, any Director and fill the
vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class. Vacancies caused by any such removal and not filled by
the stockholders at the meeting at which such removal shall have been made, or
any vacancy caused by the death or resignation of any Director or for any other
reason, and any newly created directorship resulting from any increase in the
authorized number of Directors, may be filled by the affirmative vote of a
majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. PLACE OF MEETING. The Board of Directors may hold its meetings
in such place or places in the State of Minnesota or outside the State of
Minnesota as the Board from time to time shall determine.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No further notice shall be required for any regular
meeting of the Board of Directors; but a copy of every resolution fixing or
changing the time or place of regular meetings shall be mailed to every Director
at least five days before the first meeting held in pursuance thereof.
3
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by direction of any two of the Directors then in
office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two days before the meeting or by causing
the same to be transmitted by facsimile, telegram or telephone at least one day
before the meeting to each Director. Unless otherwise indicated in the notice
thereof, any and all business other than an amendment of these By-Laws may be
transacted at any special meeting, and an amendment of these By-Laws may be
acted upon if the notice of the meeting shall have stated that the amendment of
these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
SECTION 6. QUORUM. Subject to the provisions of Section 2 of this Article
II, a majority of the members of the Board of Directors in office (but in no
case less than one-third of the total number of Directors nor less than two
Directors) shall constitute a quorum for the transaction of business and the
vote of the majority of the Directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board there is less than a quorum present, a
majority of those present may adjourn the meeting from time to time.
SECTION 7. ORGANIZATION. A Chairman of the Board shall preside at all
meetings of the Board of Directors. The Chairman shall be elected from the
Directors present at such meeting of the Board of Directors. The Secretary of
the Corporation shall act as Secretary of all meetings of the Directors; but in
the absence of the Secretary, the Chairman may appoint any person to act as
Secretary of the meeting.
SECTION 8. COMMITTEES. The Board of Directors may designate one or more
committees including, without limitation, compensation and audit committees,
each committee to consist of one or more of the Directors of the Corporation.
The Board may designate one or more Directors as alternate members of any
committee who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and the affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
approving or adopting, or recommending to the stockholders, any action or matter
expressly required by law to be submitted to stockholders for approval, or
adopting, amending or repealing these By-laws.
SECTION 9. CONFERENCE TELEPHONE MEETINGS. Unless otherwise restricted by
the Certificate of Incorporation or by these By-Laws, the members of the Board
of Directors or any committee designated by the Board, may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. CONSENT OF DIRECTORS OR COMMITTEE IN LIEU OF MEETING. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the Board
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
4
ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and a
Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 8 of this Article III.
The President, the Chief Executive Officer, one or more Vice Presidents, the
Secretary and the Treasurer shall be elected by the Board of Directors at its
first meeting after each annual meeting of the stockholders. The failure to hold
such election shall not of itself terminate the term of office of any officer.
All officers shall hold office at the pleasure of the Board of Directors. Any
officer may resign at any time upon written notice to the Corporation. Officers
may, but need not, be Directors. Any number of offices may be held by the same
person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to his or her contract rights, if any.
The election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
Any vacancy caused by the death, resignation or removal of any officer, or
otherwise, may be filled by the Board of Directors, and any officer so elected
shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief
Executive Officer shall be the chief executive officer of the Corporation, have
general charge and control of all the Corporation's business and affairs and,
subject to the control of the Board of Directors, shall have all powers and
shall perform all duties incident to the office of Chief Executive Officer. The
Chief Executive Officer shall preside at all meetings of the stockholders and at
all meetings of the Board of Directors. In addition, the Chief Executive Officer
shall have such other powers and perform such other duties as may from time to
time be assigned by these By-Laws or by the Board of Directors.
SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. The President shall,
subject to the control of the Board of Directors, have all powers and shall
perform all duties incident to the office of President. In the absence of the
Chief Executive Officer, the President shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors. In the absence of
the Chief Executive Officer, the President shall be the chief executive officer
of the Corporation, have general charge and control of all the Corporation's
business and affairs and shall have such other powers and perform such other
duties as may from time to time be assigned by these By-Laws or by the Board of
Directors.
SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice President
shall have all powers and shall perform all duties incident to the office of
Vice President and shall have such other powers and perform such other duties as
may from time to time be assigned by these By-Laws or by the Board of Directors,
the Chief Executive Officer or the President.
SECTION 5. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose. The Secretary
shall attend to the giving or serving of all notices of the Corporation; shall
have custody of the corporate seal of the Corporation and shall affix the same
to such documents and other papers as the Board of Directors, the Chief
Executive Officer or the President shall authorize and direct; shall have charge
of the stock certificate books, transfer books and stock ledgers and such other
books and papers as the Board of Directors, the Chief Executive Officer or the
President shall direct, all of which
5
shall at all reasonable times be open to the examination of any Director, upon
application, at the office of the Corporation during business hours. The
Secretary shall have all powers and shall perform all duties incident to the
office of Secretary, and shall also have such other powers and shall perform
such other duties as may from time to time be assigned by these By-Laws or by
the Board of Directors, the Chief Executive Officer or the President.
SECTION 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have
custody of, and when proper, shall pay out, disburse or otherwise dispose of,
all funds and securities of the Corporation. The Treasurer may endorse on behalf
of the Corporation for collection checks, notes and other obligations and shall
deposit the same to the credit of the Corporation in such bank or banks or
depositary or depositaries as the Board of Directors may designate; shall sign
all receipts and vouchers for payments made to the Corporation, shall enter or
cause to be entered regularly in the books of the Corporation kept for the
purpose full and accurate accounts of all moneys received or paid or otherwise
disposed of and, whenever required by the Board of Directors, the Chief
Executive Officer or the President, shall render statements of such accounts.
The Treasurer shall, at all reasonable times, exhibit the books and accounts to
any Director of the Corporation upon application at the office of the
Corporation during business hours; and shall have all powers and shall perform
all duties incident to the office of Treasurer and shall also have such other
powers and shall perform such other duties as may from time to time be assigned
by these By-Laws or by the Board of Directors, the Chief Executive Officer or
the President.
SECTION 7. ADDITIONAL OFFICERS. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned by
the Board of Directors, the Chief Executive Officer or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
SECTION 8. GIVING OF BOND BY OFFICERS. All officers of the Corporation, if
required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board of
Directors, the Chief Executive Officer, the President or any Vice President
shall have full power and authority on behalf of the Corporation to attend and
to act and to vote, or in the name of the Corporation to execute proxies to
vote, at any meeting of stockholders of any corporation in which the Corporation
may hold stock, and at any such meeting shall possess and may exercise, in
person or by proxy, any and all rights, powers and privileges incident to the
ownership of such stock. The Board of Directors may from time to time, by
resolution, confer like powers upon any other person or persons.
SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter, a "Proceeding"), by reason of the fact that he or
she is or was a director or officer of the Corporation or is or was serving at
the request of the Corporation as a director,
6
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter, an "Indemnitee"), whether the basis of such
Proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Minnesota Business Corporation Act, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than permitted prior thereto), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith and such indemnification
shall continue as to an Indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the Indemnitee's heirs,
executors and administrators; PROVIDED, HOWEVER, that, except as provided in
Section 3 of this Article IV with respect to Proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a Proceeding (or part thereof) initiated by such Indemnitee only
if such Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification
conferred in Section 1 of this Article IV shall include the right to be paid by
the Corporation the expenses incurred in defending any Proceeding for which such
right to indemnification is applicable in advance of its final disposition
(hereinafter, an "Advancement of Expenses"); PROVIDED, HOWEVER, that, if the
Minnesota Business Corporation Act requires, an Advancement of Expenses incurred
by an Indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such Indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter, an
"Undertaking"), by or on behalf of such Indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter, a "Final Adjudication")
that such Indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise.
SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT. The rights to
indemnification and to the advancement of expenses conferred in Sections 1 or 2
of this Article IV shall be contract rights. If a claim under Sections 1 or 2 of
this Article IV is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an Advancement of Expenses, in which case the applicable period shall
be twenty days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an Advancement of Expenses), it shall be a defense that, and
(ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking the Corporation shall be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
any applicable standard for indemnification set forth in the Minnesota Business
Corporation Act. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the Minnesota Business Corporation
Act, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the Indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
Advancement of Expenses hereunder, or by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the burden
7
of proving that the Indemnitee is not entitled to be indemnified, or to such
Advancement of Expenses, under this Section or otherwise shall be on the
Corporation.
SECTION 4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to
the Advancement of Expenses conferred in this Article IV shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, By-law, agreement, vote
of stockholders or disinterested directors or otherwise.
SECTION 5. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Minnesota Business Corporation Act.
SECTION 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and to the Advancement of Expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article IV with respect to the indemnification and
Advancement of Expenses of directors and officers of the Corporation.
ARTICLE V
STOCK-SEAL-FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES OF STOCK. The certificates for shares
of stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the Chief Executive Officer, the President
or a Vice President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be issued and delivered as though the person or
persons who signed such certificate or certificates had not ceased to be such
officer or officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such shares and the date of issue thereof shall be entered on
the books of the Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he or she shall file in the office of the
Corporation an affidavit setting forth, to the best of his or her knowledge and
belief, the time, place and circumstances of the loss, theft or destruction,
and, if required by the Board of Directors, a bond of indemnity or other
indemnification sufficient in the opinion of the Board of Directors to indemnify
the Corporation and its agents against any claim that may be made against it or
them on account of the alleged loss, theft or destruction of any such
certificate or the issuance of a new certificate in replacement therefor.
Thereupon, the Corporation may cause to be issued to such person a new
certificate in replacement for the certificate alleged to have been lost, stolen
or destroyed. Upon the stub of every new certificate so issued shall be noted
the fact of such issue and the number, date and the name of the registered owner
of the lost, stolen or destroyed certificate in lieu of which the new
certificate is issued.
8
SECTION 3. TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof, in person or
by his or her attorney duly authorized in writing, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in Section 2 of this Article IV.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of, or to vote at, any meeting of stockholders,
or to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; PROVIDED, HOWEVER,that if no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of, or to vote at, a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
A determination of stockholders of record entitled to notice of, or to vote
at, a meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall be not more than ten (10) days after the date upon which
the resolution fixing the record date is adopted. If no record date has been
fixed by the Board of Directors and no prior action by the Board of Directors is
required by the Minnesota Business Corporation Act, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in the manner prescribed by
Article I, Section 9 hereof. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by the
Minnesota Business Corporation Act with respect to the proposed action by
written consent of the stockholders, the record date for determining
stockholders entitled to consent to corporate action in writing shall be at the
close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any dividends
declared upon the stock of the Corporation shall be payable on such date or
dates as the Board of Directors shall determine. If the date fixed for the
payment of any dividend shall in any year fall upon a legal holiday, then the
dividend payable on such date shall be paid on the next day not a legal holiday.
SECTION 7. CORPORATE SEAL. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be kept in the
custody of the Secretary. A duplicate of the seal
9
may be kept and be used by any officer of the Corporation designated by the
Board of Directors, the Chief Executive Officer or the President.
SECTION 8. FISCAL YEAR. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. LOANS. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other evidences of indebtedness of the Corporation. When authorized so to do,
any officer or agent of the Corporation may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Corporation, any and all stocks, securities and other
personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same. Such authority may be general or confined
to specific instances.
SECTION 3. CONTRACTS. Except as otherwise provided in these By-Laws or by
law or as otherwise directed by the Board of Directors, the Chief Executive
Officer, the President or any Vice President shall be authorized to execute and
deliver, in the name and on behalf of the Corporation, all agreements, bonds,
contracts, deeds, mortgages, and other instruments, either for the Corporation's
own account or in a fiduciary or other capacity, and the seal of the
Corporation, if appropriate, shall be affixed thereto by any of such officers or
the Secretary or an Assistant Secretary. The Board of Directors, the Chief
Executive Officer, the President or any Vice President designated by the Board
of Directors may authorize any other officer, employee or agent to execute and
deliver, in the name and on behalf of the Corporation, agreements, bonds,
contracts, deeds, mortgages, and other instruments, either for the Corporation's
own account or in a fiduciary or other capacity, and, if appropriate, to affix
the seal of the Corporation thereto. The grant of such authority by the Board or
any such officer may be general or confined to specific instances.
SECTION 4. WAIVERS OF NOTICE. Whenever any notice whatever is required to
be given by law, by the Certificate of Incorporation or by these By-Laws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION 5. OFFICES OUTSIDE OF MINNESOTA. Except as otherwise required by
the laws of the State of Minnesota, the Corporation may have an office or
offices and keep its books, documents and papers outside of the State of
Minnesota at such place or places as from time to time may be determined by the
Board of Directors, the Chief Executive Officer or the President.
10
ARTICLE VII
AMENDMENTS
These By-Laws and any amendment thereof may be altered, amended or repealed,
or new By-Laws may be adopted, by the Board of Directors at any regular or
special meeting by the affirmative vote of a majority of all of the members of
the Board, provided in the case of any special meeting at which all of the
members of the Board are not present, that the notice of such meeting shall have
stated that the amendment of these By-Laws was one of the purposes of the
meeting; but these By-Laws and any amendment thereof may be altered, amended or
repealed or new By-Laws may be adopted by the holders of a majority of the total
outstanding stock of the Corporation entitled to vote at any annual meeting or
at any special meeting, provided, in the case of any special meeting, that
notice of such proposed alteration, amendment, repeal or adoption is included in
the notice of the meeting.
11
EXHIBIT B
[FORM OF OPINION OF GP]
1. The Company is a corporation duly incorporated and validly existing in good
standing under the laws of the State of Minnesota.
2. The Company has taken, or caused to be taken, all necessary corporate and
shareholder action to authorize the execution, delivery and performance by
it of the Merger Agreement and the transactions contemplated thereby to
which it is a party.
3. The Merger Agreement has been duly executed and delivered by the Company and
constitutes a legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as
limited by (a) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws relating to creditors' rights
generally or, (b) general principles of equity, whether such enforceability
is considered in a proceeding in equity or at law, and to the discretion of
the court before which any proceeding therefor may be brought, or (c) public
policy considerations or court decisions which may limit the rights of the
parties thereto for indemnification.
4. Neither the execution and the delivery of the Merger Agreement, nor the
consummation of the transactions contemplated thereby, will (a) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge or other restriction of any Governmental Entity or
court to which the Company is subject or any provision of the Articles of
Incorporation or Bylaws of the Company or (b) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create
in any party to the Merger Agreement the right to accelerate, terminate,
modify, or cancel or require any notice under any Contract to which the
Company is a party or by which it is bound or to which any of its assets or
properties is subject.
5. The Company has no Subsidiaries.
12
EXHIBIT C
[FORM OF OPINION OF OWD]
1. TAC is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Minnesota.
2. The execution and delivery of this Agreement by TAC and the consummation by
TAC of the transactions contemplated hereby have been duly authorized by all
necessary corporate action.
3. The Merger Agreement has been duly executed and delivered by TAC and
constitutes a legally valid and binding obligation of TAC, enforceable
against TAC in accordance with its terms, except as limited by (a)
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws relating to creditors' rights and remedies generally, (b)
general principles of equity including principles of commercial
reasonableness, good faith and fair dealing, whether such enforceability is
considered in a proceeding in equity or at law, and to the discretion of the
court before which any proceeding therefor may be brought, or (c) public
policy considerations or court decisions which may limit the rights of the
parties thereto for indemnification.
4. The execution and delivery of this Agreement does not, and the consummation
by TAC of the transactions contemplated hereby will not, violate the
Articles of Incorporation or By-laws of TAC.
13
ANNEX B
December 11, 1998
Board of Directors
Vaughn Communications, Inc.
5050 West 78(th) Street
Minneapolis, MN 55435
Gentlemen:
We understand that Vaughn Communications, Inc. ("Vaughn") has agreed to sell
all of its issued and outstanding shares of Common Stock, par value $0.10 per
share (the "Common Stock"), to Allied Digital, Inc. ("Allied"). Pursuant to the
Agreement and Plan of Merger dated December 11, 1998 (the "Merger Agreement"),
among Vaughn, Allied and Allied's wholly owned subsidiary, Twin Acquisition
Corp. ("Merger Sub"), Allied proposes to acquire all of Vaughn's issued and
outstanding shares of Common Stock for $10.00 per share in cash (the
"Consideration") through a merger of Merger Sub with and into Vaughn, with
Vaughn as the surviving corporation (the "Merger"), subject to the rights of
Dissenting Stockholders (as such term is defined in the Merger Agreement).
We also understand that following the Merger, Vaughn will be reincorporated
in Delaware by merging with and into a Delaware corporation of the same name
(Vaughn Communications, Inc.) The Merger is defined herein as the Transaction.
You have requested our opinion as to whether the Consideration to be
received by the stockholders of Vaughn in the Transaction is fair, from a
financial point of view, to the stockholders of Vaughn as of the date hereof.
For the purposes of the opinion set forth herein, we have, among other
things,
- Reviewed the agreement and plan of merger (the "Merger Agreement") by and
between Vaughn, Allied and Twin Acquisition Corp. in substantially final
form;
- Reviewed a draft of Vaughn's merger proxy statement dated December 9,
1998, in substantially final form;
- Reviewed Vaughn's annual report on Forms 10-K for the years ended January
31, 1997, and 1998;
- Reviewed Vaughn's quarterly reports on Forms 10-Q for the three months
ended July 30, 1998 and October 31, 1998;
- Reviewed Vaughn's current report on Form 8-K with a Date of Report of
November 16, 1998;
- Reviewed certain non-public operating and financial information, including
financial projections, relating to Vaughn's business prepared by
management of Vaughn;
- Interviewed certain members of Vaughn's management to discuss its
operations, financial statements and future prospects;
- Reviewed the historical share prices and trading volumes of Vaughn's
Common Stock;
- Reviewed premiums paid in recent merger transactions of comparable size;
- Reviewed publicly available financial data and stock market performance
data of other publicly traded multi-media companies, which we deemed
comparable to Vaughn;
- Reviewed the terms of selected recent acquisitions of companies which we
deemed comparable to Vaughn;
B-1
- Reviewed termination fees agreed to on recent transactions of comparable
size; and
- Conducted such other studies, analyses, inquiries and investigations, as
we deemed appropriate.
In arriving at our opinion, we have considered such factors as we have
deemed relevant including, but not limited to: (i) the historical market prices
and trading volume of the Common Stock of Vaughn, (ii) premiums in recent merger
transactions of comparable size, (iii) the transaction values on business
combinations which we believe comparable to Vaughn relative to sales, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), and earnings
before interest and taxes ("EBIT"), (iv) the market value of publicly held
companies we deemed comparable to Vaughn relative to sales, EBITDA, EBIT, and
net income, (v) a valuation for Vaughn (on a per share basis) based on a
discounted cash flow analysis, and (vi) other items we deemed to be relevant.
During our review, we have relied upon and assumed, without independent
verification, the accuracy and completeness of the financial and other
information provided, and have further relied upon the assurances of management
that they are unaware of any facts that would make the information provided to
us to be incomplete or misleading for the purposes of this opinion. As our
opinion encompasses forward looking valuation techniques such as the discounted
cash flow analysis, we have assumed that the financial projections which we
reviewed to have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of each
company. Our opinion is necessarily based on the economic, market, and other
conditions as in effect on, and the information made available to us as of, the
date hereof. In arriving at our opinion, we have not performed any independent
appraisal of the assets of Vaughn. We disclaim any undertaking or obligation to
advise any person of any change in any fact or matter affecting our opinion
which may come or be brought to our attention after the date of this opinion.
We have acted as financial advisor to the Special Committee of the Board of
Directors of Vaughn in connection with the sale of the Company and will receive
a fee for such services. This opinion is for the use and benefit of the Board of
Directors of Vaughn in its consideration of the Merger.
It is understood that this opinion will be included in its entirety in a
proxy statement or other document distributed to the stockholders of Vaughn in
connection with the Transaction and this constitutes our express written
approval for that purpose. It is understood that this opinion shall be used by
you solely in connection with your consideration of the fairness of the
Transaction to the stockholders of Vaughn and for no other purpose, and Vaughn
will not furnish this opinion or any other material prepared by us to any other
person or use or refer to this opinion for any other purpose without our prior
written approval. However, no summary of, or excerpt from, this opinion may be
used, and no published public reference (other than as provided in the preceding
sentence) to this opinion may be made except with our prior express approval.
This opinion does not constitute a recommendation to any stockholder of
Vaughn as to whether such stockholder should vote to approve the Merger, or as
to any other actions which such stockholder should take in conjunction with the
Transaction. This opinion relates solely to the question of fairness to the
Vaughn stockholders, from a financial point of view, of the Transaction as
currently proposed. Further, we express no opinion herein as to the structure,
terms or effect of any other aspect of the Transaction, including, without
limitation, any effects resulting from the application of any bankruptcy,
fraudulent conveyance or other federal or state insolvency law or of any pending
or threatened litigation affecting Vaughn.
Based on the foregoing, we are of the opinion that the Consideration to be
received by the stockholders of Vaughn in the Transaction is fair, from a
financial point of view, to the stockholders of Vaughn as of the date hereof.
Very truly yours,
EVEREN Securities, Inc.
/s/ EVEREN Securities Inc.
B-2
ANNEX C
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public corporation
that provides that section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment under this
section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS.
(a) A shareholder shall not assert dissenters rights as to less than all
of the shares registered in the name of the shareholder, unless the
shareholder dissents with respect to all the shares that are beneficially
owned by another person but registered in the name of the shareholder and
discloses the name and address of each beneficial owner on whose behalf the
shareholder dissents. In that event, the rights of the dissenter shall be
determined as if the shares as to which the shareholder has dissented and
the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting
C-1
shareholder under the terms of this section and section 302A.473, if the
beneficial owner submits to the corporation at the time of or before the
assertion of the rights a written consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY.
(a) Unless the articles, the bylaws, or a resolution approved by the
board otherwise provide, the right to obtain payment under this section does
not apply to a shareholder of the surviving corporation in a merger, if the
shares of the shareholder are not entitled to be voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date
fixed, and beneficial owners as of the date fixed who hold through
shareholders, as provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS.
(a) For purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1
or the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1,
up to and including the date of payment, calculated at the rate provided in
section 549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters' rights must file with the corporation
before the vote on the proposed action a written notice of intent to demand the
fair value of the shares owned by the shareholder and must not vote the shares
in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all shareholders
who have complied with subdivision 3 and to all shareholders entitled to
dissent if no shareholder vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date
by which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
C-2
(3) A form to be used to certify the date on which the shareholder,
or the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply
with any restrictions on transfer of uncertificated shares within 30 days
after the notice required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed action takes
effect.
SUBD. 5. PAYMENT; RETURN OF SHARES.
(a) After the corporate action takes effect, after the corporation
receives a valid demand for payment, whichever is later, the corporation
shall remit to each dissenting shareholder who has complied with
subdivisions 3 and 4 the amount the corporation estimates to be the fair
value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective
date of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares
and a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the
reason for withholding the remittance, and an offer to pay to the dissenter
the amount listed in the materials if the dissenter agrees to accept that
amount in full satisfaction. The dissenter may decline the offer and demand
payment under subdivision 6. Failure to do so entitles the dissenter only to
the amount offered. If the dissenter makes demand, subdivisions 7 and 8
apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel
all transfer restrictions. However, the corporation may again give notice
under subdivision 4 and require deposit or restrict transfer at a later
time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in
C-3
this state in which the last registered office of the constituent corporation
was located. The petition shall name as parties all dissenters who have demanded
payment under subdivision 6 and who have not reached agreement with the
corporation. The corporation shall, after filing the petition, serve all parties
with a summons and copy of the petition under the rules of civil procedure.
Nonresidents of this state may be served by registered or certified mail or by
publication as provided by law. Except as otherwise provided, the rules of civil
procedure apply to this proceeding. The jurisdiction of the court is plenary and
exclusive. The court may appoint appraisers, with powers and authorities the
court deems proper, to receive evidence on and recommend the amount of the fair
value of the shares. The court shall determine whether the shareholder or
shareholders in question have fully complied with the requirements of this
section, and shall determine the fair value of the shares, taking into account
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which the
fair value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES.
(a) The court shall determine the costs and expenses of a proceeding
under subdivision 7, including the reasonable expenses and compensation of
any appraisers appointed by the court, and shall assess those costs and
expenses against the corporation, except that the court may assess part or
all of those costs and expenses against a dissenter whose action in
demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses
of any experts or attorneys as the court deems equitable. These fees and
expenses may also be assessed against a person who has acted arbitrarily,
vexatiously, or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if
any.
C-4
ANNEX D
OPTION TERMINATION AND GRANT AGREEMENT
OPTION TERMINATION AND GRANT AGREEMENT, dated as of December 11, 1998 (this
"AGREEMENT"), by and among Allied Digital Technologies Corp., a Delaware
corporation ("ALLIED"), Vaughn Communications, Inc., a Minnesota corporation
("VCI") and E. David Willette (the "OPTIONHOLDER"). Capitalized terms used but
not defined herein shall have the meanings set forth in the Agreement and Plan
of Merger, dated the date hereof, by and between Twin Acquisition Corp. ("TAC")
and VCI (as such agreement may be amended from time to time, the "MERGER
AGREEMENT").
WHEREAS, concurrently herewith, TAC and VCI are entering into the Merger
Agreement, pursuant to which TAC will be merged with and into VCI (the
"MERGER"), whereby (i) each share of common stock, par value $.10 per share, of
VCI ("VCI COMMON STOCK") issued and outstanding immediately prior to the
Effective Time, other than certain shares as set forth in Section 2.1 of the
Merger Agreement, will be converted into the right to receive cash and (ii)
other than as set forth in this Agreement, each option to purchase VCI Common
Stock (a "VCI STOCK OPTION") outstanding immediately prior to the Effective
Time, whether or not vested or exercisable, will be cancelled and converted into
the right to receive cash;
WHEREAS, the Optionholder Beneficially Owns VCI Stock Options; and
WHEREAS, the Optionholder desires to cancel, immediately prior to the
Effective Time, all of his VCI Stock Options and, in consideration for such
cancellation, acquire a non-qualified option to purchase shares of Series C
Preferred Stock of Allied, par value $.01 per share ("SERIES C PREFERRED"), upon
the terms and conditions set forth in the Stock Option Agreement and Letter of
Grant attached hereto as Exhibit A ("OPTION GRANT AGREEMENT");
NOW, THEREFORE, in order to implement the foregoing and in consideration of
the mutual agreements contained herein, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. The following terms, when used in this
Agreement, shall have the following meanings (such definitions to be equally
applicable to both singular and plural terms of the terms defined):
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly Controlling, Controlled by, or under common Control with such Person,
provided that no security holder of any Person shall be deemed an Affiliate of
any other security holder solely by reason of any investment in such Person. For
the purpose of this definition, the term "control" (including with correlative
meanings, the terms "controlling", "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of stock, as a
trustee or executor, by Contract or credit arrangement or otherwise.
"AGREEMENT" has the meaning ascribed thereto in the introductory paragraph
of this Agreement.
"ALLIED" has the meaning ascribed thereto in the introductory paragraph of
this Agreement.
"ALLIED OPTION" has the meaning ascribed thereto in Section 2(a) of this
Agreement.
"ALLIED OPTION SHARES" means, collectively, the shares of Series C Preferred
that are issuable upon exercise of the Allied Option.
"BENEFICIAL OWNERSHIP" or "BENEFICIALLY OWN" with respect to any securities
shall mean having "beneficial ownership" of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
Beneficially Owned by a Person
D-1
shall include securities Beneficially Owned by all other Persons with whom such
Person would constitute a "group" as described in Section 13(d)(3) of the
Exchange Act.
"BUSINESS DAY" means any day on which the principal offices of the
Securities and Exchange Commission in Washington, D.C. are open to accept
filings or, in the case of determining a date when any payment is due, any day
other than a day on which banks in New York, New York are required or authorized
to be closed.
"CLOSING" has the meaning ascribed thereto in Section 2(b) of this
Agreement.
"CLOSING DATE" has the meaning ascribed thereto in Section 2(b) of this
Agreement.
"CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH") means the possession, directly or indirectly or as a trustee or executor,
of the power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of stock, as a trustee or executor, by
Contract or credit arrangement or otherwise.
"DGCL" has the meaning ascribed thereto in Section 11(k) of this Agreement.
"INVESTORS' AGREEMENT" has the meaning ascribed thereto in Section 5 of this
Agreement.
"MERGER" has the meaning ascribed thereto in the introduction paragraph of
this Agreement.
"MERGER AGREEMENT" has the meaning ascribed thereto in the introductory
paragraph of this Agreement.
"OPTION GRANT AGREEMENT" has the meaning ascribed thereto in the recitals of
this Agreement.
"OPTIONHOLDER" has the meaning ascribed thereto in the introductory
paragraph of this Agreement.
"PERMITTED TRANSFEREE" means in the case of the Optionholder, (i) a spouse
or lineal descendant (including by adoption and stepchildren), heir, executor,
testamentary trustee or legatee of the Optionholder or (ii) any trust or estate
the beneficiaries of which, or any corporation, limited liability company or
partnership, the stockholders, members or partners of which include only the
Persons described in clause (i) above.
"PERSON" means an individual, corporation, partnership, limited liability
company, limited partnership, association, trust, unincorporated organization or
other entity or group (as defined in Section 13(d)(3) of the Exchange Act).
"REGISTRATION RIGHTS AGREEMENT" has the meaning ascribed thereto in Section
5 of this Agreement.
"SERIES C PREFERRED" has the meaning ascribed thereto in the recitals of
this Agreement.
"TAC" has the meaning ascribed thereto in the introductory paragraph of this
Agreement.
"TRUSTEE" has the meaning ascribed thereto in Section 3(c) of this
Agreement.
"VCI" has the meaning ascribed thereto in the introductory paragraph of this
Agreement.
"VCI COMMON STOCK" has the meaning ascribed thereto in the recitals of this
Agreement.
"VCI STOCK OPTIONS" has the meaning ascribed thereto in the recitals of this
Agreement.
"WILLETTE OPTIONS" has the meaning ascribed thereto in Section 2(a) of this
Agreement.
Section 2. TERMINATION AND GRANT OF OPTIONS; CLOSING.
i. Subject to the terms and conditions of this Agreement, immediately
prior to the Effective Time, the Optionholder shall cancel VCI Stock Options
to purchase 128,500 shares of VCI Common Stock, representing (i) VCI Stock
Options to purchase 20,500 shares of VCI Common Stock at an exercise price
of $3.1250 per share, (ii) VCI Stock Options to purchase 22,000 shares of
VCI Common Stock at
D-2
an exercise price of $5.1000 per share, (iii) VCI Stock Options to purchase
34,000 shares of VCI Common Stock at an exercise price of $5.8438 per share,
(iv) VCI Stock Options to purchase 27,000 shares of VCI Common Stock at an
exercise price of $7.5438 per share, and (v) VCI Stock Options to purchase
25,000 shares of VCI Common Stock at an exercise price of $11.05 per share
(the "WILLETTE OPTIONS") and, in consideration for such cancellation,
acquire a non-qualified option (the "ALLIED OPTION") consisting of the right
to purchase 10,000 shares of Series C Preferred at an exercise price of
$543,634.30, subject to the terms and conditions set forth in the Option
Grant Agreement.
ii. The cancellation of the Willette Options and grant of the Allied
Option shall take place immediately prior to the Effective Time on the date
("CLOSING DATE") of closing ("CLOSING") of the transactions contemplated by
the Merger Agreement at the offices of Morgan, Lewis & Bockius LLP, 101 Park
Avenue, New York, NY 10178.
iii. At the Closing, immediately prior to the Effective Time, (i) Allied
will deliver to the Optionholder the Option Grant Agreement, duly executed
by Allied, evidencing the grant of the Allied Option and (ii) upon such
delivery, the Willette Options shall be duly cancelled with no further
action on the part of any Person and shall have no further force and effect,
and thereafter neither VCI nor any other Person shall have any further
Liability with respect to any such Willette Options.
iv. VCI shall take the necessary steps to cause the Willette Options to
be duly cancelled in accordance with Section 2(c) above.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE OPTIONHOLDER. The
Optionholder hereby represents and warrants to Allied as of the date hereof and
as of the Closing Date as follows:
i. The Optionholder has all necessary power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the
Optionholder, and (assuming due authorization, execution and delivery by the
Optionholder) constitutes a valid and binding obligation of the
Optionholder, enforceable against it in accordance with its terms, except as
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally and by general
principles of equity.
ii. The execution and delivery by the Optionholder of this Agreement,
the performance by the Optionholder of its obligations hereunder and the
consummation of the transactions contemplated by this Agreement do not (i)
conflict with or result in a violation or breach of, (ii) constitute (with
or without notice or lapse of time or both) a default under, or (iii)
require the Optionholder to obtain any consent, approval or action of, make
any filing with or give any notice to any Person as a result of or under the
terms of any Contract or other agreement to which the Optionholder is a
party or by which any of his assets and/or properties is bound.
iii. The Optionholder is either (i) the record holder or Beneficial
Owner of, or (ii) trustee (such trustee, a "TRUSTEE") of a trust that is the
record holder or Beneficial Owner of, and whose beneficiaries are the
Beneficial Owners of, each of the VCI Stock Options set forth opposite the
Optionholder's name on Schedule I hereto setting forth the exercise price
thereof.
iv. The Willette Options constitute all of the VCI Stock Options either
(i) Beneficially Owned or held of record by the Optionholder or (ii) held in
a trust to which the Optionholder is Trustee that is the record holder or
Beneficial Owner of, and whose beneficiaries are the Beneficial Owners of,
such VCI Stock Options.
v. Each Willette Option is free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever.
vi. No broker, investment banker, financial adviser or other person is
entitled to any broker's, finder's, financial adviser's or other similar fee
or commission in connection with the transactions
D-3
contemplated hereby based upon arrangements made by or on behalf of the
Optionholder in his or her capacity as such.
vii. The Optionholder understands and acknowledges that Allied is
directing TAC to enter into the Merger Agreement in reliance upon the
Optionholder's execution and delivery of this Agreement with Allied.
Section 4. REPRESENTATIONS AND WARRANTIES OF ALLIED. Allied hereby
represents and warrants to the Optionholder, as of the date hereof and as of the
Closing Date, as follows:
i. Allied is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation.
ii. Allied has all necessary power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance by Allied of this Agreement and the
consummation by Allied of the transactions contemplated hereby have been
duly and validly authorized and approved by all required corporate action.
This Agreement has been duly executed and delivered by Allied, and (assuming
due authorization, execution and delivery by the Optionholder) constitutes a
valid and binding obligation of Allied, enforceable against it in accordance
with its terms, except as limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors'
rights generally, (ii) general principles of equity, whether such
enforceability is considered in a proceeding in equity or at law, and to the
discretion of the court before which any proceeding therefor may be brought,
or (iii) public policy considerations or court decisions which may limit the
rights of the parties thereto for indemnification.
iii. No broker, investment banker, financial adviser or other person is
entitled to any broker's, finder's, financial adviser's or other similar fee
or commission in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of Allied.
Section 5. CERTAIN AGREEMENTS. Immediately prior to the Effective Time, the
Optionholder shall (i) become a party to that certain Investors' Agreement,
dated September 24, 1998, as such agreement may have been or may be modified or
amended from time to time (the "INVESTORS' AGREEMENT"), by and among Allied and
the Persons named therein, by executing a joinder agreement and shall be deemed
an Additional Management Stockholder (as defined in the Investors' Agreement)
for purposes thereof and shall be fully bound by, and subject to, the provisions
of the Investors' Agreement that are applicable to such Person, and (ii) become
a party to the Allied Digital Technologies Corp. Registration Rights Agreement,
dated as of September 24, 1998, as such agreement may have been or may be
modified or amended from time to time (the "REGISTRATION RIGHTS AGREEMENT"), by
and among Allied and the Persons named therein, by executing a joinder agreement
and shall be deemed an Additional Management Stockholder (as defined in the
Investors' Agreement) for purposes thereof and fully bound by, and subject to,
the covenants, terms and conditions of the Registration Rights Agreement that
are applicable to such Person.
Section 6. FURTHER ASSURANCES. From time to time, at the other party's
request and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further action as may be
necessary or desirable to consummate and make effective, in the most expeditious
manner practicable, the transactions contemplated by this Agreement.
Section 7. CERTAIN EVENTS. The Optionholder agrees that this Agreement and
the obligations hereunder shall attach to the Willette Options and shall be
binding upon any Person to which legal or Beneficial Ownership of any such VCI
Stock Option shall pass, whether by operation of Law or otherwise, including
without limitation the Optionholder's heirs, guardians, administrators or
successors or as a result of any divorce.
D-4
Section 8. STOP TRANSFER. The Optionholder agrees with, and covenants to,
Allied that the Optionholder shall not request that VCI register the transfer
(book-entry or otherwise) of any certificate or uncertificated interest
representing any of the Willette Options, unless such transfer is made in
compliance with this Agreement.
Section 9. RULE 145 AFFILIATE. The Optionholder, if deemed by Allied in its
sole discretion to be an "affiliate" for purposes of Rule 145 under the
Securities Act of 1933, as amended, hereby agrees to deliver to Allied, on or
prior to the Effective Time, a written agreement in form and substance
acceptable to Allied, restricting the disposition of the Allied Option and the
Allied Option Shares.
Section 10. TERMINATION. In the event the Merger Agreement is terminated at
any time prior to the Effective Time and the transactions contemplated thereby
are abandoned, this Agreement shall terminate and be of no further force and
effect.
Section 11. MISCELLANEOUS.
(a) All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given
(i) on the day of service if served personally on the party to whom notice
is to be given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of
transmission, provided that a copy shall be sent via certified mail, return
receipt requested, simultaneously with any such facsimile; (iii) on the
Business Day after delivery to Federal Express or similar overnight courier
or the Express Mail service maintained by the United States Postal Service;
or (iv) on the fifth day after mailing, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid and properly addressed, to the party as follows:
If to the Optionholder or E. David Willette
to VCI: c/o Vaughn Communications, Inc.
5050 West 78th Street
Minneapolis, MN 55435
Facsimile No.: (612) 832-3241
If to Allied: Allied Digital Technologies Corp.
140 Fell Court
Hauppauge, NY 11788
Facsimile No.: (516) 232-5370
Attn: Chief Executive Officer
with a copy to:
399 Venture Partners, Inc.
399 Park Avenue--14th Floor
New York, NY 10043
Facsimile No.: (212) 888-2940
Attn: Michael A. Delaney
and:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Attn: Philip H. Werner, Esq.
Facsimile No.: 212-309-6273
D-5
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(b) At any time prior to the Effective Time, any party hereto may, with
respect to any other party hereto, (i) extend the time for the performance
of any of the obligations or other acts, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto or (iii) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or parties to be
bound thereby.
(c) The headings contained in this Agreement are for convenience of
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(d) If any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain
in full force and effect so long as the economic or legal substance of the
transactions contemplated by the Merger Agreement is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner.
(e) This Agreement, including all exhibits, disclosure schedules and
schedules hereto, constitutes the entire agreement and supersedes all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and except as otherwise expressly
provided herein.
(f) Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by either party (whether by operation of law or
otherwise) without the prior written consent of the other party hereto.
Subject to the preceding sentence, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors
and permitted assigns, and no other Person shall have any right, benefit or
obligation under this Agreement as a third party beneficiary or otherwise.
(g) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the
parties hereto shall be entitled to specific performance of the terms
hereof, this being in addition to any other remedy to which they are
entitled at Law or in equity.
(h) No failure or delay on the part of any party hereto in the exercise
of any right hereunder shall impair such right or be construed to be a
waiver of, or acquiescence in, any breach of any representation, warranty or
agreement herein, nor shall any single or partial exercise of any such right
preclude other or further exercise thereof or of any other right. All rights
and remedies existing under this Agreement are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
(i) Notwithstanding anything herein to the contrary, the Optionholder
does not make any agreement or understanding herein in his capacity as
director of VCI and the agreements set forth herein shall in no way restrict
him in the exercise of his fiduciary duties as a director of VCI. The
Optionholder has executed this Agreement solely in his capacity as the
record or beneficial holder of the Willette Options or as the Trustee of a
trust whose beneficiaries are the Beneficial Owners of the Willette Options.
(j) Each party agrees to bear its own expenses in connection with the
transactions contemplated hereby.
(k) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York (without regard to any conflict of
laws provisions that might indicate the applicability of
D-6
the laws of any jurisdiction other than the State of New York), except to
the extent that the Delaware General Corporation Law ("DGCL") applies as a
result of Allied being incorporated in the State of Delaware in which case
the DGCL shall apply to the extent required under applicable choice of law
doctrines.
(l) EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATIVE TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND FOR
ANY COUNTERCLAIM THEREIN. EACH OF THE PARTIES HERETO ALSO WAIVES ANY BOND OR
SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF SUCH PARTY. THE SCOPE OF THIS WAIVER, IF ANY, IS INTENDED TO
ENCOMPASS ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON
LAW AND STATUTORY CLAIMS. EACH OF THE PARTIES HERETO FURTHER WARRANTS AND
REPRESENTS THAT HE OR IT HAS REVIEWED THIS PROVISION WITH HIS OR ITS LEGAL
COUNSEL, AND THAT HE OR IT KNOWINGLY AND VOLUNTARILY WAIVES HIS OR ITS JURY
TRIAL RIGHTS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
(m) Notwithstanding anything in this Agreement or any other document,
agreement or instrument contemplated hereby or entered into in connection
with the transactions contemplated hereby to the contrary, (i) the
obligations and liabilities of Allied hereunder shall be without recourse to
any shareholder of Allied or any of such shareholder's Affiliates,
directors, employees, officers or agents and shall be limited to the assets
of Allied and (ii) none of the shareholders of Allied or any of such
shareholder's Affiliates, directors, employees, officers or agents has made
any (or shall be deemed to have made any) representations, warranties or
covenants (express or implied) under or in connection with this Agreement.
(n) This Agreement may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
[SIGNATURE PAGE TO FOLLOW]
D-7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/ EMILY M. HILL
-----------------------------------------
Name: Emily M. Hill
TITLE: SENIOR VICE PRESIDENT-FINANCE
VAUGHN COMMUNICATIONS, INC.
By: /s/ E. DAVID WILLETTE
-----------------------------------------
Name: E. David Willette
TITLE: CHIEF EXECUTIVE OFFICER
/S/ E. DAVID WILLETTE
-----------------------------------------
E. David Willette
D-8
SCHEDULE I
OPTIONS
NO. OF SHARES OF
NO. OF VCI STOCK VCI COMMON STOCK
OPTIONS TO PURCHASE PURCHASABLE UPON EXERCISE EXERCISE
SHARES OF VCI OF PRICE
OPTIONHOLDER COMMON STOCK EACH SUCH VCI STOCK OPTION PER SHARE
- ------------------------------------------------- ------------------------- --------------------------- -------------
E. David Willette................................ 1 20,500 $ 3.1250
E. David Willette................................ 1 22,000 $ 5.1000
E. David Willette................................ 1 34,000 $ 5.8438
E. David Willette................................ 1 27,000 $ 7.5438
E. David Willette................................ 1 25,000 $ 11.0500
D-9
EXHIBIT A
STOCK OPTION AGREEMENT AND LETTER OF GRANT
PERSONAL AND CONFIDENTIAL
, 1998
E. David Willette
[address]
RE: STOCK OPTION GRANT
Dear Mr. Willette:
In order to provide incentive to you to contribute to the successful
operations of Allied Digital Technologies Corp. (the "COMPANY") and its
Affiliates, and in accordance with the terms of the Option Termination and Grant
Agreement between you and the Company dated the date hereof (the "OPTION
TERMINATION AGREEMENT") and subject to the terms and conditions hereof, the
Company is offering you by means of this Stock Option Agreement (this
"AGREEMENT") a non-qualified option ("OPTION") to purchase 10,000 authorized but
unissued or reacquired shares ("SHARES") of Series C Preferred Stock, par value
$.01 per share, of the Company ("SERIES C PREFERRED"). Terms not otherwise
defined herein shall have the meanings ascribed thereto in the Agreement and
Plan of Merger by and between Twin Acquisition Corp. and Vaughn Communications,
Inc. (the "MERGER AGREEMENT"). This offer is subject to the following terms and
conditions:
1 NUMBER OF OPTIONS. Subject to the terms and conditions hereof, the
Company hereby grants to you, as of the Effective Time, one Option to purchase
10,000 shares of Series C Preferred.
2. EXERCISE PRICE. The price (the "EXERCISE PRICE") at which the Series C
Preferred may be acquired upon the exercise of the Option shall be $543,634.30
to be paid by you in cash or in surrender to the Company of shares of Series B
Preferred Stock of the Company, par value $.01 per share ("SERIES B PREFERRED")
or a combination of both cash and shares of Series B Preferred.
3. VESTING/EXERCISE PERIOD. The Option shall be fully vested and
exercisable on the date of grant. The Option shall expire on the tenth
anniversary of the date of grant unless sooner terminated pursuant to Section 5
thereof.
4. TRANSFERABILITY. Neither the Option nor any portion thereof shall be
transferable by you other than by will or the laws of descent and distribution,
and the Option may not be exercised by anyone other than you during your
lifetime.
5. SHARE REPURCHASE OR REDEMPTION.
(a) SALE EVENT. If you undergo a cessation of employment during the
term of this Option, you must exercise the Option within twenty calendar
days of the date of such cessation or the Option shall be forfeited at the
end of such twenty day period without any further rights therein, and the
Shares you purchase (if any) will be subject to repurchase pursuant to the
terms of Article IV of the Investors' Agreement, dated as of September 24,
1998, as such agreement may have been or may be modified or amended from
time to time (the "INVESTORS' AGREEMENT")
(b) SALE OF THE COMPANY. Immediately upon the occurrence of a Sale of
the Company (as such term is defined in the Amended and Restated Certificate
of Incorporation of the Company (the "CERTIFICATE OF INCORPORATION")), you
must either exercise the Option concurrently with the Sale of the Company or
the Option shall be forfeited without any further rights therein, and the
Shares you
1
purchase (if any) will be subject to redemption pursuant to the terms of the
Certificate of Incorporation.
6. MANNER OF EXERCISE. You must exercise the Option in whole (not in
part). You may exercise the Option only by giving the Chief Financial Officer of
the Company written notice by personal hand delivery to the Chief Financial
Officer or by registered or certified mail, postage prepaid, at the following
address of your intent to exercise the Option: Allied Digital Technologies
Corp., 140 Fell Court, Hauppauge, New York 11788, Attn.: Chief Financial
Officer.
7. PAYMENT OF EXERCISE PRICE. If you exercise the Option, you must pay the
purchase price in U.S. dollars (by check). In no event will any Shares be
transferred to you on the exercise of the Option until the Company has received
the full payment pursuant to Section 2 and until the provisions of Section 8 are
satisfied.
8. DELIVERY OF SHARES AND COMPLIANCE WITH LAWS.
(a) GENERAL. The Company shall, upon payment of the Exercise Price for
the number of Shares purchased and paid for, make prompt delivery of such
Shares to you; PROVIDED that, if any law or regulation requires the Company
to take any action with respect to such Shares before the issuance thereof,
then the date of delivery of such Shares shall be extended for the period
necessary to complete such action.
(b) LISTING, QUALIFICATIONS, ETC. The Option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the Shares subject hereto
upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that the
disclosure of nonpublic information or the satisfaction of any other
condition is necessary as a condition of, or in connection with, the
issuance or purchase of Shares thereunder, the Option may not be exercised
unless such listing, registration, qualification, consent or approval,
disclosure or satisfaction of such other condition shall have been effected
or obtained on terms acceptable to the Company. Nothing herein shall be
deemed to require the Company to apply for, effect or obtain such listing,
registration, qualification, or disclosure, or to satisfy such other
condition.
9. REPRESENTATIONS AND WARRANTIES. You represent and warrant to the
Company as follows:
(a) AUTHORITY. You have the requisite power, authority and capacity to
execute and deliver this Agreement, to perform your obligations hereunder
and to consummate the transactions contemplated hereby.
(b) INVESTMENT INTENTION; NO RESALES. You are acquiring the Option
being purchased by you hereunder for the purpose of investment and not with
a view to, or for resale in connection with, the distribution thereof, and
not with any present intention of distributing such Option. The Option was
offered and sold to the undersigned directly and not by any form of general
solicitation or general advertising.
(c) ACCREDITED INVESTOR. You are an "accredited investor" as such term
is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act of 1933, as amended.
10. STATUS UPON ISSUANCE. Upon exercising the Option and prior to the
issuance of the Shares by the Company, you shall execute and deliver to the
Company (i) written documentation satisfactory to the Company that, as of such
date, the representations and warranties set forth in Sections 9(b) and (c)
hereof are true and correct in all respects and (ii) such other representations,
warranties and other provisions as the Company may reasonably request.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Company and you with respect to the matters contained herein.
2
12. BINDING EFFECT. This Agreement shall inure to the benefit of and shall
be binding upon the Company and you and your and its respective heirs, legal
representatives, successors and assigns. Nothing in this Agreement, express or
implied, is intended to or shall confer on any person other than the Company and
you, or your or its respective heirs, legal representatives, successors or
assigns, any rights, remedies, obligations or liabilities.
13. AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended
except by an instrument in writing signed by the Company and you. The Company
and you may, by an instrument in writing, waive compliance by the other party
with any term or provision of this Agreement on the part of such other party
hereto to be performed or complied with. The waiver by any such party of a
breach of any term or provision of this Agreement shall not be construed as a
waiver of any subsequent breach.
14. SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for reference purposes only and shall not be deemed to be
a part of this Agreement or to affect the meaning or interpretation of this
Agreement.
15. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. You shall have no rights as a
shareholder with respect to any Shares covered by the Option until the date of
the issuance of a certificate or certificates for the Shares for which the
Option has been exercised. No adjustment shall be made for dividends (ordinary
or extraordinary, whether cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate or certificates are issued. Nothing in this Agreement shall confer
upon you any right to be in the employ of the Company or any Affiliate thereof,
or, if you are employed by the Company or any Affiliate thereof, interfere in
any way with any right of the Company to terminate your employment at any time.
16. FURTHER ASSURANCES. The Company and you shall do and perform all such
further acts and things and execute and deliver all such other certificates,
instruments and/or documents (including without limitation, such proxies and/or
powers of attorney as may be necessary or appropriate) as either party hereto
may, at any time and from time to time, reasonably request in connection with
the performance of any of the provisions of this Agreement.
17. ACKNOWLEDGMENT. You accept the Option subject to all the terms and
provisions of this Agreement. You agree to accept as binding, conclusive and
final all decisions or interpretations of the Board of Directors of the Company
(the "BOARD") or any committee appointed by the Board upon any questions arising
under this Agreement. You agree to consult your independent tax advisors with
respect to the income tax consequences to you, if any, of the Option and you
authorize the Company to withhold in accordance with applicable law from any
compensation otherwise payable to you any taxes required to be withheld by
federal, state or local law as a result of the Option.
18. CERTAIN RESTRICTIONS. THE SECURITIES REPRESENTED BY THIS OPTION GRANT
ARE SUBJECT TO THE RESTRICTIONS, RIGHTS TO REPURCHASE AND TO REQUIRE TRANSFERS
CONTAINED IN AN INVESTORS' AGREEMENT, DATED AS OF SEPTEMBER 24, 1998, AS SUCH
AGREEMENT MAY BE AMENDED, MODIFIED OR RESTATED FROM TIME TO TIME (A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE ISSUER HEREOF).
THE SECURITIES REPRESENTED BY THIS OPTION GRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR (ii) AN APPLICABLE EXEMPTION
FROM REGISTRATION THEREUNDER OR UNDER APPLICABLE STATE SECURITIES LAWS.
3
You should execute the enclosed copy of this Agreement and return the
executed copy to Emily Hill at the Company as soon as possible. The additional
copy is for your records.
Sincerely yours,
ALLIED DIGITAL TECHNOLOGIES CORP.
By:
-----------------------------------
ACCEPTED AND AGREED TO:
-------------------------------------
E. David Willette
4