ATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
Commission File number 0-25754
KELLY RUSSELL STUDIOS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1735795
(State of incorporation or organization) (I.R.S. Employer Identification No.)
2905 Northwest Boulevard, Suite 220, Plymouth, Minnesota 55441
(Address of principal executive offices)
612-553-9992
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the last 90 days.
Yes X No
On May 6, 1996, the Company had 4,082,373 shares of Common Stock, $.01 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Kelly Russell Studios, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
Assets
Current assets
Cash $ 37,962 $ 257,618
Trade receivables, less allowances of $71,000 and
$161,000, respectively 514,163 709,988
Inventories 276,597 372,370
Prepaid and other expenses 57,656 26,430
Prepaid licensing rights 132,627 175,945
Escrow deposit 100,000 --
-------------- ---------------
Total current assets 1,119,005 1,542,351
-------------- ---------------
Property & equipment
Property and equipment, net of accumulated depreciation of
$143,240 and $114,060, respectively 278,324 314,934
--------------- ----------------
Total assets $1,397,329 $1,857,285
=============== ================
Liabilities and shareholders' equity
Current liabilities
Accounts payable 541,425 597,649
Accrued expenses 167,927 179,130
License fees payable 49,081 57,061
---------------- ----------------
Total current liabilities 758,433 833,840
----------------- ----------------
Shareholders' equity
Common stock, par value $.01; authorized 10,000,000 shares; 4,082,373
and 4,082,373 shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively 40,824 40,824
Additional paid in capital 8,133,560 8,133,560
Deferred compensation expense -- --
Accumulated deficit (7,535,488) (7,150,939)
---------------- ----------------
Total shareholders' equity 638,896 1,023,445
---------------- ----------------
Total liabilities and shareholders' equity $1,397,329 $1,857,285
================ ================
</TABLE>
See notes to condensed financial statements (unaudited).
<PAGE>
Kelly Russell Studios, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
--------------- ----------------
<S> <C> <C>
Net sales $778,614 $512,863
Cost of sales:
Cost of goods sold 338,503 220,884
Licensing fees 114,235 56,520
------------------- ------------------
Total cost of sales 452,738 277,404
------------------- ------------------
Gross profit 325,876 235,459
Operating expenses 708,401 451,950
------------------- ------------------
Operating loss (382,525) (216,491)
Net interest income (expense) (2,024) --
------------------- ------------------
Net loss before income taxes and extraordinary item (384,549) (216,491)
Federal and state income taxes -- --
------------------- ------------------
Net loss before extraordinary item (384,549) (216,491)
Extraordinary item -- 246,697
------------------- ------------------
Net income (loss) $(384,549) $ 30,206
=================== ===================
Net income (loss) per common and common equivalent shares:
Net loss before extraordinary item $(0.09) $(0.07)
=================== ===================
Extraordinary item -- $ 0.08
=================== ===================
Net income (loss) (0.09) $ 0.01
=================== ===================
Weighted average number of common and common equivalent shares
outstanding 4,082,373 3,286,765
=================== ===================
</TABLE>
See notes to condensed financial statements (unaudited).
<PAGE>
Kelly Russell Studios, Inc.
Condensed Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Deferred
Common Stock Paid-In Compensation Accumulated
Shares Amount Capital Expense Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 712,000 $7,120 $96,069 -- $(391,643) $(288,454)
Issuance of 25,000 employee
options to purchase common stock
at $2.25 per share on January 20,
1994 -- -- 18,750 (18,750) -- --
Issuance of warrants for the
purchase of 60,000 shares of
common stock for $1 per share in
January 1994 -- -- 120,000 -- -- 120,000
Issuance of 400,000 incentive
options to purchase common stock
at $2.48 per share on February
25, 1994 -- -- 207,950 (207,950) -- --
Issuance of 240,000 shares of
restricted common stock on
February 25, 1994 240,000 2,400 717,600 (720,000) -- --
Warrants to purchase common
stock for $1 per share exercised
on March 24, 1994 300,000 3,000 297,000 -- -- 300,000
Issuance of common stock at
$3.50 per share on March 31,
1994, net of offering expenses of
$792,017 1,477,750 14,777 4,365,331 -- -- 4,380,108
Conversion of $900,000 of
convertible debentures into
common stock on March 31, 1994 399,986 4,000 896,000 -- -- 900,000
Issuance of common stock at
$1.00 per share on December 30,
1994, net of offering expenses of
$55,945 285,000 2,850 226,205 -- -- 229,055
Forfeiture of 9,000 employee
options to purchase common stock
at $2.25 per share granted on
January 20, 1994 -- -- (6,750) 6,750 -- --
Forfeiture of 400,000 incentive
options to purchase common stock
at $2.48 per share granted on
February 25, 1994 -- -- (207,950) 207,950 -- --
Forfeiture of 240,000 shares of
restricted common stock granted
on February 25, 1994 (240,000) (2,400) (717,600) 720,000 -- --
Forfeiture of 660,000 shares of
common stock issued on
November 11, 1992 in exchange
for the partners' interests (660,000) (6,600) (79,378) -- -- (85,978)
Noncash compensation expense -- -- -- 7,118 -- $7,118
Net loss -- -- -- -- (5,216,030) (5,216,030)
-----------------------------------------------------------------------------------------------
<PAGE>
Balance, December 31, 1994 2,514,736 $25,147 $5,933,227 $(4,882) $(5,607,673) $345,819
Issuance of common stock at
$1.00 per share in February and
March 1995, net of offering
expenses of $71,600 641,000 6,410 563,040 -- -- 569,450
Issuance of common stock upon exercise of
warrants at $2.00 per share in May to
September, 1995, net of offering
expenses of $204,089 926,000 9,260 1,638,651 -- -- 1,647,911
Issuance of common stock upon
exercise of stock options 637 7 443 -- -- 450
Forfeiture of employee options
and noncash compensation
expense (1,801) 4,882 -- 3,081
Net loss -- -- -- -- (1,543,266) (1,543,266)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,082,373 $40,824 $8,133,560 $ 0 $(7,150,939) $1,023,445
Net loss -- -- -- -- (384,549) (384,549)
-----------------------------------------------------------------------------------------------
Balance at March 31, 1996 4,082,373 $40,824 $8,133,560 $ 0 $(7,535,488) $638,896
===============================================================================================
</TABLE>
See notes to condensed financial statements (unaudited)
<PAGE>
Kelly Russell Studios, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
----------------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (384,549) $30,206
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 34,009 22,281
Provision for trade receivable allowances (89,667) (230,000)
Provision for inventories (633) (706,000)
Gain (loss) on disposal of assets 2,599 --
Noncash compensation expense, net -- (392)
Changes in assets and liabilities:
Trade receivables 285,492 407,191
Inventories 96,406 702,340
Prepaid and other expenses (31,226) (2,276)
Prepaid licensing rights 43,318 19,334
Accounts payable and accrued expenses (67,415) (543,879)
License fee payable (7,980) (205,256)
--------------------- ----------------------
Net cash used in operating activities (119,656) (506,451)
--------------------- ----------------------
Cash flows from investing activities:
Purchase of equipment -- (5,958)
Escrow deposit (100,000) --
--------------------- ----------------------
Net amount used in investing activities (100,000) (5,958)
Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses -- 569,450
Net cash provided by financing activities -- 569,450
-------------------- -----------------------
Net increase (decrease) in cash (219,656) 57,041
Cash:
Beginning 257,618 403,840
-------------------- -----------------------
Ending $37,962 $460,881
==================== =======================
</TABLE>
See notes to condensed financial statements (unaudited)
<PAGE>
Kelly Russell Studios, Inc.
Notes to Condensed Financial Statements
Note 1. Unaudited Interim Results
The accompanying condensed balance sheet as of March 31, 1996, and the
condensed statements of operations and cash flows for the three month periods
ended March 31, 1996 and 1995, respectively, are unaudited and reflect all
adjustments, consisting of only normal recurring adjustments which, in the
opinion of management, are necessary for a fair statement of financial position,
results of operations and cash flows for the periods presented. These financial
statements are condensed and do not include all information required by
generally accepted accounting principles. These condensed financial statements
should be read in conjunction with the Company's year ended December 31, 1995
audited financial statements and notes thereto. The operating results for the
interim periods are not necessarily indicative of the operating results to be
expected for a full fiscal year.
Note 2. Inventories
The components of inventory as of March 31, 1996 and December 31, 1995, are
as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw materials $485,208 $565,716
Finished goods 130,926 146,825
Less inventory allowance (339,537) (340,171)
-------- --------
$276,597 $372,370
======== ========
</TABLE>
Note 3. Net Income (Loss) Per Share
Net income (loss) per share is computed based upon the weighted average
number of common shares and dilutive common equivalent shares outstanding.
Note 4. Business Transactions
On March 27, 1996, the Company entered into an Agreement and Plan of
Reorganization ("Merger Agreement") with O.S.P. Publishing, Inc. ("OSP"), a
California corporation, and its shareholders. Pursuant to the Merger Agreement,
the Company will combine its operations with OSP, its subsidiary Stanley
DeSantis, Inc. ("SDI") and The Button Exchange ("BEx"). OSP is the largest
domestic publisher of posters, SDI develops and markets licensed and nonlicensed
T-shirts, sweatshirts, boxer shorts and mugs, and BEx develops and markets
licensed and nonlicensed buttons, key rings and stickers. To effectuate this
reorganization, a new corporation, Global One Distribution & Merchandising Inc.
("Global One"), a Delaware corporation has been formed, and Global One will form
three wholly-owned Delaware subsidiaries, KRSI Acquisition Corp. ("KRSI
Acquisition"), OSP Acquisition Corp. ("OSP Acquisition"), and BEx Acquisition
Corp. ("BEx Acquisition"). As part of the reorganization, the Company will be
merged with and into KRSI Acquisition, KRSI Acquisition being the surviving
company, and OSP and BEx will be merged with and into OSP Acquisition and BEx
Acquisition, respectively. As a result, Global One will be the holding company
for the operations formerly conducted by the Company, OSP, SDI and BEx.
Following consummation of the merger, KRSI Acquisition will change its name and
conduct its business under the name "Kelly Russell Studios, Inc."
The Company's shareholders will receive one share of Global One Common
Stock for every two shares of the Company's Common Stock outstanding at closing.
The closing of the Merger Agreement will be subject to various conditions,
including approval of the merger by the Company's shareholders at a special
meeting and the successful placement of at least 4,000,000 shares of Global One
Common Stock at $1.50 per share. The Company currently anticipates that the
special meeting of shareholders will be held sometime in August 1996. In
connection with the merger, the Company has delivered $100,000 to an escrow
account. Upon receipt by the Company of OSP's audited financial statements for
the year ended December 31, 1995, the Company is obligated to deposit an
additional $150,000 in the escrow account. In the event the Merger Agreement is
terminated by the Company, the escrow agent may be obligated to deliver the
escrowed funds to OSP as liquidated damages for such termination.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion relates to the results of operations of Kelly
Russell Studios, Inc. for the three months ended March 31, 1996 and March 31,
1995 and its financial position as of March 31, 1996. Due to the seasonal nature
of the Company's business, the results of operations are not indicative of the
results expected for the complete year.
Results of Operations
In the first quarter of 1996, the Company's Board of Directors further
revised its business plan and operations to reduce operating costs. In 1996, the
Company plans to produce and distribute a more limited number of images,
primarily just the top few athletes of any given sport. The product line in 1996
will include approximately 100 different images, down from the 300 images
offered during 1995. Additionally, in 1996 the Company will continue to increase
channels of distribution with existing and new national and regional retail
customers. The Company also changed contractors for its assembly warehousing and
shipping function in January 1996. Management believes that alternate
contractors are available in the event the Company is unable to obtain services
from their current contractor.
In connection with this restructuring, the Company recorded a charge to
1995 operations of approximately $186,000 for the write-down of inventories,
pre-paid licensing rights and original art work, all relating to print images
which will not be aggressively sold during 1996. The Company also reduced the
number of employees and accepted the resignation of its Chief Executive Officer
in February 1996. Management believes its new business strategy will result in
improved income and cash flow during 1996.
On March 27, 1996, the Company entered into an Agreement and Plan of
Reorganization ("Merger Agreement") with O.S.P. Publishing, Inc. ("OSP"), a
California corporation, and its shareholders. Pursuant to the Merger Agreement,
the Company will combine its operations with OSP, its subsidiary Stanley
DeSantis, Inc. ("SDI") and The Button Exchange ("BEx"). OSP is the largest
domestic publisher of posters, SDI develops and markets licensed and nonlicensed
T-shirts, sweatshirts, boxer shorts and mugs, and BEx develops and markets
licensed and nonlicensed buttons, key rings and stickers. To effectuate this
reorganization, a new corporation, Global One Distribution & Merchandising Inc.
("Global One"), a Delaware corporation has been formed, and Global One will form
three wholly-owned Delaware subsidiaries, KRSI Acquisition Corp. ("KRSI
Acquisition"), OSP Acquisition Corp. ("OSP Acquisition"), and BEx Acquisition
Corp. ("BEx Acquisition"). As part of the reorganization, the Company will be
merged with and into KRSI Acquisition, KRSI Acquisition being the surviving
company, and OSP and BEx will be merged with and into OSP Acquisition and BEx
Acquisition, respectively. As a result, Global One will be the holding company
for the operations formerly conducted by the Company, OSP, SDI and BEx.
Following consummation of the merger, KRSI Acquisition will change its name and
conduct its business under the name "Kelly Russell Studios, Inc."
<PAGE>
The Company's shareholders will receive one share of Global One Common
Stock for every two shares of the Company's Common Stock outstanding at closing.
The closing of the Merger Agreement will be subject to various conditions,
including approval of the merger by the Company's shareholders at a special
meeting and the successful placement of at least 4,000,000 shares of Global One
Common Stock at $1.50 per share. The Company currently anticipates that the
special meeting of shareholders will be held sometime in August 1996. In
connection with the merger, the Company has delivered $100,000 to an escrow
account. Upon receipt by the Company of OSP's audited financial statements for
the year ended December 31, 1995, the Company is obligated to deposit an
additional $150,000 in the escrow account. In the event the Merger Agreement is
terminated by the Company, the escrow agent may be obligated to deliver the
escrowed funds to OSP as liquidated damages for such termination.
OSP is the world's largest publisher and distributor of licensed posters.
OSP also develops, publishes and distributes an extensive product line of
novelty and gift items, including Book Bites(TM), Wallet Cards(TM), buttons, key
chains, stickers, movie scripts and T-shirts, which incorporate images and/or
characters from motion pictures, television, animation, music, sports
personalities and popular performers. In the last five years, OSP sales have
increased from $13 million in 1990 to $38 million in 1995.
The Company has explored various alternatives to generate acceptable
revenue growth as a stand-alone company without success. Management of the
Company believes that combining the Company's sports licenses and original art
capability with OSP's strong distribution network will provide OSP with another
large market and potential for further expansion. Management of the Company
believes that the merger will therefore give the Company's shareholders a
significant stake in a company with exciting growth prospects.
However, if the merger is not approved by the shareholders or not completed
for any other reason, management believes it will be necessary for the Company
to obtain debt or equity financing to finance operations through 1996. If
management is unsuccessful in its financing efforts, the Company may not be able
to continue as a going concern and would be forced to sell off significant
assets, file for protection under federal bankruptcy laws or liquidate the
business.
Sales for the three months ended March 31, 1996 were $778,614 compared to
$512,863 for the three months ended March 31, 1995, representing an increase of
52%. The reasons for the substantial increase in net sales specifically relate
to (i) the elimination of all executive sales positions in the Company and
hiring a national sales organization to handle all of the Company's sales
functions beginning March 1996, (ii) immediately obtaining orders from national
mass merchant accounts after implementing the newly hired national sales
organization, and (iii) restructuring the existing outside sales representative
organizations and instituting a management and control system for identifying
and obtaining potential new business.
<PAGE>
Cost of goods sold totaled $338,503 for the three months ended March 31,
1996, representing 43% of net sales, compared to $220,884 or 43% of net sales
for the three months ended March 31, 1995. As a result of the most recent
restructuring, the Company has changed its procedure for recording original art
and photographic resource costs and will expense these items as they are
incurred. By incorporating these procedures, management currently anticipates
that cost of goods sold will be approximately 43% to 47% of the net sales in the
future.
License and royalty expenses paid to third parties totaled $114,235 or 15%
of net sales for the three months ended March 31, 1996, compared to $56,520 or
11% of net sales for the three months ended March 31, 1995. Management currently
anticipates that license and royalty expenses will be approximately 15% to 18%
of net sales in the future.
Operating expenses increased to $708,401 for the three months ended March
31, 1996 from $451,950 for three months ended March 31, 1995, representing an
increase of $256,451 or 57%. This increase is primarily due to (i) additional
advertising, promotions and services to increase salability of the Company's
products, (ii) additional commissions paid to outside sales representatives as a
result of the increase in sales, (iii) increase in depreciation relating to
purchase of displays in 1995, and (iv) increase in accounting and legal expenses
relating to the pending OSP transaction.
The Company has incurred $2,024 of interest expense in the first quarter of
1996 which relates to finance charges paid to vendors who have extended payments
terms to the Company. The Company did not utilize any interest-bearing debt in
the first quarter of 1995.
Liquidity and Capital Resources
The Company had cash of $37,962 and working capital of $360,570 at March
31, 1996, as compared to cash of $257,618 and working capital of $708,511 at
December 31, 1995. Cash flow used in operating activities totaled $119,656 for
the three months ended March 31, 1996, primarily due to the operating loss as
offset partially by the normal first quarter reduction in trade receivables as
customers made payments on their fourth quarter holiday shipments and a
reduction in the amount of inventory purchases. The Company's first quarter
sales are typically substantially less than its fourth quarter sales.
In February 1996, the Company restructured its business in an effort to
improve income and cash flows from operations. The Company is also pursuing
plans to merge with another company in 1996 pursuant to the Merger Agreement,
the Company has delivered $100,000 to an escrow account. Upon receipt by the
Company of OSP's audited financial statements for the year ended December 31,
1995, the Company is obligated to deposit an additional $150,000 in the escrow
account. In the event the Merger Agreement is terminated by the Company, the
escrow agent may be obligated to deliver to OSP the escrowed funds as liquidated
damages for such termination. If the planned merger is not consummated,
management believes it will be necessary for the Company to obtain debt or
equity financing to finance operations through 1996. If management is
unsuccessful in its financing efforts, the Company may not be able to continue
as a going concern and would be forced to sell off significant assets, file for
protection under federal bankruptcy laws or liquidate the business.
<PAGE>
Even if the Company obtains sufficient financing, its success will
nevertheless be dependent upon the effectiveness of the recent restructuring in
increasing sales and managing costs. The restructuring changes in management,
production, product distribution and operations undertaken in the recent
restructuring have not been in effect sufficiently long to demonstrate their
efficacy in correcting the Company's financial condition. The Company can,
therefore, provide no assurance that its new business plan will be effective in
significantly improving the Company's financial results in 1996.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization among the Company,
O.S.P. Publishing, Inc., Joseph C. Angard and Michael A.
Malm dated March 27, 1996.
27 Financial Data Schedule (included in
electronic version only)
(b) Reports on Form 8-K - None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant)
KELLY RUSSELL STUDIOS, INC.
Dated: May 10, 1996 By /s/ George J. Vrabeck
---------------------------
George J. Vrabeck
President and Chief Executive Officer
(principal executive officer)
By /s/ William J. Righeimer, III
----------------------------------
William J. Righeimer, III
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
Kelly Russell Studios, Inc.
Form 10-QSB Quarterly Report
For the Quarter Ended March 31, 1996
EXHIBIT INDEX
Exhibit
Number Item
2.1 Agreement and Plan of Reorganization among the Company, O.S.P.
Publishing, Inc., Joseph C. Angard and Michael A. Malm
dated March 27, 1996.
27 Financial Data Schedule (included in electronic version only)
AGREEMENT AND PLAN OF REORGANIZATION
Among
KELLY RUSSELL STUDIOS, INC.,
O.S.P. PUBLISHING, INC.,
JOSEPH C. ANGARD
AND
MICHAEL A. MALM
Dated: March 27, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS............................................ 2
ARTICLE II - THE MERGER............................................ 6
2.1 The Merger................................................ 6
2.2 Articles of Merger; Effective Time........................ 7
2.3 Effect of Merger.......................................... 7
2.4 Closing................................................... 7
2.5 Articles of Incorporation; By-laws........................ 7
2.6 Directors and Officers.................................... 7
ARTICLE III - CONVERSION OF SECURITIES;EXCHANGE OF CERTIFICATES.... 8
3.1 Conversion of Securities.................................. 8
3.2 Rights of Holders of OSP and KRSI Common Stock............ 8
3.3 Exchange of Certificates.................................. 8
ARTICLE IV - THE OFFERING.......................................... 9
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF OSP AND THE
OSP SHAREHOLDERS................................................... 9
5.1 Corporate Existence and Power............................ 10
5.2 OSP Subsidiaries......................................... 10
5.3 Corporate Authorization.................................. 10
5.4 Governmental Authorization............................... 10
5.5 Non-Contravention........................................ 11
5.6 Capitalization........................................... 11
5.7 OSP Financial Statements................................. 12
5.8 OSP's Books and Records.................................. 12
5.9 OSP Contracts with Related Parties....................... 12
5.10 Absence of Certain Changes or Events.................... 12
5.11 Litigation ............................................. 13
5.12 Taxes................................................... 13
5.13 Title to Assets......................................... 14
5.14 Labor Matters........................................... 14
5.15 Employee Benefit Plans.................................. 14
5.16 Compliance with Laws.................................... 15
5.17 Brokers................................................. 15
5.18 Vote Required........................................... 16
5.19 Environmental Matters................................... 16
5.20 Trademarks, Patents and Copyrights...................... 16
5.21 Contracts and Other Agreements.......................... 16
5.22 Insurance............................................... 18
5.23 Disclosure.............................................. 18
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF KRSI............... 18
6.1 Corporate Existence and Power............................ 18
6.2 KRSI Subsidiaries........................................ 18
6.3 Corporate Authorization.................................. 19
6.4 Governmental Authorization............................... 19
6.5 Non-Contravention........................................ 19
6.6 Capitalization........................................... 20
6.7 SEC Documents............................................ 20
6.8 KRSI's Books and Records................................. 21
6.9 KRSI Contracts with Related Parties...................... 21
6.10 Absence of Certain Changes or Events.................... 21
6.11 Litigation.............................................. 22
6.12 Taxes................................................... 22
6.13 Title to Assets......................................... 22
<PAGE>
6.14 Labor Matters........................................... 23
6.15 Employee Benefit Plans.................................. 23
6.16 Compliance with Laws.................................... 24
6.17 Brokers................................................. 24
6.18 Vote Required........................................... 24
6.19 Environmental Matters................................... 24
6.20 Trademarks, Patents and Copyrights...................... 24
6.21 Contracts and Other Agreements.......................... 25
6.22 Insurance............................................... 26
6.23 Disclosure.............................................. 26
ARTICLE VII - COVENANTS RELATING TO CONDUCT OF BUSINESS........... 26
7.1 Conduct of Business by OSP............................... 26
7.2 Conduct of Business by KRSI.............................. 29
7.3 Other Action............................................. 30
7.4 No Solicitation of Transactions.......................... 31
ARTICLE VIII - ADDITIONAL AGREEMENTS.............................. 32
8.1 Preparation of Registration Statements and the Proxy Statement;
Shareholders' Meeting........................................ 32
8.2 Information Supplied by OSP.............................. 32
8.3 Information Supplied by KRSI............................. 33
8.4 Access to Information.................................... 33
8.5 Confidentiality.......................................... 33
8.6 Public Announcements..................................... 34
8.7 Appropriate Action; Consents; Filings.................... 34
8.8 State Statutes........................................... 35
8.9 Directors' and Officers' Indemnification and
Insurance.................................................... 36
8.10 Additional OSP Financial Statements..................... 37
8.11 Escrow Payments......................................... 37
8.12 Employment Contracts.................................... 37
8.13 Indemnification......................................... 37
ARTICLE IX - CONDITIONS TO THE MERGER............................. 39
9.1 Conditions of Each Party's Obligation to Effect the
Merger....................................................... 39
9.2 Conditions of Obligation of KRSI......................... 40
9.3 Conditions of Obligation of OSP.......................... 41
ARTICLE X - TERMINATION, AMENDMENT AND WAIVER..................... 42
10.1 Termination............................................. 42
10.2 Consequences of Termination............................. 43
10.3 Amendment............................................... 43
10.4 Waiver.................................................. 44
ARTICLE XI - GENERAL PROVISIONS................................... 44
11.1 Survival of Representations and Warranties.............. 44
11.2 Notices................................................. 44
11.3 Entire Agreement........................................ 44
11.4 Severability............................................ 44
11.5 Successors and Assigns.................................. 45
11.6 Parties in Interest..................................... 45
11.7 Enforcement............................................. 45
11.8 Governing Law........................................... 45
11.9 Counterparts; Effectiveness............................. 45
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
DATE: March 27, 1996
PARTIES: Kelly Russell Studios, Inc. ("KRSI")
2905 Northwest Boulevard, Suite 220
Minneapolis, MN 55441
Fax Number: (612) 553-9960
O.S.P. Publishing, Inc. ("OSP")
5548 Lindbergh Lane
Bell, CA 90201-6410
Fax Number: (213) 263-9419
Joseph C. Angard ("Angard")
O.S.P. Publishing, Inc.
5548 Lindbergh Lane
Bell, CA 90201-6410
Fax Number: (213) 263-9258
Michael A. Malm ("Malm")
O.S.P. Publishing, Inc.
5548 Lindbergh Lane
Bell, CA 90201-6410
Fax Number: (213) 263-9419
RECITALS:
A. KRSI creates, markets and distributes products bearing realistic sports
images.
B. OSP manufactures, publishes and distributes licensed posters, buttons,
t-shirts and other apparel and gift items.
C. Angard and Malm are the sole shareholders of OSP.
D. The respective Boards of Directors of KRSI and OSP have determined that
it is in the best interests of KRSI and OSP and its subsidiaries and their
respective shareholders to combine their respective businesses under common
management and control and to raise additional equity capital for the combined
businesses.
E. In order to consummate this reorganization, KRSI and OSP will merge and
the surviving entity will issue 4,000,000 additional shares of its common stock
all upon the terms and subject to the conditions of this Agreement.
AGREEMENT:
The parties hereto, each intending to be legally bound, agree as follows:
ARTICLE I - DEFINITIONS
As used herein, the following words and terms shall have the meanings set
forth below:
1.1 "Amended OSP Articles" shall mean the amended articles of incorporation
of OSP in substantially the form attached hereto as Exhibit 1.1.
1.2 "Amended OSP By-laws" shall mean the amended by-laws of OSP in
substantially the form attached hereto as Exhibit 1.2.
1.3 "Angard" shall mean Joseph C. Angard.
1.4 "Articles of Merger" shall refer to the document attached hereto as
Exhibit 2.2.
1.5 "CGCL" shall mean the California General Corporation Law.
1.6 "Closing" shall mean the closing of the Merger as discussed in Section
2.4 below.
1.7 "Closing Date" shall mean the date on which the Closing occurs.
1.8 "Code" shall mean the Internal Revenue Code of 1986, as amended.
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1.9 "Competing Transaction" shall mean any of the following (other than the
transactions contemplated hereby): (i) any merger, consolidation, share
exchange, business combination, or other similar transaction involving OSP or
KRSI, (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 50% or more of the assets of OSP, any subsidiary of OSP or KRSI,
taken as a whole, in a single transaction or series of transactions, other than
in the ordinary course of business, (iii) any tender offer or exchange offer for
50% or more of the OSP Shares or the KRSI Shares or the filing of a registration
statement under the Securities Act in connection therewith, (iv) any person
having acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) having been
formed which beneficially owns or has the right to acquire beneficial ownership
of, 50% or more of the OSP Shares or the KRSI Shares or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing other than any transaction
contemplated herein.
1.10 "Effective Time" shall mean the time that the Merger becomes effective
pursuant to Section 2.2 below.
1.11 "Environment Laws" shall mean all federal, state and local laws,
rules, regulations, ordinances and orders that purport to regulate the release
of hazardous substances or other materials into the environment, or impose
requirements relating to environmental protection.
1.12 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.13 "Escrow Agent" shall mean City National Bank.
1.14 "Escrow Agreement" shall mean that certain Escrow Agreement of even
date herewith by and among KRSI, OSP and the Escrow Agent to hold the escrow
payments to be made by KRSI pursuant to Section 8.12 below.
1.15 "Evaluation Materials" shall mean any business and/or technical
information of the Other Party or any of its subsidiaries designated orally or
in writing as "Confidential" or "Proprietary" (or in like words) or of a type
typically regarded as confidential or proprietary, whether or not so designated,
including, but not limited to, systems, processes, formulae, data, functional
specifications, computer programs, blueprints, know-how, improvements,
discoveries, developments, designs, inventions, techniques, new products,
marketing and advertising methods, supplier agreements, customer lists, pricing
policies, financial information, projections, forecasts, strategies, budgets or
other information related to its business or its customers.
1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.17 "Exchange Agent" shall mean Norwest Bank National Association.
1.18 "Exchange Ratio" shall mean the number determined by dividing the sum
of (a) fifty percent (50%) of the Fully Diluted KRSI Shares plus (b) the New
Survivor Shares by the sum of (y) the number of OSP Shares immediately prior to
the Effective Time and (z) the number of shares of OSP Common Stock that would
be issued immediately prior to the Effective Time if all the holders of
outstanding warrants, options and any other rights to acquire OSP Common Stock
were exercised immediately prior to the Effective Time.
1.19 "Fully Diluted KRSI Shares" shall mean the number of shares determined
by adding (a) all KRSI Shares immediately prior to the Effective Time and (b)
all of the shares of KRSI Common Stock that would be issued immediately prior to
the Effective Date if all of the holders of outstanding warrants, options and
any other rights to acquire KRSI Common Stock were exercised immediately prior
to the Effective Time (excluding any warrants being issued to the OSP Financial
Advisor and the KRSI Financial Advisor and any other warrants being issued in
connection with the transactions contemplated herein.
1.20 "Governmental Entity" shall mean any federal, state, local or foreign
governmental body, agency, official or authority (including courts,
administrative agencies, commissions, self-regulatory agencies or authorities or
other governmental authority or instrumentality).
<PAGE>
1.21 "Hazardous Materials" means any "hazardous waste" as defined in either
the United States Resource Conservation and Recovery Act or regulations adopted
pursuant to said act, any "hazardous substances" or "hazardous materials" as
defined in the United States Comprehensive Environmental Response, Compensation
and Liability Act and, to the extent not included in the foregoing, any medical
waste.
1.22 "Knowledge" shall mean actual knowledge of a fact or constructive
knowledge if a reasonably prudent person in a like position would have known or
should have known, the fact. In the case of a corporate party hereto knowledge
shall be limited to the aggregate knowledge of all of the officers of such
corporation.
1.23 "KRSI" shall mean Kelly Russell Studios, Inc., a Minnesota
corporation.
1.24 "KRSI Common Stock" shall mean the common stock of KRSI with a par
value of $.01 per share.
1.25 "KRSI Financial Advisor" shall mean The Equisource Group.
1.26 "KRSI Plans" shall mean all employee benefit plans (as defined in
Section 3(3) of ERISA) which KRSI or any of its subsidiaries maintains or to
which KRSI or any of its subsidiaries contributes.
1.27 "KRSI SEC Documents" shall mean all required reports, schedules,
forms, statements and other documents filed or required to be filed by KRSI with
the SEC since December 31, 1992.
1.28 "KRSI Shares" shall mean all issued and outstanding shares of KRSI
Common Stock.
1.29 "Lien" shall mean any pledge, claim, lien, charge, encumbrance or
security interest of any nature whatsoever.
1.30 "Malm" shall mean Michael A. Malm.
1.31 "Material Adverse Effect" when used with respect to any entity means
(a) a material adverse effect on the business, assets (including intangible
assets), liabilities, financial condition, results of operations or prospects of
such entity and its subsidiaries, if any, taken as a whole, or on the ability of
such entity or any of its subsidiaries following the consummation of the
Reorganization to continue the business of such entity and its subsidiaries, if
any, taken as a whole, substantially as currently conducted (without the loss of
any material rights), or (b) a material impairment in the ability of such entity
or any of its subsidiaries to perform any of their respective obligations under
this Agreement or to consummate any portion of the Reorganization.
1.32 "MBCA" shall mean the Minnesota Business Corporation Act.
1.33 "Merger" shall mean the merger of OSP and KRSI more fully described
herein.
1.34 "New Survivor Shares" shall mean the shares of Survivor Common Stock
issued in the Offering.
1.35 "Offering" shall mean the offering of 4,000,000 Shares of Survivor
Common Stock at $1.50 per share as more fully described herein.
1.36 "OSP" shall mean O.S.P. Publishing, Inc., a California corporation.
1.37 "OSP Affiliated Group" shall mean OSP, each of the entities listed on
Schedule 5.2 hereto, any other subsidiaries and each member of any affiliated,
consolidated, combined or unitary group of which OSP or any of its subsidiaries
is a member.
<PAGE>
1.38 "OSP Common Stock" shall mean the common stock of OSP with no par
value.
1.39 "OSP Financial Advisor" shall mean Tamarix Capital Corporation.
1.40 "OSP Financial Statements" shall mean the balance sheets, statements
of operations, statements of changes in shareholders' equity, statements of cash
flows, reports thereon by OSP's independent auditors, if any, and any notes
thereto which are referred to in Section 5.7 below and Section 8.11 below.
1.41 "OSP Plans" shall mean all employee benefit plans (as defined in
Section 3(3) of ERISA) which OSP or any of its subsidiaries maintains or to
which OSP or any of its subsidiaries contributes.
1.42 "OSP Shareholders" shall mean collectively Angard and Malm.
1.43 "OSP Shares" shall mean all issued and outstanding shares of OSP
Common Stock, and "OSP Share" shall mean one outstanding share of OSP Common
Stock.
1.44 "Other Party" when used with reference to KRSI shall mean OSP and any
of its subsidiaries and when used with respect to OSP, shall mean KRSI.
1.45 "Proxy Statement" shall mean the proxy statement to be filed by KRSI
pursuant to the provisions of Section 8.1 below.
1.46 "Registration Statements" shall mean the registration statements to be
filed by KRSI and OSP on Forms S-4 and S-1 pursuant to the provisions of Section
8.1 below.
1.47 "Reorganization" shall mean the combination of the Merger and the
Offering.
1.48 "SEC" shall mean the Securities and Exchange Commission.
1.49 "Securities Act" shall mean the Securities Act of 1933, as amended.
1.50 "Shareholders' Meeting" shall mean the meeting of the shareholders of
KRSI to be called to approve the Merger and this Agreement.
1.51 "State Takeover Laws" shall mean any state "control share
acquisition," "anti-takeover" or other similar statutes and regulations.
1.52 "Surviving Corporation" shall mean the corporation that is the
surviving corporation in the Merger.
1.53 "Survivor Common Stock" shall mean the common stock of the Surviving
Corporation with no par value.
1.54 "Taxes" shall mean all federal, state, local and foreign income,
property, sales, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, including any interest, penalties or additions with respect
thereto.
<PAGE>
ARTICLE II - THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time, KRSI shall be merged with and into OSP in
accordance with the MBCA and the CGCL, whereupon the separate existence of KRSI
shall cease, and OSP shall continue as the Surviving Corporation, all in
accordance with this Agreement.
2.2 Articles of Merger; Effective Time. As soon as practicable after
satisfaction or, to the extent permitted hereunder, waiver of all conditions to
the Merger set forth in Article IX below, the parties hereto shall cause the
Merger to be consummated by filing the Articles of Merger with the Secretary of
State of the State of Minnesota and the Secretary of State of the State of
California and make all other filings or recordings required by the MBCA and the
CGCL in connection with the Merger and the transactions contemplated by this
Agreement. The Merger shall become effective (a) at the later of such time as
the Articles of Merger are duly filed with the Secretary of State of the State
of Minnesota or the Secretary of State of the State of California or (b) at such
later time as may be agreed by the parties in writing and specified in the
Articles of Merger.
2.3 Effect of Merger. From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
be subject to all of the restrictions, disabilities and duties of OSP and KRSI,
all as provided under the MBCA and the CGCL.
2.4 Closing. The Closing will take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the third business day
after satisfaction or waiver of the conditions set forth in Article IX at the
offices of Manatt, Phelps & Phillips in Los Angeles, California, unless another
date, time or place is agreed to in writing by the parties hereto.
2.5 Articles of Incorporation; By-laws.
(a) At the Effective Time, the Amended OSP Articles shall be the articles
of incorporation of the Surviving Corporation until thereafter amended as
provided by law and such articles of incorporation.
(b) At the Effective Time, the Amended OSP By-laws shall be the by-laws of
the Surviving Corporation until thereafter amended as provided by law, the
articles of incorporation of the Surviving Corporation and such by-laws.
2.6 Directors and Officers. The persons specified in Exhibit 2.6 attached
hereto shall be the initial directors of the Surviving Corporation, each to hold
office in accordance with the articles of incorporation and by-laws of the
Surviving Corporation, and the officers of OSP immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation plus
George J. Vrabeck as executive vice president, in each case until their
respective successors are duly elected or appointed and qualified. The OSP
Shareholders shall use their best efforts to ensure the nomination and election
of Thomas R. King or his nominee to the board of directors of the Surviving
Corporation at the two annual meetings of the shareholders of the Surviving
Corporation immediately following the Effective Time.
<PAGE>
ARTICLE III - CONVERSION OF SECURITIES;
EXCHANGE OF CERTIFICATES
3.1 Conversion of Securities. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of OSP
Common Stock or KRSI Common Stock:
(a) subject to Section 3.3(b) below, each OSP Share immediately prior to
the Effective Time shall be converted into the right to receive the number of
shares of Survivor Common Stock equal to the Exchange Ratio; and
(b) subject to Section 3.3(b) below, each KRSI Share immediately prior to
the Effective Time shall be converted into one-half share of Survivor Common
Stock.
3.2 Rights of Holders of OSP and KRSI Common Stock. On and after the
Effective Time and until surrendered for exchange, each outstanding stock
certificate which immediately prior to the Effective Time represented shares of
OSP Common Stock or KRSI Common Stock shall be deemed for all purposes, except
as provided in Section 3.3(b) below, to evidence ownership of and to represent
the number of whole shares of Survivor Common Stock into which such shares of
OSP Common Stock and KRSI Common Stock shall have been converted, and the record
holder of such outstanding certificate shall, after the Effective Time, be
entitled to vote the shares of Survivor Common Stock into which such shares of
OSP Common Stock and KRSI Common Stock shall have been converted on any matters
on which the holders of record of Survivor Common Stock, as of any date
subsequent to the Effective Time, shall be entitled to vote. In any matters
relating to such certificates, the Surviving Corporation may rely conclusively
upon the record of shareholders maintained by OSP or by or on behalf of KRSI
containing the names and addresses of the holders of record of OSP Common Stock
and KRSI Common Stock at the Effective Time.
3.3 Exchange of Certificates.
(a) Exchange of Shares. At the Closing, the Surviving Corporation shall
deliver to the Exchange Agent the number of shares of Survivor Common Stock to
which the holders of the OSP Shares and KRSI Shares are entitled pursuant to
Section 3.2 above, to be held and distributed by the Exchange Agent in
accordance with the terms of an agreement by and between the Surviving
Corporation and the Exchange Agent and the terms of this Agreement. As soon as
possible after the Closing, the Exchange Agent shall deliver to all the
shareholders of record of both OSP and KRSI as of the Effective Time a
transmittal letter in form and substance satisfactory to the Surviving
Corporation and the Exchange Agent. Upon receipt from the holders of the OSP
Shares and the KRSI Shares of the letter of transmittal duly executed by such
holder, the certificates representing the OSP Shares or KRSI Shares, as
appropriate, for cancellation and such other documents as may reasonably be
required by the Exchange Agent, the Exchange Agent shall deliver to such holder
one or more certificates representing the appropriate number of shares of
Survivor Common Stock. The shares of Survivor Common Stock issued upon the
surrender for exchange of the OSP Shares and the KRSI Shares in accordance with
the terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to the OSP Shares and the KRSI Shares exchanged therefor.
(b) No Fractional Shares. No certificates or scrip representing fractional
shares of Survivor Common Stock shall be issued upon the surrender for exchange
of the certificates representing the OSP Shares or the KRSI Shares, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a shareholder of KRSI. Notwithstanding any other provision of this
Agreement, each holder of OSP Shares or KRSI Shares exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Survivor Common Stock (after taking into account all certificates
representing OSP Shares or KRSI Shares delivered by such holder) shall receive,
in lieu thereof, one additional share of Survivor Common Stock.
ARTICLE IV - THE OFFERING
OSP and KRSI shall each use their respective reasonable best efforts to
commence the Offering as soon as possible after the execution of this Agreement
and to close the Offering coincident with the Closing of the Merger. The
Offering shall be made to pursuant to the prospectus contained in the
Registration Statement filed on Form S-1. With the mutual agreement of OSP and
KRSI, one or more persons may be retained to assist with the Offering pursuant
to such agreements as are mutually acceptable to KRSI and OSP, and may be paid
such fees, expenses and commissions as are mutually acceptable to KRSI and OSP.
Exhibit 4.1 provides a pro forma summary of the ownership of the Survivor Common
Stock immediately following the Closing of the Merger and the Offering.
<PAGE>
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF OSP AND THE OSP
SHAREHOLDERS
Except as set forth in and qualified by the schedules attached hereto, OSP
hereby makes the following representations and warranties to KRSI, and except as
set forth in and qualified by the schedules attached hereto, the OSP
Shareholders, jointly and severally, hereby make the representations and
warranties set forth in Sections 5.1, 5.3, 5.6, 5.9, 5.10, 5.17 and 5.18 below
to KRSI.
5.1 Corporate Existence and Power. OSP is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of California,
and has all corporate powers required to carry on its business as now conducted.
OSP is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would not
have a Material Adverse Effect on OSP. The copies of the articles of
incorporation and by-laws of OSP which have been delivered to KRSI by OSP are as
of the date hereof and will be at the Effective Time true and complete copies of
the articles of incorporation and by-laws of OSP.
5.2 OSP Subsidiaries. Schedule 5.2 hereto lists each subsidiary of OSP,
together with its jurisdiction of incorporation or organization. All the
outstanding shares of capital stock of each such subsidiary have been validly
issued and are fully paid and nonassessable and, except as set forth on Schedule
5.2 hereto, owned by OSP free and clear of any Liens. Except for the capital
stock of its subsidiaries, OSP does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, joint venture
or other entity. At the Effective Time, OSP will own all of the outstanding
shares of capital stock of Button Exchange, Ltd. As has been previously
disclosed to KRSI, discussions are ongoing with Stanley DeSantis regarding the
ownership of Stanley DeSantis Inc.'s common stock. If and to the extent that OSP
proposes to enter into an agreement that would result in any change in the
ownership of Stanley DeSantis Inc.'s common stock prior to the Effective Time,
OSP will so advise KRSI. Any such agreement will not be entered into without
KRSI's prior written consent, which shall not be unreasonably withheld.
5.3 Corporate Authorization. The execution, delivery and performance by OSP
of this Agreement and the consummation by OSP of the transactions contemplated
hereby are within OSP's corporate powers and have been duly authorized by all
necessary corporate action on the part of OSP, including without limitation
approval of the OSP Shareholders. This Agreement has been duly and validly
executed and delivered by OSP and the OSP Shareholders and constitutes a valid
and binding agreement of OSP and the OSP Shareholders enforceable in accordance
with its terms.
5.4 Governmental Authorization. The execution, delivery and performance by
OSP and the OSP Shareholders of this Agreement and the consummation of the
Merger by OSP require no action by or in respect of, or filing with, any
Governmental Entity other than (a) the filing of the Articles of Merger in
accordance with the MBCA and the CGCL, (b) compliance with any applicable
requirements of the Securities Act, (c) compliance with any applicable
requirements of the Exchange Act, (d) compliance with the rules or regulations
of NASDAQ, (e) compliance with the securities laws of various states and (f) any
action or filing which the failure to obtain or make would not, individually or
in the aggregate, have a Material Adverse Effect on any party hereto.
<PAGE>
5.5 Non-Contravention. The execution, delivery and performance by OSP and
the OSP Shareholders of this Agreement does not, and the consummation by OSP and
the OSP Shareholders of the transactions contemplated hereby will not, (a)
contravene or conflict with the articles of incorporation or by-laws of OSP, (b)
assuming compliance with the matters referred to in Section 5.4 above,
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to OSP or its subsidiaries or the OSP Shareholders, other than such
contraventions, conflicts or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on any party hereto, (c) assuming that
the consents listed on Schedule 5.5 hereto are obtained prior to the Effective
Time, constitute a breach or violation of, or a default under or give rise to a
right of termination, cancellation or acceleration of any right or obligation of
OSP or any of its subsidiaries or to a loss of any benefit to which OSP or any
of its subsidiaries is entitled under any provision of, any agreement, contract
or other instrument binding upon OSP or any of its subsidiaries or any license,
franchise, permit or other similar authorization held by OSP or any of its
subsidiaries, other than such breaches, violations, defaults, rights or losses
which would not, individually or in the aggregate, have a Material Adverse
Effect on OSP, or (d) result in the creation or imposition of any Lien on any
asset of OSP or any of its subsidiaries, other than any such creation or
imposition which would not, individually or in the aggregate, have a Material
Adverse Effect on OSP. Schedule 5.5 hereto sets forth a true, complete and
correct list of all consents, approvals and authorizations required to be
obtained by OSP and any of its subsidiaries from any third party (other than as
otherwise expressly contemplated by Section 5.4 of this Agreement) in connection
with this Agreement, the Merger and the transactions contemplated hereby where
the failure of OSP or any of its subsidiaries to obtain such consent, approval
or authorization, individually or in the aggregate, would have a Material
Adverse Effect on any party hereto.
5.6 Capitalization. The authorized capital stock of OSP consists of 10,000
shares of OSP Common Stock. As of the date of this Agreement, there are
outstanding 1,636 shares of OSP Common Stock and a warrant to purchase up to 50
shares of OSP Common Stock. All outstanding shares of OSP Common Stock are, and
all shares of Survivor Common Stock which may be issued pursuant to the
Reorganization will be, when issued in accordance with the terms hereof, duly
authorized and validly issued and are fully paid and nonassessable, and were
issued in compliance with all applicable federal and state securities laws.
Except as set forth in this Section, there are outstanding (a) no shares of OSP
Common Stock or other voting securities of OSP, (b) no securities of OSP
convertible into or exchangeable for shares of OSP Common Stock or voting
securities of OSP and (c) no options, warrants or other rights to acquire from
OSP, and no obligation of OSP to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of OSP. There are no outstanding obligations of OSP to repurchase,
redeem or otherwise acquire any OSP Common Stock. As of the date hereof all of
the shares of OSP Common Stock are owned by the OSP Shareholders free and clear
from all Liens. As of the Effective Time, all of the shares of OSP Common Stock
will be owned by the OSP Shareholders free and clear of all Liens, except to the
extent that the warrant to purchase up to 50 shares of OSP Common Stock referred
to in this Section 5.6 has been exercised between the date hereof and the
Effective Time.
5.7 OSP Financial Statements. OSP has furnished KRSI true and complete
copies of its consolidated balance sheets, statements of operations, statements
of changes in shareholders' equity and statements of cash flows together with
the report thereon by Deloitte & Touche LLP, OSP's independent auditors, for its
fiscal years ended December 31, 1993 and December 31, 1994 and has furnished
unaudited updates thereof as of and for the period ending December 31, 1995. The
OSP Financial Statements have been, and any OSP Financial Statements delivered
to KRSI for subsequent periods will be, prepared in conformance with generally
accepted accounting principles applied on a basis consistent with prior periods,
and fairly present and will fairly present in all material respects the
financial condition of OSP and its subsidiaries as of the represented dates
thereof and the results of OSP's and its subsidiaries' operations for the
periods covered thereby.
<PAGE>
5.8 OSP's Books and Records. The books of account and records (including
customer order files, employment records, licensing records, employment records
and production and manufacturing records) of OSP and its subsidiaries are
complete, true and correct in all material respects.
5.9 OSP Contracts with Related Parties. Except as disclosed on Schedule 5.9
hereto, there are no material agreements or contracts by, between or among OSP
or any of its subsidiaries and any of OSP's officers, directors or the OSP
Shareholders.
5.10 Absence of Certain Changes or Events. Except as expressly contemplated
by this Agreement, since December 31, 1995, OSP and each of its subsidiaries has
conducted its business only in the ordinary course, and there has not been:
(a) any event, occurrence or development of a state of circumstances or
facts which has had a Material Adverse Effect on OSP;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of OSP Common Stock, or any repurchase,
redemption or other acquisition by OSP of any outstanding shares of OSP Common
Stock or other securities of, or other ownership interests in, OSP except as
described in Schedule 5.10(b) hereto;
(c) any split, combination or reclassification of any of OSP Common Stock
or any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for shares of OSP Common Stock;
(d) any incurrence, assumption or guarantee by OSP or any of its
subsidiaries of any indebtedness for borrowed money other than in the ordinary
course of business and in amounts and on terms consistent with past practices
(including any such borrowings under its existing bank credit facility) except
as described in Schedule 5.10(d) hereto;
(e) any damage, destruction or other casualty loss (whether or not covered
by insurance) affecting the business assets of OSP or any of its subsidiaries
which, individually or in the aggregate, has had or would reasonably be expected
to have a Material Adverse Effect on OSP;
(f) any change in any method of accounting or accounting practice by OSP or
any of its subsidiaries, except for any such change required by reason of a
concurrent change in generally accepted accounting principles; or
(g) any (i) grant except pursuant to agreements in effect on the date of
this Agreement and disclosed in a Schedule hereto, of any material severance or
termination pay to any director, officer or employee of OSP or any of its
subsidiaries, (ii) entering into any material employment, deferred compensation
or other similar agreement (or any amendment to any such existing agreement)
with any director, officer or employee of OSP or any of its subsidiaries, (iii)
material increase in benefits payable under any existing severance or
termination pay policies or employment agreements or (iv) other than in the
ordinary course of business consistent with past practices, material increase in
compensation, bonus or other benefits payable to directors, officers or
employees of OSP or any of its subsidiaries.
<PAGE>
5.11 Litigation. Except as disclosed in Schedule 5.11 hereto, there is no
action, suit, investigation or proceeding pending against or, to the knowledge
of OSP and the OSP Shareholders, threatened against or affecting, OSP or any of
its subsidiaries or properties (other than any such suit, action or proceeding
challenging the transactions contemplated by this Agreement or any provision of
this Agreement or seeking to restrain or prohibit the consummation of the
Merger) that, if determined or resolved adversely to OSP or its subsidiaries (in
accordance with the plaintiff's demands, if applicable), individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
OSP.
5.12 Taxes. Except as set forth in Schedule 5.12, each of the OSP
Affiliated Group has filed all material tax returns and reports required to be
filed by it and has paid (or OSP has paid on its behalf) all of the Taxes
required to be paid by it (other than Taxes, the failure to pay which would not,
individually or in the aggregate, have a Material Adverse Effect on OSP), and
the most recent financial statements contained in the OSP Financial Statements
reflect an adequate reserve for all material Taxes payable by OSP and its
subsidiaries for all taxable periods and portions thereof through the date of
such financial statements. No deficiencies for any Taxes have been proposed,
asserted or assessed against OSP or any member of the OSP Affiliated Group
(other than deficiencies, the liability for which would not, individually or in
the aggregate, have a Material Adverse Effect on OSP), and no requests for
waivers of the time to assess any Taxes are pending. None of the assets or
properties of OSP or any of its subsidiaries is subject to any tax lien (other
than liens for Taxes that are not yet due or that are being contested in good
faith by appropriate proceedings) except for liens which would not, individually
or in the aggregate, have a Material Adverse Effect on OSP.
5.13 Title to Assets. As of the dates of the respective balance sheets that
are part of the OSP Financial Statements, OSP and its subsidiaries owned and
will own the assets reflected therein as of such dates. As of the date hereof
and as of the Effective Time, OSP and its subsidiaries shall hold title to their
respective assets free and clear of all Liens, except as disclosed in Schedule
5.13 hereto.
5.14 Labor Matters. Neither OSP nor any of its subsidiaries is a party to
any collective bargaining agreement or other labor union contract applicable to
persons employed by OSP or any of its subsidiaries.
5.15 Employee Benefit Plans.
(a) Schedule 5.15 hereto sets forth a list of all OSP Plans. Except for the
OSP Plans, with respect to all employees and former employees of OSP or any of
its subsidiaries and all dependents and beneficiaries of such employees and
former employees, (i) neither OSP nor any of its subsidiaries maintains or
contributes to any nonqualified deferred compensation or retirement plans,
contracts or arrangements, (ii) neither OSP nor any of its subsidiaries
maintains or contributes to any qualified defined contribution plans (as defined
in Section 3(34) of ERISA, or Section 414(i) of the Code), (iii) neither OSP nor
any of its subsidiaries maintains or contributes to any qualified defined
benefit plans (as defined in Section 3(35) of ERISA or Section 414(j) of the
Code) and (iv) neither OSP nor any of its subsidiaries maintains or contributes
to any employee welfare benefit plans (as defined in Section 3(1) of ERISA).
(b) The OSP Plans comply in all material respects with the requirements of
ERISA and the Code, except for such failures to comply which individually or in
the aggregate could not reasonably be expected to have a Material Adverse Effect
on OSP.
(c) OSP has delivered to KRSI true and complete copies of (i) all OSP
Plans, (ii) the most recent determination letter, if any, received by OSP or any
of its subsidiaries from the Internal Revenue Service regarding the OSP Plans
(iii) the most recent financial statements and annual report or return for the
OSP Plans and (iv) the most recently prepared actuarial valuation reports for
the OSP Plans, if any.
(d) Neither OSP nor any of its subsidiaries contributes (and has not ever
contributed) to any multi-employer plan, as defined in Section 3(37) of ERISA.
Neither OSP nor any of its subsidiaries has any actual or potential liabilities
under Section 4201 of ERISA for any complete or partial withdrawal from a
multi-employer plan. Neither OSP nor any of its subsidiaries has any actual or
potential liability for death or medical benefits after separation from
employment, other than (i) death benefits under the OSP Plans (whether or not
subject to ERISA) and (ii) health care continuation benefits described in
Section 4980B of the Code.
(e) Neither OSP nor any of its subsidiaries nor any of their directors,
officers, employees or other "fiduciaries", as such term is defined in Section
3(21) of ERISA, has committed any breach of fiduciary responsibility imposed by
ERISA or any other applicable law with respect to the OSP Plans which would
subject OSP, KRSI, the Surviving Corporation or OSP's subsidiaries or any of
their respective directors, officers or employees to any liability under ERISA
or any applicable law, which liability would have a Material Adverse Effect on
OSP.
<PAGE>
(f) Neither OSP nor any of its subsidiaries has incurred any liability for
any tax or civil penalty or any disqualification of any employee benefit plan
(as defined in Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of the
Code and Part 6 of Title I and Section 502(i) of ERISA, which liability would
have a Material Adverse Effect on OSP.
5.16 Compliance with Laws. Except as disclosed on Schedule 5.16 hereto,
neither OSP nor any of its subsidiaries (a) is in violation of, nor has it
violated, any applicable provisions of any laws, statutes, ordinances or
regulations or (b) has received any notice from any Governmental Entity or any
other person that OSP or any of its subsidiaries is in violation of, or has
violated, any applicable provisions of any laws, statutes, ordinances or
regulations, except in the case of clauses (a) and (b), for violations,
individually or in the aggregate, which have not had and could not reasonably be
expected to have a Material Adverse Effect on OSP. Each of OSP and its
subsidiaries has all permits, licenses and franchises from Governmental Entities
required to conduct its business as now being conducted, except for such
permits, licenses and franchises the absence of which would not, individually or
in the aggregate, have a Material Adverse Effect on OSP.
5.17 Brokers. No broker, investment banker, financial advisor or other
person, other than the OSP Financial Advisor, 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 OSP and/or the OSP Shareholders and not entered into
pursuant to the provisions of this Agreement. The fees and expenses of the OSP
Financial Advisor will be paid by the Surviving Corporation. OSP has provided
KRSI with a true and correct copy of the fee agreement among OSP, the OSP
Shareholders and the OSP Financial Advisor.
5.18 Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding OSP Shares are entitled to cast at a meeting called
for the purpose of approving the Merger, the Offering and this Agreement is the
only vote of holders of any OSP capital stock required to approve this
Agreement, the Merger, the Offering and the transactions contemplated hereby.
5.19 Environmental Matters. OSP and its subsidiaries are in compliance with
all Environmental Laws, except for any noncompliance that, either singly or in
the aggregate, would not be reasonably likely to have a Material Adverse Effect
on OSP. OSP has previously furnished to KRSI a true and correct list of all
Hazardous Materials generated, used, handled or stored by OSP or any of its
subsidiaries, the proper disposal of which will require any material expenditure
by OSP or any of its subsidiaries. OSP has previously made available to KRSI
copies of all documents concerning any environmental or health and safety matter
adversely affecting OSP or any of its subsidiaries and copies of any
environmental audits or risk assessments, site assessments, documentation
regarding off-site disposal of Hazardous Materials, spill control plans and
material correspondence with any Governmental Entity regarding the foregoing.
5.20 Trademarks, Patents and Copyrights. OSP and its subsidiaries own, or
possess adequate licenses or other valid rights to use, all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights,
copyrights, service marks, service mark rights, trade secrets, applications to
register and registrations for, the foregoing patents, trademarks, service
marks, know-how and other proprietary rights and information used in connection
with the business of OSP and its subsidiaries as currently conducted, and no
assertion or claim has been made in writing challenging the validity of any of
such rights. The conduct of the business of OSP and its subsidiaries as
currently conducted does not conflict in any way with any patent, patent rights,
license, trademark, trademark right, trade name, trade name right, service mark,
copyright or other proprietary right of any other person, OSP has received no
claim or threat that any such conflict exists, and no litigation, claim, suit,
action, proceeding, or complaint concerning the foregoing has been filed or is
ongoing. Except as set forth in Schedule 5.20 hereto, OSP and its subsidiaries
have the unencumbered right to sell their products and services (whether now
offered for sale or under development) free from any royalty or other
obligations to any third parties.
5.21 Contracts and Other Agreements. All contracts and agreements listed on
Schedule 5.21 hereto are valid, existing, in full force and effect, binding upon
OSP or its subsidiaries, as the case may be, and to the best knowledge of OSP,
binding upon the other parties thereto in accordance with their terms, and OSP
and its subsidiaries have paid in full or accrued all amounts now due from them
thereunder and have satisfied in full or provided for all of their liabilities
and obligations thereunder which are presently required to be satisfied or
provided for, and are not in default under any of them, nor, to the best
knowledge of OSP and the OSP Shareholders, is any other party to any such
contract or other agreement in default thereunder, nor does any condition exist
that with notice or lapse of time or both would constitute a default thereunder.
Schedule 5.21 hereto sets forth a list of the following contracts and other
agreements to which OSP or any of its subsidiaries is a party or by or to which
they or their assets or properties are bound or subject:
(a) any agreement that individually requires aggregate expenditures by OSP
or any of its subsidiaries in any one year of more than $50,000;
(b) any indenture, trust agreement, loan agreement or note that involves or
evidences outstanding indebtedness, obligations or liabilities for borrowed
money in excess of $50,000;
<PAGE>
(c) any lease, sublease, installment purchase or similar arrangement for
the purchase, use or occupancy of real or personal property (i) that
individually requires aggregate expenditures by OSP or any of its subsidiaries
in any one year of more than $50,000, or (ii) pursuant to which OSP or any of
its subsidiaries is the lessor of any real property which has rentals over
$50,000 per year, together with the date of termination of such leases, the name
of the other party and the annual rental payments required to be made under such
leases;
(d) any agreement of surety, guarantee or indemnification, other than (i)
an agreement in the ordinary course of business with respect to obligations in
an amount not in excess of $50,000, or (ii) indemnification provisions contained
in leases not otherwise required to be disclosed;
(e) any agreement, including without limitation employment agreements and
bonus plans, relating to the compensation of, or obligating OSP to make payments
(whether such payments are fixed in amount or contingent) to, (i) officers, (ii)
employees, (iii) former employees, (iv) consultants, (v) advisors or (vi) any
person who was promised such payments;
(f) any agreement containing covenants of OSP or any of its subsidiaries
not to compete in any line of business, in any geographic area or with any
person or covenants of any other person not to compete with OSP or any of its
subsidiaries in any line of business of OSP or any of its subsidiaries.
(g) any agreement granting or restricting the right of OSP or any of its
subsidiaries to use a trade name, trade mark or logo;
(h) any agreement with any customer or supplier that cannot be terminated
without penalty in excess of $10,000 by OSP or any of its subsidiaries within
ninety days; and
(i) any franchise, licensing or development agreement.
True and complete copies of all of the contracts and other agreements set
forth in Schedule 5.21 hereto (or required to be set forth therein) have been
previously provided to KRSI.
5.22 Insurance. Schedule 5.22 attached hereto contains a complete listing
of all policies of insurance maintained by OSP and its subsidiaries as of the
date hereof and at all times during the twenty four month period ending on the
date hereof. All such policies of insurance are in full force and effect, and
true and correct copies of all such policies of insurance have been previously
provided to KRSI.
5.23 Disclosure. To the best knowledge of OSP and the OSP Shareholders, all
material facts relating to the business, operations, properties, assets,
liabilities (contingent or otherwise), and financial condition of OSP and its
subsidiaries have been disclosed to KRSI in or in connection with this
Agreement. The representations, warranties and statements made by OSP and the
OSP Shareholders in this Agreement and in the certificates delivered pursuant
hereto do not contain any untrue statement of a material fact, and, when taken
together, do not omit to state any material fact necessary to make such
representations, warranties and statements, in light of the circumstances under
which they are made, not misleading.
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF KRSI
KRSI represents and warrants to OSP and the OSP Shareholders that, except
as set forth in and qualified by the schedules attached hereto:
<PAGE>
6.1 Corporate Existence and Power. KRSI is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Minnesota,
and has all corporate powers required to carry on its business as now conducted.
KRSI is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would not
have a Material Adverse Effect on KRSI. The copies of the articles of
incorporation and by-laws of KRSI which have been delivered to OSP by KRSI are
true and complete copies of the articles of incorporation and by-laws of KRSI.
6.2 KRSI Subsidiaries. KRSI has no subsidiaries. KRSI does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, partnership, joint venture or other entity.
6.3 Corporate Authorization. Subject to obtaining the approval of the
shareholders of KRSI at the Shareholders' Meeting, the execution, delivery and
performance by KRSI of this Agreement and the consummation by KRSI of the
transactions contemplated hereby to be consummated by it are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of KRSI. This Agreement has been duly and validly executed and
delivered by KRSI and constitutes a valid and binding agreement of KRSI
enforceable in accordance with its terms.
6.4 Governmental Authorization. The execution, delivery and performance by
KRSI of this Agreement and the consummation by KRSI of the transactions
contemplated hereby to be consummated by them require no action by or in respect
of, or filing with, any Governmental Entity other than (a) the filing of
Articles of Merger in accordance with the MBCA and CGCL, (b) compliance with any
applicable requirements of the Securities Act, (c) compliance with any
applicable requirements of the Exchange Act, (d) compliance with the rules or
regulations of NASDAQ, (e) compliance with the securities laws of various states
and (f) any action or filing which the failure to obtain or make would not,
individually or in the aggregate, have a Material Adverse Effect on any party
hereto.
6.5 Non-Contravention. The execution, delivery and performance by KRSI of
this Agreement does not, and the consummation by KRSI of the transactions
contemplated hereby will not, (a) contravene or conflict with the articles of
incorporation or by-laws of KRSI, (b) assuming compliance with the matters
referred to in Section 6.4 above, contravene or conflict with or constitute a
violation of any provision of any law, regulation, judgment, injunction, order
or decree binding upon or applicable to KRSI other than such contraventions,
conflicts or violations which would not, individually or in the aggregate, have
a Material Adverse Effect on any party hereto, (c) assuming that the consents
listed on Schedule 6.5 hereto are obtained prior to the Effective Time,
constitute a breach or violation of, or a default under or give rise to a right
of termination, cancellation or acceleration of any right or obligation of KRSI
or to a loss of any benefit to which KRSI is entitled under any provision of,
any agreement, contract or other instrument binding upon KRSI or any license,
franchise, permit or other similar authorization held by KRSI, other than such
breaches, violations, defaults, rights or losses which would not, individually
or in the aggregate, have a Material Adverse Effect on KRSI, or (d) result in
the creation or imposition of any Lien on any asset of KRSI, other than any such
creation or imposition which would not, individually or in the aggregate, have a
Material Adverse Effect on KRSI. Schedule 6.5 sets forth a true, complete and
correct list of all consents, approvals and authorizations required to be
obtained by KRSI from any third party (other than as otherwise expressly
contemplated by Section 6.4 of this Agreement) in connection with this
Agreement, the Reorganization and the transactions contemplated hereby where the
failure of KRSI to obtain such consent, approval or authorization, individually
or in the aggregate, would have a Material Adverse Effect on KRSI.
<PAGE>
6.6 Capitalization. The authorized capital stock of KRSI consists of
10,000,000 shares of KRSI Common Stock. As of the date of this Agreement, there
are outstanding 4,082,373 shares of KRSI Common Stock. As of the date of this
Agreement, KRSI has reserved 1,438,589 shares of KRSI Common Stock for issuance
to upon exercise of outstanding employee and director stock options and
outstanding warrants to purchase shares of KRSI Common Stock. All outstanding
shares of KRSI Common Stock are duly authorized, validly issued, fully paid and
nonassessable and issued in compliance with all applicable federal and state
securities laws. The KRSI Common Stock is registered pursuant to Section 12(g)
of the Exchange Act. Except as set forth in this Section or on Schedule 6.6
attached hereto and except for changes since the date hereof resulting from the
exercise, cancellation or exchange of currently outstanding options and warrants
listed on Schedule 6.6 hereto, there are outstanding (a) no shares of KRSI
Common Stock or other voting securities of KRSI, (b) no securities of KRSI
convertible into or exchangeable for shares of capital stock or voting
securities of KRSI and (c) no options or other rights to acquire from KRSI, and
no obligation of KRSI to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of KRSI. There are no outstanding obligations of KRSI to repurchase,
redeem or otherwise acquire any KRSI Common Stock.
6.7 SEC Documents. KRSI has filed all KRSI SEC Documents and has previously
provided to OSP copies of all SEC comment letters received in connection
therewith. As of their respective dates, the KRSI SEC Documents complied as to
form 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 KRSI SEC Documents, and none of the
KRSI SEC Documents 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. Except to the extent that information contained in any
KRSI SEC Document has been revised or superseded by a later-filed KRSI SEC
Document, filed and publicly available prior to the date of this Agreement, as
of the date of this Agreement, none of the KRSI SEC Documents contains any
untrue statement of a material fact or omits 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 were made, not misleading. The
financial statements of KRSI included in the KRSI SEC Documents complied as of
their respective dates of filing with the SEC 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 generally accepted accounting principles (except, in the case of unaudited
statements, as permitted by the Exchange Act) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto)
and fairly present the financial position of KRSI as of the dates thereof and
the results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as to the extent that information contained in any KRSI SEC
Document has been revised or superseded by a later-filed KRSI SEC Document,
filed and publicly available prior to the date of this Agreement, and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice, KRSI has no liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by
generally accepted accounting principles to be set forth on a balance sheet of
KRSI or in the notes thereto which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on KRSI.
6.8 KRSI's Books and Records. The books of account and records (including
customer order files, employment records, licensing records, employment records
and production and manufacturing records) of KRSI are complete, true and correct
in all material respects.
6.9 KRSI Contracts with Related Parties. Except as disclosed on Schedule
6.9 hereto or in the KRSI SEC Documents, there are no material agreements or
contracts by, between or among KRSI and any of KRSI's officers, directors or
shareholders.
6.10 Absence of Certain Changes or Events. Except as disclosed in the KRSI
SEC Documents, and except as expressly contemplated by this Agreement, since the
date of the most recent audited financial statements included in the KRSI SEC
Documents, KRSI has conducted its business only in the ordinary course, and
there has not been:
(a) any event, occurrence or development of a state of circumstances or
facts which has had a Material Adverse Effect on KRSI;
<PAGE>
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of KRSI Common Stock, or any repurchase,
redemption or other acquisition by KRSI of any outstanding shares of KRSI Common
Stock or other securities of, or other ownership interests in, KRSI;
(c) any split, combination or reclassification of any of KRSI Common Stock
or any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for shares of KRSI Common Stock;
(d) any incurrence, assumption or guarantee by KRSI of any indebtedness for
borrowed money other than in the ordinary course of business and in amounts and
on terms consistent with past practices (including any such borrowings under its
existing bank credit facility) except as described in Schedule 6.10(d) hereto;
(e) any damage, destruction or other casualty loss (whether or not covered
by insurance) affecting the business assets of KRSI which, individually or in
the aggregate, has had or would reasonably be expected to have a Material
Adverse Effect on KRSI;
(f) any change in any method of accounting or accounting practice by KRSI,
except for any such change required by reason of a concurrent change in
generally accepted accounting principles; or
(g) any (i) grant, except pursuant to agreements in effect on the date of
this Agreement and disclosed in a Schedule hereto, of any material severance or
termination pay to any director, officer or employee of KRSI, (ii) entering into
any material employment, deferred compensation or other similar agreement (or
any amendment to any such existing agreement) with any director, officer or
employee of KRSI, (iii) material increase in benefits payable under any existing
severance or termination pay policies or employment agreements or (iv) other
than in the ordinary course of business consistent with past practices, material
increase in compensation, bonus or other benefits payable to directors, officers
or employees of KRSI.
6.11 Litigation. Except as disclosed in the KRSI SEC Documents or Schedule
6.11 attached hereto, there is no action, suit, investigation or proceeding
pending against or, to the knowledge of KRSI, threatened against or affecting,
KRSI or any of its properties (other than any such suit, action or proceeding
challenging the transactions contemplated by this Agreement or seeking to
restrain or prohibit the consummation of any part of the Reorganization) that,
if determined or resolved adversely to KRSI (in accordance with the plaintiff's
demands, if applicable), individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on KRSI.
6.12 Taxes. KRSI has filed all material tax returns and reports required to
be filed by it and has paid all of the Taxes required to be paid by it (other
than Taxes, the failure to pay which would not, individually or in the
aggregate, have a Material Adverse Effect on KRSI), and the most recent
financial statements contained in the KRSI SEC Documents reflect an adequate
reserve for all material Taxes payable by KRSI for all taxable periods and
portions thereof through the date of such financial statements. No deficiencies
for any Taxes have been proposed, asserted or assessed against KRSI (other than
deficiencies, the liability for which would not, individually or in the
aggregate, have a Material Adverse Effect on KRSI), and no requests for waivers
of the time to assess any Taxes are pending. None of the assets or properties of
KRSI is subject to any tax lien (other than liens for Taxes that are not yet due
or that are being contested in good faith by appropriate proceedings) except for
liens which would not, individually or in the aggregate, have a Material Adverse
Effect on KRSI.
<PAGE>
6.13 Title to Assets. As of the dates of the respective balance sheets that
are part of the KRSI SEC Documents, KRSI owned and will own the assets reflected
thereon as of such dates. As of the date hereof and as of the Effective Time,
KRSI shall hold title to its assets free and clear of all Liens, except as
described in Schedule 6.13 hereto.
6.14 Labor Matters. KRSI is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by KRSI.
6.15 Employee Benefit Plans.
(a) Schedule 6.15 hereto sets forth a list of all KRSI Plans. Except for
the KRSI Plans, with respect to all employees and former employees of KRSI and
all dependents and beneficiaries of such employees and former employees, (i)
KRSI does not maintain or contribute to any nonqualified deferred compensation
or retirement plans, contracts or arrangements, (ii) KRSI does not maintain or
contribute to any qualified defined contribution plans (as defined in Section
3(34) of ERISA, or Section 414(i) of the Code), (iii) KRSI does not maintain or
contribute to any qualified defined benefit plans (as defined in Section 3(35)
of ERISA or Section 414(j) of the Code) and (iv) KRSI does not maintain or
contribute to any employee welfare benefit plans (as defined in Section 3(1) of
ERISA).
(b) The KRSI Plans comply in all material respects with the requirements of
ERISA and the Code, except for such failures to comply which individually or in
the aggregate could not reasonably be expected to have a Material Adverse Effect
on KRSI.
(c) KRSI has delivered to OSP true and complete copies of (i) all KRSI
Plans, (ii) the most recent determination letter, if any, received by KRSI or
any of its subsidiaries from the Internal Revenue Service regarding the KRSI
Plans, (iii) the most recent financial statements and annual report or return
for the KRSI Plans and (iii) the most recently prepared actuarial valuation
reports for the KRSI Plans, if any.
(d) KRSI does not contribute (and has not ever contributed) to any
multi-employer plan, as defined in Section 3(37) of ERISA. KRSI does not have
any actual or potential liabilities under Section 4201 of ERISA for any complete
or partial withdrawal from a multi-employer plan. KRSI does not have any actual
or potential liability for death or medical benefits after separation from
employment, other than (i) death benefits under the KRSI Plans (whether or not
subject to ERISA) and (ii) health care continuation benefits described in
Section 4980B of the Code.
(e) Neither KRSI nor any of its directors, officers, employees or other
"fiduciaries", as such term is defined in Section 3(21) of ERISA, has committed
any breach of fiduciary responsibility imposed by ERISA or any other applicable
law with respect to the KRSI Plans which would subject KRSI, OSP, the Surviving
Corporation, OSP's subsidiaries or any of their respective directors, officers
or employees to any liability under ERISA or any applicable law, which liability
would have a Material Adverse Effect on KRSI.
(f) KRSI has not incurred any liability for any tax or civil penalty or any
disqualification of any employee benefit plan (as defined in Section 3(3) of
ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6 of Title I and
Section 502(i) of ERISA, which liability would have a Material Adverse Effect on
KRSI.
6.16 Compliance with Laws. Except as disclosed in the KRSI SEC Documents or
on Schedule 6.16 hereto, KRSI (a) is not in violation of, nor has it violated,
any applicable provisions of any laws, statutes, ordinances or regulations and
(b) has not received any notice from any Governmental Entity or any other person
that KRSI is in violation of, or has violated, any applicable provisions of any
laws, statutes, ordinances or regulations, except in the case of clauses (a) and
(b), for violations, individually or in the aggregate, which have not had and
could not reasonably be expected to have a Material Adverse Effect. KRSI has all
permits, licenses and franchises from Governmental Entities required to conduct
its business as now being conducted, except for such permits, licenses and
franchises the absence of which would not, individually or in the aggregate,
have a Material Adverse Effect on KRSI
<PAGE>
6.17 Brokers. Except for discounts, commissions and expenses in connection
with the Offering, no broker, investment banker, financial advisor or other
person, other than the KRSI Financial Advisor 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 KRSI. The fees and expenses of the KRSI Financial
Advisor will be paid by the Surviving Corporation. KRSI has provided OSP with a
true and correct copy of the fee agreement between KRSI and the KRSI Financial
Advisor.
6.18 Vote Required. The affirmative votes of the holders of the outstanding
shares of the KRSI Common Stock to be described in the Proxy Statement are the
only votes of holders of capital stock of KRSI required to approve the Merger,
this Agreement and the transactions contemplated hereby.
6.19 Environmental Matters. KRSI is in compliance with all Environmental
Laws, except for any noncompliance that, either singly or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect on KRSI. KRSI
has previously furnished to OSP a true and correct list of all Hazardous
Materials generated, used, handled or stored by KRSI, the proper disposal of
which will require any material expenditure by KRSI. KRSI has previously made
available to OSP copies of all documents concerning any environmental or health
and safety matter adversely affecting KRSI and copies of any environmental
audits or risk assessments, site assessments, documentation regarding off-site
disposal of Hazardous Materials, spill control plans and material correspondence
with any Governmental Entity regarding the foregoing.
6.20 Trademarks, Patents and Copyrights. KRSI owns, or possesses adequate
licenses or other valid rights to use, all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights, copyrights, service marks,
service mark rights, trade secrets, applications to register and registrations
for, the foregoing patents, trademarks, service marks, know-how and other
proprietary rights and information used in connection with the business of KRSI
as currently conducted, and no assertion or claim has been made in writing
challenging the validity of any of such rights. The conduct of the business of
KRSI as currently conducted does not conflict in any way with any patent, patent
rights, license, trademark, trademark right, trade name, trade name right,
service mark, copyright or other proprietary right of any other person, KRSI has
received no claim or threat that any such conflict exists, and no litigation,
claim, suit, action, proceeding, or complaint concerning the foregoing has been
filed or is ongoing. Except as set forth in Schedule 6.20 hereto, KRSI has the
unencumbered right to sell its products and services (whether now offered for
sale or under development) free from any royalty or other obligations to any
third parties.
6.21 Contracts and Other Agreements. All contracts and agreements listed on
Schedule 6.21 hereto are valid, existing, in full force and effect, binding upon
KRSI and to the best knowledge of KRSI, binding upon the other parties thereto
in accordance with their terms, and KRSI has paid in full or accrued all amounts
now due from them thereunder and have satisfied in full or provided for all of
its liabilities and obligations thereunder which are presently required to be
satisfied or provided for, and is not in default under any of them, nor, to the
best knowledge of KRSI, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist that with notice
or lapse of time or both would constitute a default thereunder. Schedule 6.21
hereto sets forth a list of the following contracts and other agreements to
which KRSI is a party or by or to which it or its assets or properties are bound
or subject:
(a) any agreement that individually requires aggregate expenditures by KRSI
in any one year of more than $50,000;
(b) any indenture, trust agreement, loan agreement or note that involves or
evidences outstanding indebtedness, obligations or liabilities for borrowed
money in excess of $50,000;
(c) any lease, sublease, installment purchase or similar arrangement for
the purchase, use or occupancy of real or personal property (i) that
individually requires aggregate expenditures by KRSI in any one year of more
than $50,000, or (ii) pursuant to which KRSI is the lessor of any real property
which has rentals over $50,000 per year, together with the date of termination
of such leases, the name of the other party and the annual rental payments
required to be made under such leases;
<PAGE>
(d) any agreement of surety, guarantee or indemnification, other than (i)
an agreement in the ordinary course of business with respect to obligations in
an amount not in excess of $50,000, or (ii) indemnification provisions contained
in leases not otherwise required to be disclosed;
(e) any agreement, including without limitation employment agreements and
bonus plans, relating to the compensation of, or obligating KRSI to make
payments (whether such payments are fixed in amount or contingent) to, (i)
officers, (ii) employees, (iii) former employees, (iv) consultants, (v) advisors
or (vi) any person who was promised such payments;
(f) any agreement containing covenants of KRSI not to compete in any line
of business, in any geographic area or with any person or covenants of any other
person not to compete with KRSI in any line of business of KRSI.
(g) any agreement granting or restricting the right of KRSI to use a trade
name, trade mark or logo;
(h) any agreement with any customer or supplier that cannot be terminated
without penalty in excess of $10,000 by KRSI within ninety days; and
(i) any franchise, licensing or development agreement.
True and complete copies of all of the contracts and other agreements set
forth in Schedule 6.21 hereto (or required to be set forth therein) have been
previously provided to OSP.
6.22 Insurance. Schedule 6.22 attached hereto contains a complete listing
of all policies of insurance maintained by KRSI as of the date hereof and at all
times during the twenty four month period ending on the date hereof. All such
policies of insurance are in full force and effect, and true and correct copies
of all such policies of insurance have been previously provided to OSP.
6.23 Disclosure. To the best knowledge of KRSI, all material facts relating
to the business, operations, properties, assets, liabilities (contingent or
otherwise), and financial condition of KRSI and its subsidiaries have been
disclosed to OSP in or in connection with this Agreement. The representations,
warranties and statements made by KRSI in this Agreement and in the certificates
delivered pursuant hereto do not contain any untrue statement of a material
fact, and, when taken together, do not omit to state any material fact necessary
to make such representations, warranties and statements, in light of the
circumstances under which they are made, not misleading.
ARTICLE VII - COVENANTS RELATING TO CONDUCT OF BUSINESS
7.1 Conduct of Business by OSP. Except as contemplated by this Agreement or
as described on Schedule 7.1 attached hereto, from the date hereof until the
Effective Time, OSP and its subsidiaries shall conduct their respective
businesses in the ordinary course consistent with past practice and shall use
their best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, except as provided in this Agreement, from the date hereof until the
Effective Time, neither OSP nor any of its subsidiaries will and the OSP
Shareholders will not permit OSP and its subsidiaries to, without the prior
written approval of KRSI:
(a) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
<PAGE>
(b) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any OSP Common
Stock, except for distributions required for the payment of Angard's and Malm's
respective tax liabilities for the year ended December 31, 1995 and for the
period from January 1, 1996 through the Closing computed in a manner consistent
with past practices;
(c) acquire or agree to acquire (i) by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
portion of the assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof except in the ordinary course of business
consistent with past practice or (ii) any assets that are material, individually
or in the aggregate, to OSP, except purchases of inventory in the ordinary
course of business consistent with past practice;
(d) 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;
(e) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of OSP or any of its securities,
guarantee any debt securities of another person, 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 (A) to
OSP or (B) advances to employees in accordance with past practice;
(f) make or agree to make any new capital expenditure or expenditures
which, individually, is in excess of $50,000 or, in the aggregate, are in excess
of $100,000;
(g) make any material tax election or settle or compromise any material tax
liability;
(h) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction, in
the ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent OSP Financial Statements or incurred in the
ordinary course of business consistent with past practice, or waive any material
benefits of, or agree to modify in any material respect, any confidentiality,
standstill or similar agreements to which OSP or any of its subsidiaries is a
party;
(i) except in the ordinary course of business, modify, amend or terminate
any material contract or agreement to which OSP or any of its subsidiaries is a
party or waive, release or assign any material rights or claims;
(j) enter into any contracts, agreements, arrangements or understandings
relating to the distribution, sale or marketing by third parties of OSP's or any
of its subsidiaries' products or products licensed by OSP or any of its
subsidiaries except in the ordinary course of business consistent with past
practice;
<PAGE>
(k) except as required to comply with applicable law, (i) adopt, enter
into, terminate or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation or other
plan, trust arrangement or fund for the benefit or welfare of any director,
officer or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director, officer
or employee (except for normal increases or bonuses in the ordinary course of
business consistent with past practice), (iii) pay any benefit not provided for
under an OSP Plan, (iv) except as permitted in clause (ii), grant any awards
under any bonus, incentive, performance or other compensation plan or
arrangement or OSP Plan (including the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any OSP Plans or
agreement or awards made thereunder) or (v) take any action to fund or in any
other way secure the payment of compensation or benefits under any employee
plan, agreement, contract or arrangement or OSP Plan;
(l) make any change in any method of accounting or accounting practice or
policy other than those required by generally accepted accounting principles; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
7.2 Conduct of Business by KRSI. Except as contemplated by this Agreement
or as described on Schedule 7.2 attached hereto, from the date hereof until the
Effective Time, KRSI shall conduct its business in the ordinary course
consistent with past practice and shall use its best efforts to preserve intact
its business organizations and relationships with third parties and to keep
available the services of its present officers and employees. Without limiting
the generality of the foregoing, except as provided in this Agreement, from the
date hereof until the Effective Time, KRSI will not, without the prior written
approval of OSP:
(a) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
(b) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any KRSI
Common Stock;
(c) acquire or agree to acquire (i) by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
portion of the assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof except in the ordinary course of business
consistent with past practice or (ii) any assets that are material, individually
or in the aggregate, to KRSI, except purchases of inventory in the ordinary
course of business consistent with past practice;
(d) 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;
(e) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of OSP or any of its securities,
guarantee any debt securities of another person, 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 (A) to
KRSI or (B) advances to employees in accordance with past practice;
(f) make or agree to make any new capital expenditure or expenditures
which, individually, is in excess of $50,000 or, in the aggregate, are in excess
of $100,000;
<PAGE>
(g) make any material tax election or settle or compromise any material tax
liability;
(h) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction, in
the ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent balance sheet contained in the KRSI SEC
Documents or incurred in the ordinary course of business consistent with past
practice, or waive any material benefits of, or agree to modify in any material
respect, any confidentiality, standstill or similar agreements to which KRSI is
a party;
(i) except in the ordinary course of business, modify, amend or terminate
any material contract or agreement to which KRSI or any of its subsidiaries is a
party or waive, release or assign any material rights or claims;
(j) enter into any contracts, agreements, arrangements or understandings
relating to the distribution, sale or marketing by third parties of KRSI's or
any of its subsidiaries' products or products licensed by KRSI except in the
ordinary course of business consistent with past practice;
(k) except as required to comply with applicable law, (i) adopt, enter
into, terminate or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation or other
plan, trust arrangement or fund for the benefit or welfare of any director,
officer or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director, officer
or employee (except for normal increases or bonuses in the ordinary course of
business consistent with past practice), (iii) pay any benefit not provided for
under a KRSI Plan, (iv) except as permitted in clause (ii), grant any awards
under any bonus, incentive, performance or other compensation plan or
arrangement or KRSI Plan (including the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any KRSI Plans or
agreement or awards made thereunder) or (v) take any action to fund or in any
other way secure the payment of compensation or benefits under any employee
plan, agreement, contract or arrangement or KRSI Plan;
(l) make any change in any method of accounting or accounting practice or
policy other than those required by generally accepted accounting principles; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
7.3 Other Action. OSP and KRSI shall not, and OSP shall not permit any of
its subsidiaries to, take any action that would, or that could reasonably be
expected to, result in (i) any of the representations and warranties of such
party set forth in this Agreement that are qualified as to materiality becoming
untrue, (ii) any of the representations and warranties that are not so qualified
becoming untrue in any material respect or (iii) any of the conditions to the
Merger and consummation of the transactions contemplated by this Agreement set
forth in Article IX below not being satisfied (subject to KRSI's right to take
action specifically permitted by Section 7.4 below).
<PAGE>
7.4 No Solicitation of Transactions. OSP and KRSI shall, and shall each
direct and use their respective commercially reasonable efforts to cause their
respective officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it) not to initiate, solicit or knowingly encourage, directly or
indirectly (including by way of furnishing non-public information or
assistance), or take any other action to facilitate knowingly, any inquiries or
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Competing Transaction, or enter into or continue discussions or
negotiations with any person or entity in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize any of their respective officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
other representative retained by them to take any such action, and OSP and KRSI
shall notify the other of all inquiries or proposals which such party may
receive relating to any of such matters and if such inquiry or proposal is in
writing, shall deliver to the other party a copy of such inquiry or proposal;
provided, however, that nothing contained in this Section 7.4 shall prohibit the
Board of Directors of KRSI from (i) furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes an
unsolicited, bona fide proposal to acquire KRSI pursuant to a merger,
consolidation, share exchange, business combination, tender or exchange offer or
other similar transaction or to acquire a substantial portion of the assets of
KRSI if, and only to the extent that, (A) the Board of Directors of KRSI
determines, which determination is supported by a written legal opinion from
counsel for KRSI reasonably acceptable to OSP, in good faith that such action is
necessary for the Board of Directors of KRSI to comply with its fiduciary duties
to the shareholders of KRSI under applicable law and (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
person or entity, KRSI (1) provides written notice to OSP to the effect that it
is furnishing information to, or entering into discussions or negotiations with,
such person or entity, (2) receives from such person or entity an executed
agreement to the effect that such person or entity will not disclose any
confidential information of KRSI and (3) subject to the terms of any
confidentiality agreement to which KRSI is a party on the date hereof, keeps OSP
informed of the status (but not the terms) of any such discussions or
negotiations, (ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to a tender or exchange offer or (iii) failing to make or
withdrawing or modifying its recommendation referred to in Section 8.1(b) below
following the making of a proposal that constitutes, or may reasonably be
expected to lead to, a Competing Transaction if the Board of Directors of KRSI
determines, which determination is supported by a written legal opinion from
counsel for KRSI reasonably acceptable to OSP, in good faith that such action is
necessary for the Board of Directors of KRSI to comply with its fiduciary duties
to the shareholders of KRSI under applicable law. In the event that the Board of
Directors of KRSI fails to make or withdraws its recommendation referred to in
Section 8.1(b) below and KRSI enters into an agreement to consummate a Competing
Transaction within one year after such failure or withdrawal, KRSI shall upon
the earlier of the consummation of such Competing Transaction or the termination
of such binding agreement pay to OSP $500,000 in cash. Any amounts paid to OSP
by the Escrow Agent pursuant to the Escrow Agreement shall reduce the amount of
the payment to be made by KRSI to OSP under the preceding sentence.
ARTICLE VIII - ADDITIONAL AGREEMENTS
8.1 Preparation of Registration Statements and the Proxy Statement;
Shareholders' Meeting.
(a) As soon as practicable following the date of this Agreement, (i) the
parties hereto shall provide to each other all information reasonably requested
by the Other Party in order to permit the Other Party to comply with the
provisions of this Section 8.1, (ii) KRSI shall prepare and file with the SEC
the Proxy Statement relating to the approval by the holders of KRSI Common Stock
of the Merger and this Agreement and (iii) KRSI and OSP shall prepare and file
with the SEC the Registration Statements for the purpose of registering the
shares of Survivor Common Stock to be issued in the Merger and in the Offering
under the Securities Act, in which the Proxy Statement will be included as a
prospectus. The parties hereto shall use all commercially reasonable efforts to
file the Registration Statements with the SEC no later than April 22, 1996. Each
of OSP and KRSI shall use all commercially reasonable efforts to have the
Registration Statements declared effective under the Securities Act as promptly
as practicable after such filing. KRSI will use its commercially reasonable
efforts to cause the Proxy Statement to be mailed to the shareholders of KRSI as
promptly as practicable after the Registration Statements are declared effective
under the Securities Act.
<PAGE>
(b) KRSI will, as soon as practicable following the date of this Agreement,
establish a record date (which will be as soon as practicable following the date
of this Agreement) for, duly call, give notice of, convene and hold a meeting of
its shareholders for the purpose of approving the Merger and this Agreement;
provided, however, that KRSI may postpone or adjourn any Shareholders' Meeting
to a date no later than July 31, 1996, in order to facilitate the satisfaction
of the condition set forth in Section 9.1(a) below. KRSI will, through its Board
of Directors, recommend to its shareholders approval of the Merger and this
Agreement, except to the extent that the Board of Directors of KRSI shall have
withdrawn or modified its approval or recommendation of the Merger and this
Agreement as permitted by Section 7.4 above.
8.2 Information Supplied by OSP. OSP warrants and represents that none of
the information supplied or to be supplied by OSP specifically for inclusion or
incorporation by reference in the Registration Statements or Proxy Statement
will, at the time the Registration Statements or Proxy Statement is filed with
the SEC, at any time it is amended or supplemented and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
8.3 Information Supplied by KRSI. KRSI warrants and represents that none of
the information supplied or to be supplied by KRSI specifically for inclusion or
incorporation by reference in the Registration Statements or Proxy Statement
will, at the time the Registration Statements or Proxy Statement is filed with
the SEC, at any time it is amended or supplemented and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
8.4 Access to Information. Subject to Section 8.5 below, from the date
hereof to the Effective Time, KRSI and OSP shall each provide to the other
access to all information and documents which the other may reasonably request
regarding the business, assets, liabilities, employees and other aspects of the
other party and their respective subsidiaries, other than the information and
documents that in the opinion of such other party's legal counsel may not be
disclosed under applicable law.
8.5 Confidentiality. Neither OSP or any of its subsidiaries on the one hand
nor KRSI on the other hand shall release, publish, reveal or disclose, directly
or indirectly, any Evaluation Material of the Other Party, except (a) to such of
its directors, officers, employees, financial advisors, legal counsel,
accountants or other agents, advisors or representatives as shall require access
thereto on a need-to-know basis for the purpose of the transactions contemplated
by this Agreement, including, without limitation, for purposes of providing
information to prospective investors in the Offering, so long as such persons
are informed by the revealing party of the confidential nature of such
information and are directed by it to treat such information confidentially, (b)
to such third parties as are reasonably necessary to obtain the consents and
approvals from such parties to the transactions contemplated by this Agreement
so long as such third parties are informed by the revealing party of the
confidential nature of such information and are directed by it to treat such
information confidentially, and (c) with the prior written consent of the Other
Party and then only to the extent specified in such consent. The parties agree
to take all reasonable precautions to safeguard the confidentiality of the
Evaluation Material. Neither the OSP or any of its subsidiaries nor KRSI shall
make, or permit to be made, except in furtherance of the transactions
contemplated by this Agreement, any copies, abstracts or summaries of the
Evaluation Material of the Other Party and its subsidiaries. In addition, all
such Evaluation Material shall be used solely for the purposes of the
investigations contemplated by Section 8.4 above, and shall not be otherwise
used to the detriment of the Other Party and its subsidiaries or in competition
with the Other Party and its subsidiaries. The restrictions on disclosure of
information contained in this Section 8.5 do not extend to any item of
information that (i) is publicly known at the time of its disclosure, (ii) is
lawfully received from a third party not bound in a confidential relationship to
the Other Party and its subsidiaries, (iii) is published or otherwise made known
to the public by the Other Party and its subsidiaries, (iv) was generated
independently before its receipt from the Other Party and its subsidiaries or
(v) is required to be disclosed pursuant to a governmental order or decree or
other legal requirement to produce or disclose such item of information,
provided that upon receiving notice that any such order or decree is being
sought or that any such legal requirement is applicable, such corporation shall
promptly give the Other Party notice thereof and such corporation shall
cooperate with the Other Party's efforts, if any, to contest the issuance of
such order or decree or the application of such legal requirement. Upon written
request, the parties shall return all writings, documents and materials
containing Evaluation Material. Each of OSP on the one hand and KRSI on the
other hand understands that the Other Party will not have an adequate remedy at
law for a breach or threatened breach by the revealing party or any of its
subsidiaries of the terms of this Section 8.5, and each corporation therefore
agrees that if there is any such breach or threatened breach, the Other Party
may, in addition to any other legal or equitable remedies available to it,
obtain an injunction or restraining order to enjoin the Other Party or any of
its subsidiaries from the breach or threatened breach of this Section 8.5.
<PAGE>
8.6 Public Announcements. OSP and KRSI will consult with the Other Party
before issuing any press release or making any public statement with respect to
this Agreement and the transactions contemplated hereby and, except as may be
required by applicable law or any listing agreement with any national securities
exchange, will not issue any such press release or make any such public
statement prior to such consultation. The parties have agreed on the text of a
joint press release by which KRSI and OSP will announce the execution of this
Agreement, a copy of which is attached hereto as Exhibit 8.6.
8.7 Appropriate Action; Consents; Filings.
(a) OSP, the OSP Shareholders and KRSI shall use their respective best
efforts to (i) take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things necessary, proper or advisable under applicable law
or required to be taken by any Governmental Entity or otherwise to consummate
the Reorganization and the transactions contemplated by this Agreement as
promptly as practicable, (ii) obtain from any Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by OSP, its subsidiaries or KRSI in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and (iii) as promptly as
practicable, make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Reorganization required
under (A) the Securities Act, the Exchange Act and any other applicable federal
or state securities laws and (B) any other applicable law; provided that KRSI
and OSP shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the Other
Party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
OSP and KRSI shall use reasonable best efforts to furnish to Other Party all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable law (including all information
required to be included in the Registration Statements and the Proxy Statement)
in connection with the transactions contemplated by the Reorganization and this
Agreement.
(b) (i) OSP, its subsidiaries and KRSI shall give any notices to third
parties, and use their reasonable best efforts to obtain any third party
consents, (A) necessary to consummate the Reorganization and the transactions
contemplated by this Agreement, (B) disclosed or required to be disclosed in the
schedules to this Agreement or (C) required to prevent a Material Adverse Effect
on OSP or KRSI.
(ii) In the event that OSP, its subsidiaries or KRSI shall fail to obtain
any third party consent described in subsection (b)(i) above, OSP or KRSI, as
appropriate, shall use its reasonable best efforts, and shall take any such
actions reasonably requested by the Other Party, to minimize any adverse effect
on OSP, its subsidiaries and KRSI and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
(c) From the date of this Agreement until the Effective Time, OSP and KRSI
shall each promptly notify the Other Party of any pending or, to the knowledge
of such party, threatened action, proceeding or investigation by any
Governmental Entity or any other person (i) challenging or seeking material
damages in connection with the Reorganization or the transactions contemplated
by this Agreement or (ii) seeking to restrain or prohibit the consummation of
the Reorganization or otherwise limit the right of KRSI or, to the knowledge of
such first party, any subsidiary of KRSI to own or operate all or any portion of
the businesses or assets of OSP, which in either case is reasonably likely to
have a Material Adverse Effect on KRSI.
(d) Each party shall execute and deliver on and after the execution of this
Agreement such further documents and instruments and take such other actions as
the Other Party may reasonably request to implement and effectuate the purposes
of and transactions contemplated by this Agreement.
<PAGE>
8.8 State Statutes. If any State Takeover Laws shall become applicable to
the transactions contemplated by this Agreement, each of OSP and KRSI, as the
case may be, and their respective Boards of Directors shall use their reasonable
best efforts to grant such approvals and take such actions as are necessary so
that the transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effects of such State Takeover Law on the transactions
contemplated by this Agreement. Nothing herein shall limit or affect KRSI in
taking actions specifically permitted by Section 7.4 above.
8.9 Directors' and Officers' Indemnification and Insurance.
(a) Prior to the Effective Time, KRSI shall use its commercially reasonable
efforts to obtain directors' and officers' insurance coverage in form and
substance reasonably acceptable to OSP and the OSP Shareholders to provide for
coverage of the directors and officers of OSP with respect to claims that may be
asserted by KRSI's shareholders or creditors arising in connection with the
transactions contemplated by this Agreement.
(b) OSP and the OSP Shareholders shall cause the Surviving Corporation to
keep in effect the provisions in the Amended OSP By-laws with respect to
exculpation of director and officer liability and indemnification to the fullest
extent permitted under the CGCL, which provisions shall not be amended, repealed
or otherwise modified except as required by applicable law or except to make
changes permitted by law that would enlarge the exculpation or rights of
indemnification thereunder. In addition, the parties hereby acknowledge and
agree that the Surviving Corporation will obtain directors' and officers'
insurance for the directors and officers of the Surviving Corporation that will
provide for a minimum of $5 million of coverage for any individual claim.
(c) At the Effective Time, the Surviving Corporation shall enter into
indemnification agreements in form and substance reasonably satisfactory to
KRSI, OSP and their respective officers and directors with each person who is a
director and officer of KRSI or OSP immediately prior to the Effective Time for
the purpose of indemnifying such person to the fullest extent permitted under
the CGCL.
(d) The Surviving Corporation shall reimburse all expenses, including
reasonable attorneys' fees, incurred by any person required to enforce the
indemnity and other obligations of the Surviving Corporation under this Section
8.9 if such person is entitled to reimbursements under the by-laws, the CGCL or
any indemnification agreement.
(e) The directors and officers referred to in Section 8.9(c) above shall be
third party beneficiaries of this Section 8.9, and the rights under this Section
8.9 shall be in addition to any other rights under Minnesota law, California law
or otherwise. In addition, the directors and officers of KRSI referred to in
Section 8.9(c) above shall be third party beneficiaries of the representations,
warranties and covenants of OSP and the OSP Shareholders made in this Agreement,
and the directors and officers of OSP referred to in Section 8.9(c) above shall
be third party beneficiaries of the representations, warranties and covenants of
KRSI made in this Agreement. This Section 8.9 shall survive the consummation of
the Merger and the Reorganization. 8.10 Additional OSP Financial Statements. As
soon as possible after the execution of this Agreement and in no event later
than April 15, 1996, OSP shall deliver to KRSI true and complete copies of its
consolidated balance sheet, statements of operations, statements of changes in
shareholders' equity and statements of cash flows together with the unqualified
report thereon by Deloitte & Touche LLP, OSP's independent auditors, for its
fiscal year ending December 31, 1995. Such financial statements shall not
reflect any material differences from the preliminary and unaudited financial
statements for OSP and subsidiaries for the same period attached hereto as
Exhibit 8.10.
<PAGE>
8.11 Escrow Payments.
(a) Concurrent with the execution of this Agreement, KRSI has delivered to
the Escrow Agent the sum of one hundred thousand dollars ($100,000) to be held
pursuant to the Escrow Agreement.
(b) Upon receipt by KRSI from OSP of the OSP Financial Statements required
to be delivered pursuant to Section 8.11 above, KRSI shall deliver to the Escrow
Agent an additional sum of one hundred fifty thousand dollars ($150,000).
8.12 Employment Contracts. The parties shall use their respective
reasonable best efforts to cause the Surviving Corporation to enter into
employment contracts to be effective as of the Effective Time with George J.
Vrabeck, Angard and Malm in substantially the form attached hereto as Exhibits
8.12-1, 8.12-2 and 8.12-3, respectively.
8.13 Indemnification.
(a) Indemnification by OSP. Subject to the limitations set forth in Section
8.13(b) below, OSP shall indemnify and hold KRSI harmless at all times from and
after the date of this Agreement against and in respect of all damages, losses,
costs and expenses (including reasonable attorney fees) which KRSI may suffer or
incur in connection with any material breach by OSP of any of its
representations, warranties or covenants in this Agreement.
(b) Limitation of Liability of OSP. KRSI shall not assert any claim under
Section 8.13(a) above unless and until such claims exceed an aggregate of
$50,000 and any claim under Section 8.13(a) above must be asserted within one
year from the Effective Time or be forever barred. The rights of KRSI with
respect to any claims arising under Section 8.13(a) above shall be limited to
recovery of actual losses, costs and expenses (including reasonable attorney
fees).
(c) Indemnification by the OSP Shareholders. Subject to the limitations set
forth in Section 8.13(d) below, the OSP Shareholders, jointly and severally,
shall indemnify and hold KRSI harmless at all times from and after the date of
this Agreement against and in respect of all damages, losses, costs and expenses
(including reasonable attorney fees) which KRSI may suffer or incur in
connection with any material breach by the OSP Shareholders of any of their
respective representations, warranties or covenants in this Agreement.
(d) Limitation of Liability of the OSP Shareholders. KRSI shall not assert
any claim under Section 8.13(c) above unless and until such claims exceed an
aggregate of $50,000 and any claim under Section 8.13(c) above must be asserted
within one year from the Effective Time or be forever barred. The rights of KRSI
with respect to any claims arising under Section 8.13(c) above shall be limited
to recovery of actual losses, costs and expenses (including reasonable attorney
fees).
<PAGE>
(e) Indemnification by KRSI. Subject to the limitations set forth in
Section 8.13(f) below, KRSI shall indemnify and hold OSP and the OSP
Shareholders harmless at all times from and after the date of this Agreement,
against and in respect of all losses, damages, costs and expenses (including
reasonable attorney fees) which OSP or the OSP Shareholders may suffer or incur
in connection with any material breach by KRSI of any of its representations,
warranties or covenants in this Agreement.
(f) Limitation of Liability of KRSI. OSP and the OSP Shareholders shall not
assert any claim under Section 8.13(e) above unless and until such claims exceed
an aggregate of $50,000 and any claim under Section 8.13(e) above must be
asserted within one year from the Effective Time or be forever barred. The
rights of OSP and the OSP Shareholders with respect to any claims arising under
Section 8.13(e) above shall be limited to recovery of actual losses, costs and
expenses (including reasonable attorney fees).
(g) Third Party Claims. If a claim by a third party is made against any of
the indemnified parties, and if any of the indemnified parties intends to seek
indemnity with respect to such claim under this Section 8.13, such indemnified
party shall promptly notify the indemnifying party of such claim. The
indemnifying party shall have thirty (30) days after receipt of the
above-mentioned notice to undertake, conduct and control, through counsel of
such party's own choosing (subject to the consent of the indemnified party, such
consent not to be unreasonably withheld) and at such party's expense, the
settlement or defense of it, and the indemnified party shall cooperate with the
indemnifying party in connection with such efforts; provided that: (i) the
indemnifying party shall not by this Agreement permit to exist any lien,
encumbrance or other adverse charge upon any asset of any indemnified party,
(ii) the indemnifying party shall permit the indemnified party to participate in
such settlement or defense through counsel chosen by the indemnified party,
provided that the fees and expenses of such counsel shall be borne by the
indemnified party, and (iii) the indemnifying party shall agree promptly to
reimburse the indemnified party for the full amount of any loss resulting from
such claim and all related expense incurred by the indemnified party pursuant to
this Section. So long as the indemnifying party is reasonably contesting any
such claim in good faith, the indemnified party shall not pay or settle any such
claim. If the indemnifying party does not notify the indemnified party within
thirty (30) days after receipt of the indemnified party's notice of a claim of
indemnity under this Section that such party elects to undertake the defense of
such claim, the indemnified party shall have the right to contest, settle or
compromise the claim in the exercise of the indemnified party's exclusive
discretion at the expense of the indemnifying party.
ARTICLE IX - CONDITIONS TO THE MERGER
9.1 Conditions of Each Party's Obligation to Effect the Merger. The
respective obligations of OSP and KRSI to consummate the Merger are subject to
the satisfaction upon or prior to the Closing of the following conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have been
approved by the affirmative vote of the holders of a majority of shares of
outstanding KRSI Common Stock in accordance with the MBCA and the articles of
incorporation and by-laws of KRSI.
<PAGE>
(b) The Offering. The Offering shall have been completed in such a manner
that the Surviving Corporation shall have received, or shall receive
simultaneous with the Closing, gross proceeds from the Offering of at least
$6,000,000.
(c) Governmental Entity Approvals. All authorizations, consents, orders or
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed, expired or
been obtained.
(d) Registration Statements; Proxy Statement. The Registration Statements
shall have become effective under the Securities Act and shall not be the
subject of any stop order or proceedings seeking a stop order and the Proxy
Statement shall not at the Effective Time be subject to any proceedings
commenced or threatened by the SEC.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any Governmental
Entity of competent jurisdiction nor other legal restraint or prohibition
preventing the consummation of the Merger, the Offering, the Reorganization or
any other transaction contemplated by this Agreement shall be in effect.
(f) Statutes. No action shall have been taken, and no statute, rule,
regulation or order shall have been enacted, promulgated or issued or deemed
applicable to any part of the Reorganization by any Governmental Entity which
would (i) make the consummation of any part of the Reorganization illegal or
(ii) render OSP or KRSI unable to consummate any portion of the Reorganization,
except for any waiting period provisions.
9.2 Conditions of Obligation of KRSI. The obligation of KRSI to consummate
the Merger are subject to the satisfaction prior to or upon the Closing of the
following conditions, unless waived by KRSI.
(a) Representations and Warranties. The representations and warranties of
OSP and the OSP Shareholders set forth in this Agreement, without regard to any
qualification or reference to immateriality or "Material Adverse Effect", shall
be true and correct in all respects as of the Closing Date, as though made on
and as of such date (provided that those representations or warranties made as
of a particular date need only be true and correct as of such date), except for
any inaccuracies which, individually or in the aggregate, have not had, and
would not have, a Material Adverse Effect on OSP; provided, however, that there
shall be deemed not to be such a Material Adverse Effect to the extent that such
effect is the result of conditions or factors affecting the economy generally or
the industry in which OSP operates or the result of the announcement of the
Reorganization or actions taken in contemplation thereof. KRSI shall have
received a certificate signed on behalf of OSP by the chief executive officer
and the chief financial officer of OSP to such effect.
(b) Performance of Obligations of OSP. OSP shall have performed in all
material respects all obligations and covenants required to be performed by it
under this Agreement prior to or as of the Closing Date, unless waived in
writing by KRSI, and KRSI shall have received a certificate signed on behalf of
OSP by the chief executive officer and the chief financial officer of OSP to
such effect.
(c) Consents. The consents, approvals and authorizations described (or
required to be described) on Schedule 5.5 hereto shall have been obtained in
form and in substance reasonably satisfactory to KRSI, except for such consents,
approvals and authorizations with respect to which the failure to obtain would
not have a Material Adverse Effect on either KRSI or the Surviving Corporation.
(d) Fairness Opinion. KRSI shall have received from the KRSI Financial
Advisor an opinion in form and substance reasonably satisfactory to KRSI that
the Merger and the other transactions contemplated by the Reorganization and
this Agreement are fair to the shareholders of KRSI from a financial point of
view; provided, however, that the condition set forth in this Section 9.2(d)
shall be deemed satisfied if KRSI fails to use all commercially reasonable
efforts to obtain such fairness opinion.
<PAGE>
9.3 Conditions of Obligation of OSP. The obligation of OSP to effect the
Merger is subject to the satisfaction prior to or upon the Closing of the
following conditions, unless waived by OSP:
(a) Representations and Warranties. The representations and warranties of
KRSI set forth in this Agreement, without regard to any qualification or
reference to immateriality or "Material Adverse Effect," shall be true and
correct in all respects as of the Closing Date, as though made on and as of such
date (provided that those representations or warranties made as of a particular
date need only be true and correct as of such date), except for any inaccuracies
which, individually or in the aggregate, have not had, and would not have, a
Material Adverse Effect on KRSI; provided, however, that there shall be deemed
not to be such a Material Adverse Effect to the extent that such effect is the
result of conditions or factors affecting the economy generally or the industry
in which KRSI operates or the result of the announcement of the Merger or
actions taken in contemplation thereof. OSP shall have received a certificate
signed on behalf of KRSI by the chief executive officer and the chief financial
officer of KRSI to such effect.
(b) Performance of Obligations of KRSI. KRSI shall have performed in all
material respects all obligations and covenants required to be performed by them
under this Agreement prior to or as of the Closing Date, unless waived in
writing by OSP and/or the OSP Shareholders, and OSP shall have received a
certificate signed on behalf of KRSI by the chief executive officer and the
chief financial officer of KRSI to such effect.
(c) Consents. The consents, approvals and authorizations described (or
required to be described on Schedules 5.5 and 6.5 hereto) on Schedules 5.5 and
6.5 hereto shall have been obtained in form and substance reasonably
satisfactory to OSP, except for such consents, approvals and authorizations with
respect to which the failure to obtain would not have a Material Adverse Effect
on either KRSI or the Surviving Corporation.
(d) Review of KRSI Securities. OSP shall have received a letter from KRSI's
independent auditors or legal counsel indicating (i) the number of shares of
KRSI Common Stock that have been authorized for issuance by the board of
directors of KRSI as set forth in the minutes in the KRSI minute book and (ii)
the number of shares of KRSI Common Stock subject to warrants and options to
purchase them that have been authorized by the board of directors of KRSI as set
forth in the minutes in the KRSI minute book.
ARTICLE X - TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated and the Reorganization
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval of this Agreement and the Reorganization by the shareholders
of KRSI:
(a) by mutual written consent of KRSI and OSP; or
(b) by either KRSI or OSP if either (i) the Effective Time shall not have
occurred on or before August 31, 1996; provided, however, that the right to
terminate this Agreement under this Section 10.1(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Effective Time to occur on or
before such date, or (ii) there shall be any law that makes consummation of any
part of the Reorganization illegal or otherwise prohibited or if any court of
competent jurisdiction or Governmental Entity shall have issued an order,
decree, ruling or taken any other action restraining, enjoining or otherwise
prohibiting any part of the Reorganization and such order, decree, ruling or
other action shall have become final and unappealable; provided that the party
seeking to terminate this Agreement pursuant to this subsection (b)(ii) shall
have complied with its obligations under Section 8.7 above; or
<PAGE>
(c) by OSP, if (i) the Board of Directors of KRSI withdraws, modifies or
changes its recommendation of this Agreement or any part of the Reorganization
in a manner adverse to OSP or shall have resolved to do any of the foregoing or
the Board of Directors of KRSI shall have recommended to the shareholders of
KRSI any Competing Transaction or resolved to do so, (ii) KRSI receives an
unsolicited proposal that constitutes a Competing Transaction and the Board of
Directors of KRSI, within 30 calendar days after such proposal is received by
KRSI, either fails to terminate discussions with the maker of such proposal and
its agents, or determines to accept, or takes no position with respect to, such
proposal, (iii) a tender offer or exchange offer for 25% or more of the
outstanding shares of KRSI Common Stock is commenced, and the Board of Directors
of KRSI, within 10 business days after such tender offer or exchange offer is so
commenced, either fails to recommend against acceptance of such tender offer or
exchange offer by its shareholders or takes no position with respect to the
acceptance of such tender offer or exchange offer by its shareholders or (iv)
any person shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder)
shall have been formed which beneficially owns, or has the right to acquire
beneficial ownership of, 25% or more of the then outstanding shares of KRSI
Common Stock (excluding for this purpose holdings of shares by persons or groups
as currently reflected in filings with the SEC under Section 13(d)); or
(d) by KRSI, if the Board of Directors of KRSI shall have recommended or
resolved to recommend to the shareholders of KRSI a proposal for a Competing
Transaction under circumstances where a majority of such Directors reasonably
determines in good faith, that failure to accept such proposal would be a breach
of the fiduciary duty of such Directors; or
(e) by either KRSI or OSP, if the Shareholders' Meeting shall have been
held and the shareholders of KRSI shall have failed to approve the Merger or
this Agreement at such meeting (including any adjournment or postponement
thereof); or
(f) by OSP, in the event of a material breach by KRSI of any
representation, warranty, covenant or agreement contained herein which has not
been cured or is not curable by August 31, 1996; or
(g) by KRSI, in the event of a material breach by OSP or the OSP
Shareholders of any representation, warranty, covenant or agreement contained
herein which has not been cured or is not curable by August 31, 1996.
10.2 Consequences of Termination.
(a) In the event KRSI terminates this Agreement other than in compliance
with Section 10.1 above, or in the event OSP terminates this Agreement in
compliance with the provisions of Section 10.1(b)(i) above because the Effective
Time has not occurred on or before August 31, 1996 as a result of a material
breach of this Agreement by KRSI or in compliance with the provisions of Section
10.1(e) or (f) above, OSP shall be entitled to all of the funds held by the
Escrow Agent pursuant to the Escrow Agreement as liquidated damages, and in such
event, OSP and the OSP Shareholders may not pursue any other remedies at law or
equity.
(b) KRSI may pursue any remedies available at law or equity in the event
OSP terminates this Agreement other than and in compliance with Section 10.1
above, or in the event KRSI terminates this Agreement in compliance with the
provisions of Section 10.1(b)(i) above because the Effective Date has not
occurred on or before July 31, 1996 as a result of a material breach of this
Agreement by OSP or the OSP Shareholders or in compliance with the provisions of
Section 10.1(g) above.
<PAGE>
10.3 Amendment. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after the approval of the
Merger and this Agreement by the shareholders of KRSI, no amendment may be made
which would reduce the amount or change the type of consideration to be received
by the shareholders of KRSI or OSP upon consummation of the Merger. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
10.4 Waiver. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any obligation or other act of any
other party hereto, (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any agreement or condition contained herein. Any such
extension or waiver shall be valid if set forth in any instrument in writing
signed by the party or parties to be bound thereby.
ARTICLE XI - GENERAL PROVISIONS
11.1 Survival of Representations and Warranties. The representations and
warranties in this Agreement and in any instrument delivered pursuant to this
Agreement shall survive for one year following the Effective Time.
11.2 Notices. All notices, requests, claims, demands and other
communications to any party hereunder shall be in writing (including telecopy or
similar writing) and shall be deemed given if delivered personally, by
facsimile, by certified mail (postage prepaid, return receipt requested) or sent
by overnight courier (in each case, providing proof of delivery) to the parties
at the following addresses and/or facsimile numbers set forth at the beginning
of this Agreement (or such other address or facsimile number for a party as
shall be specified in like notice).
11.3 Entire Agreement. This Agreement (including the Exhibits and Schedules
hereto) and the other documents referenced herein contain the entire agreement
between the parties with respect to the subject matter hereof and supersede all
prior arrangements and understandings, both written and oral, with respect
thereto.
11.4 Severability. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
<PAGE>
11.5 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of the other parties hereto.
11.6 Parties in Interest. This Agreement shall be binding upon and insure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 8.9 above (which is intended to be for the benefit
of the persons covered by the indemnification provisions contained therein and
may be enforced by such persons).
11.7 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 United States
located in the State of California or in a California state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of California or
any California state court in the event any dispute arises out of this
Agreement, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (c)
agrees that it will not bring any action relating to this Agreement or the
transactions contemplated by this Agreement in any court other than a federal
court sitting in the State of California or a California state court.
11.8 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of the State of California, without giving effect to the
principles of conflict of laws thereof.
11.9 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
O.S.P. PUBLISHING, INC.
By
Name:
Title:
By
Name:
Title:
KELLY RUSSELL STUDIOS, INC.
By
Name:
Title:
By
Name:
Title:
Joseph C. Angard
Michael A. Malm
<PAGE>
EXHIBITS
1.1 Amended OSP Articles
1.2 Amended OSP By-laws
2.2 Articles of Merger
2.6 Directors of the Surviving Corporation
4.1 Pro Forma Stock Ownership
8.6 Press Release
8.10 1995 OSP Preliminary Financial Statements
8.12-1 Vrabeck Employment Contract
8.12-2 Angard Employment Contract
8.12-3 Malm Employment Contract
Escrow Agreement
SCHEDULES
5.2 OSP Subsidiaries
5.5 OSP Consents
5.9 OSP Related Party Transactions
5.10(b) OSP Common Stock Distributions
5.10(d) OSP Borrowings
5.11 OSP Litigation
5.12 OSP Taxes
5.13 OSP Liens
5.15 OSP Plans
5.16 OSP Violations
5.20 OSP Royalties
5.21 OSP Contracts
5.22 OSP Insurance
6.5 KRSI Consents
6.6 KRSI Options and Warrants
6.9 KRSI Related Party Transactions
6.10(d) KRSI Borrowings
6.11 KRSI Litigation
6.13 KRSI Liens
6.15 KRSI Plans
6.16 KRSI Violations
6.20 KRSI Royalties
6.21 KRSI Contracts
6.22 KRSI Insurance
7.1 OSP Permitted Actions
7.2 KRSI Permitted Actions
The Company agrees to furnish supplementally a copy of any omitted Exhibits
and Schedules to the Commission upon request.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 37,962
<SECURITIES> 0
<RECEIVABLES> 585,163
<ALLOWANCES> 70,874
<INVENTORY> 276,597
<CURRENT-ASSETS> 1,119,005
<PP&E> 421,564
<DEPRECIATION> 143,240
<TOTAL-ASSETS> 1,397,329
<CURRENT-LIABILITIES> 758,433
<BONDS> 0
0
0
<COMMON> 40,824
<OTHER-SE> 598,072
<TOTAL-LIABILITY-AND-EQUITY> 1,397,329
<SALES> 778,614
<TOTAL-REVENUES> 778,614
<CGS> 338,503
<TOTAL-COSTS> 452,738
<OTHER-EXPENSES> 708,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,024
<INCOME-PRETAX> (384,549)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (384,549)
<EPS-PRIMARY> (.09)
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