VAUGHAN FOODS INC 8-K 2011
N.E. 12th Street, Moore, OK 73160
Item 8.01 Other Events.
As previously disclosed, Vaughan Foods, Inc. entered into an Agreement and Plan of Merger, dated as of July 6, 2011, with Resers Fine Foods, Inc. and Resers Acquisition, Inc., a wholly owned subsidiary of Resers (the Merger Agreement). Pursuant to the terms of the Merger Agreement, Resers Acquisition will merge with and into Vaughan and all of the outstanding shares of Vaughans common stock, other than shares held in treasury and shares held by Resers or any of its affiliates, and outstanding options and warrants to purchase shares of Vaughan common stock, other than those whose exercise price exceeds approximately $1.58 per share, will be exchanged for an aggregate of $18.25 million (the Merger). In conjunction with the Merger, Vaughan filed a Proxy Statement, dated August 10, 2011 (the Proxy Statement), concerning a special meeting of the Vaughan stockholders to be held on September 15, 2011 at 10:00 a.m. Central Time at Vaughans corporate offices located at 216 NE 12th Street, Moore, Oklahoma 73160, at which the Vaughan stockholders will be asked to consider and vote on a proposal to approve, adopt and ratify the Merger Agreement (the Special Meeting). In connection therewith, Vaughan is making the following disclosures:
Prior to executing and delivering the Merger Agreement, Vaughan obtained an opinion from Burrill LLC (Burrill), an investment banking firm that focuses on small-cap and mid-cap companies, that the Merger is fair, from a financial point of view, to the Vaughan stockholders (the Fairness Opinion). Burrills opinion that the Merger is fair, from a financial point of view, to the Vaughan stockholders has not changed.
In connection with rendering the Fairness Opinion, Burrill performed the following analyses, among others, as described in Burrills original Fairness Opinion annexed to the Proxy Statement:
As set forth in more detail below and based upon discussions with Vaughan and the Board, Burrill has updated the assumptions used in the calculation of Cost of Equity and Weighted Average Cost of Capital to reflect the SBBI Valuation Update provided by Morningstar/Ibbotson as of June 30, 2011.
Burrill reviewed, among other things, the estimated cash flow of Vaughan for the purposes of a discounted cash flow analysis. Using the Perpetuity Growth Model and a discount rate of 9.9% to 11.9%, derived from the selected comparable companies, this analysis indicated an implied value reference range for Vaughan of approximately $9.3 million to $19.9 million, as compared with the $18.25 million aggregate Merger Consideration.
The free cash flow forecasts, and net present values of those free cash flows by year, were as follows (dollars in millions):
The net present values were calculated using a discount rate of 10.9%.
Burrill reviewed, among other things, the estimated cash flow of Vaughan for the purposes of a discounted cash flow analysis. Using the Perpetuity Growth Model and a discount rate of 9.9% to 11.9%, derived from the selected comparable companies, this analysis indicated an implied value reference range for Vaughan of approximately $9.3 million to $19.9 million, as compared with the $18.25 million aggregate Merger Consideration. The assumptions used to calculate the weighted average cost of capital (WACC), included the following:
The table included in the original presentation to the Vaughan Board implied that the small cap premium was added to the total WACC, rather than the cost of equity. For clarity purposes this table has been revised as shown above.
Based on the updated premium data from Morningstar/Ibbotson, Burrill arrived at a revised WACC of 10.9% as compared with the original estimate of 11.8%
The small cap premium was selected based on the 10th decile portfolio of all NYSE/AMEX/NASDAQ, which as of June 30, 2011 ranged between $1.2 million and $235.6 million of market capitalization. Vaughans market capitalization was $3.5 million at June 21, 2011.
In performing its analyses for the purpose of rendering a Fairness Opinion, Burrill considered business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Burrills analyses for comparative purposes is identical to Vaughan or the Merger. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Burrill did not make separate or quantifiable judgments regarding individual analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond Vaughans control and the control of Burrill. Much of the information used in, and accordingly the results of, Burrills analyses are inherently subject to substantial uncertainty.
Burrill also used various multiples of revenue, EBITDA, EBIT and gross profit for comparable companies.
Revenue multiples were given only limited weight as a basis for determining share valuation in both Comparable Companies and Precedent Transaction Analyses. The revenue multiple was not used as a key metric since the range of values (0.4x to 1.1x as of June 21, 2011) was too broad to be meaningful.
The range of multiples which were applied to Vaughans financial data in order to calculate an equity value reference range for Vaughan were based on the range of highest values and lowest values in each range.
As noted above, the Long-Horizon Equity Risk Premium has been updated to 6.72% based on the SBBI Valuation Update as of June 2011.
The terminal value was calculated using the Perpetuity Growth Model. The terminal value FCF was calculated by projecting the FCF in the first year beyond the projection horizon (N+1), where N equaled 2016. Using an assumed 3% perpetuity growth rate, the resulting terminal year FCF value was $2.1 million. This value was then divided by the discount rate minus the assumed perpetuity growth rate to arrive at the implied terminal value of $26.0 million. To determine the present value of the terminal
value, the terminal value was then discounted by a factor equal to the number of years included in the initial projection period (where N = 5).
In connection with its Fairness Opinion, Burrill selected comparable companies; however, in Burrills opinion, as represented to management, none of those companies is directly comparable to Vaughan. Accordingly, an analysis of the results of such a comparison is not purely mathematical, but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies and other factors that could affect the public trading value of the selected companies or Vaughan.
The companies selected as comparables were those in the public domain that most closely resembled the characteristics of Vaughan.
The various multiples of revenue, EBITDA, EBIT and gross profit for the comparable companies are as follows:
Excludes highest and lowest value.
The range of multiples which were applied to Vaughans financial data in order to calculate an equity value reference range for Vaughan were based on the range of multiples of the comparable companies, excluding the highest and lowest value in each range.
In connection with its Fairness Opinion, Burrill selected comparable transactions; however, in Burrills opinion, as represented to management, none of those transactions is directly comparable to Vaughan. The range of multiples which were applied to Vaughans financial data in order to calculate an equity value reference range for Vaughan were based on the high and low ranges indicated by the 75% quartile and the 25% quartile, respectively.
(1) High range indicated by
75% quartile and low range indicated by 25% quartile
Background to the Merger
On April 6, 2011, Resers presented a written offer to Vaughan to purchase 100 percent of the equity of Vaughan for $0.80 per share, plus nominal per share amounts for certain warrants, which would have resulted in a total purchase price of $8.1 million. However, certain equity components, specifically non-publicly traded warrants issued to a lender and stock options issued primarily to employees, were ostensibly excluded from the written offer letter.
On April 8, 2011, Vaughan responded by acknowledging receipt of the written offer and, citing certain of Vaughans financial metrics and certain valuation multiples in recent industry transactions, requested Resers to reevaluate their offer to determine whether it could increase the purchase price. The response was prepared by Vaughans Chairman and Chief Executive Officer, its Chief Financial Officer, and its President and Chief Operating Officer, and was signed by the Chairman and sent to Resers by the Chief Financial Officer. Metrics and valuation multiples cited in the communication were those derived by the Chief Financial Officer from various public filings.
On April 20, 2011, at the request of Resers, Vaughan provided Resers with additional information regarding its outstanding securities. The additional information included the equity components of Vaughans capital structure primarily the details of employee stock options and non-publicly traded warrants. The information was provided by Vaughans Chief Financial Officer and authorization for providing this information was given by Vaughans Chairman and Chief Executive Officer.
On April 22, 2011, Resers presented a revised written offer increasing the proposed purchase price to $15.0 million, which would have resulted in per share Merger Consideration of approximately $1.31.
On April 28, 2011, the Board met telephonically to discuss Resers April 22, 2011 offer. Prior to this time, there was no reason to involve the Board, since management believed and the Board subsequently confirmed that the prior offer was inadequate. Thus, this was the first disclosure to the Vaughan Board regarding the Resers proposal.
Management made a presentation to the Board at this telephonic meeting on April 28, 2011, advising the Board of the various steps and milestones in the negotiation process and of the progress of the negotiations with Resers. The Board agreed with managements position that the offer from Resers was inadequate and instructed management to inform Resers of the Boards determination and to continue negotiations with Resers to increase the purchase price.
On May 7, 2011, Vaughan sent a letter to Resers that contained non-public information requested by Resers on May 5, 2011, and additional non-public information, including the following:
The information regarding net operating loss carryforwards disclosed that: (a) Vaughan Foods, Inc. has a net operating loss carryforward for Federal income tax purposes of $8.2 million that can be used by the acquiring subsidiary although with certain limitations over a period of at least the next 12 years; and (b) Vaughan has $1.0 million in Oklahoma job and investment credit carryforwards. The letter urged Resers to make a careful analysis of the net operating loss carryforwards, since Vaughans management believes they could have considerable value, despite the limitations.
In addition, Vaughan pointed out that the intangible assets acquired in the merger, primarily customer relationships, intellectual property and (possibly) goodwill, may be amortized under for tax purposes and used to offset other taxable income over a period of 15 years.
Engagement of Burrill
On June 16, 2011, the Board engaged Burrill to provide a written opinion to the Board as to the fairness of the proposed transaction to the Vaughan stockholders from a financial point of view. Prior to that date, management did not believe there would be any benefit for the stockholders to incur the expense of engaging financial advisors until such time as management believed it had an agreement in principle that it believed reflected the true value of Vaughan and that would be acceptable to the Board. At this time, no binding agreement had been entered, and management believed that a fairness opinion was necessary in order to provide assurance to the stockholders that the proposed transaction was fair from a financial point of view. Burrill is an investment banking firm based in San Francisco, California, that has substantial experience in the mid- and small-cap markets. As part of its investment banking activities, it is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes and other purposes. The Board considered several investment banking firms, but selected Burrill based on its qualifications, reputation and experience in rendering fairness opinions in connection with merger and acquisition transactions generally, as well as substantial experience in transactions similar to the Merger. Burrill has not previously provided any services for Vaughan, Resers or Merger Sub.
Issuance of Director Options
On June 22, 2011, options to purchase common stock were awarded to the independent directors of Vaughan. Since its initial public offering in June, 2007, each independent director of Vaughan has received an annual grant of options to purchase 5,000 shares of Vaughan common stock in connection with his or her service on the Board. The options have an exercise price equal to the market price of a share of Vaughan common stock on the date of grant. The stock options awarded on June 22, 2011, constituted the stock option awards that each independent director was entitled to for 2011 in accordance with Vaughans independent director equity compensation policy and were similar to the options issued to each director in prior years.
Boards Evaluation of the Adequacy of the Offer
The Boards view is that Vaughan, prior to Resers offer, had communicated with a sufficient number of parties, including brokers and potential acquirers (both strategic and financial), to obtain the best value reasonably available to stockholders.
Specifically, Vaughan received an informal, non-written overture from a potential strategic party in 2009 for an amount that was less than one-half of the Merger Consideration and was unable to obtain a better value at that time. In the first quarter of 2010, Vaughan completed an equity offering of securities that, based on the amount raised and the number of shares gave the Company a market cap of approximately $3.8 million.
From January 1, 2009 through July 6, 2011, Vaughans management believes that it received between five and ten unsolicited informal inquiries by parties each interested in acquiring a controlling interest in Vaughan either, in some cases, to take out all shares or, in other cases, to make a supplemental investment in the equity of Vaughan. In Managements judgment, based on the ranges of values informally discussed (when they were discussed at all), each of those unsolicited verbal inquiries would have resulted in transaction values that that would have been materially lower than the Merger Consideration and were otherwise unacceptable because they would have resulted in significant dilution of the existing stockholders and, accordingly, were not pursued further.
Vaughans Senior Officers
The Merger Agreement provides that, at the closing of the Merger, Vaughan is required to deliver to Resers the resignation of each of its officers and directors as well as those of its subsidiaries prior to the Effective Time. After the execution and delivery of the Merger Agreement, July 6, 2011, and before Vaughan filed preliminary proxy materials with the SEC, July 21, 2011, Resers agreed to waive that closing condition with respect to Vaughans senior executive officers Messrs. Grimes, Vaughan and Jones. As a result, Vaughans senior executive officers will continue to be employed by Vaughan after the Merger in the same capacity as before the Merger. However, Resers has no formal or implied obligation to employ Vaughans senior executive officers for any specific length of time following the Effective Time. The Management Agreements that are in effect as of the Effective Time and that have been in effect since 2009, will continue in full force and effect following the Effective Time.
Repayment of Certain Indebtedness
Within 30 days after the closing of the Merger, the surviving corporation in the Merger i.e., Vaughan, will pay Herbert B. Grimes, approximately $810,000 plus accrued interest, in full satisfaction of a note he holds (Grimes Note). The Grimes Note was provided as partial consideration for the sale of Mr. Grimes interest in Allisons Gourmet Kitchens, LLP, in 2007. The original note was due and payable on June 30, 2008; however, due to Vaughans inability to satisfy this note when due, Mr. Grimes has renewed and extended the Grimes Note on several occasions. The Grimes Note is due on July 5, 2013, with interest accruing at the rate of 10 percent per annum. Vaughan has been making weekly payments to Mr. Grimes in the amount of $1,500 and has scheduled certain one-time payments. Mr. Grimes previously agreed that repayment of the note was subject to Vaughans ability to pay.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.