<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-26110
KUSHI MACROBIOTICS CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3768554
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
THREE STAMFORD LANDING, SUITE 210, STAMFORD, CT 06902
(Address of principal executive offices) (Zip Code)
(203) 973-2929
(Issuer's telephone number, including area code)
1177 High Ridge Road, Stamford, CT 06905
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act 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 past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of August 5, 1995
----- --------------------------------
<S> <C>
Common 2,749,997
</TABLE>
<PAGE> 2
KUSHI MACROBIOTICS CORP.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial statements:
Balance Sheets as of June 30, 1996
and December 31, 1995 3
Statements of Operations for the three and six months
ended June 30, 1996 and 1995 4
Statements of Shareholders' Equity 5
Statement of Cash Flows for the six months
ended June 30, 1996 and 1995 6
Notes to financial statements 7 - 10
Item 2. Management's Discussion and Analysis
or Plan of Operation 11 - 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a
Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
KUSHI MACROBIOTICS CORP.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,093,367 $ 2,069,501
Accounts receivable 47,086 --
Inventories 239,143 530,764
Vendor advances -- 175,884
Prepaid expenses and other current assets 13,973 57,328
Deferred expenses 39,721 214,669
----------- -----------
Total Current Assets 1,433,290 3,048,146
----------- -----------
PROPERTY AND EQUIPMENT, less accumulated
depreciation 60,197 168,631
OTHER ASSETS
Security deposits 50,040 52,682
----------- -----------
TOTAL ASSETS $ 1,543,527 $ 3,269,459
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 167,365 $ 169,111
OTHER LIABILITIES
Deferred income 32,500 37,500
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized;
Convertible preferred stock, 400,000 shares authorized;
issued and outstanding, 117,909 at June 30, 1996 and
184,451 at December 31, 1995 1,179 1,845
Common stock, $.001 par value, 15,000,000 shares authorized;
issued and outstanding 2,749,997 at June 30, 1996,
and 2,683,455 at December 31, 1995 2,750 2,684
Additional paid-in capital 6,096,994 5,796,394
Deficit accumulated during the development stage (4,757,261) (2,738,075)
----------- -----------
Total Shareholders' Equity 1,343,662 3,062,848
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,543,527 $ 3,269,459
=========== ===========
</TABLE>
3
<PAGE> 4
KUSHI MACROBIOTICS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 117,895 $ -- $ 298,469 $ --
Cost of Sales 82,885 -- 222,169 --
---------- ---------- ----------- ----------
Gross profit 35,010 -- 76,300 --
---------- ---------- ----------- ----------
Costs and Expenses
Inventory write-down 156,538 -- 178,883 --
General and administrative expenses 733,958 332,641 1,885,957 640,572
---------- ---------- ----------- ----------
890,496 332,641 2,064,840 640,572
---------- ---------- ----------- ----------
Loss from operations (855,486) (332,641) (1,988,540) (640,572)
---------- ---------- ----------- ----------
Other Income (Expense)
Loss on sale of equipment (66,297) -- (66,297) --
Interest expense, including amortization of notes -- (180,125) -- (366,679)
payable discount of $158,000 and $321,666 for
the three and six months ended June 30, 1996
Interest income 14,105 6,404 35,651 15,384
---------- ---------- ----------- ----------
Total other income and expense (52,192) (173,721) (30,646) (351,295)
---------- ---------- ----------- ----------
Net loss $ (907,678) $ (506,362) $(2,019,186) $ (991,867)
========== ========== =========== ==========
Net loss per common share $ (0.33) $ (0.18) $ (0.74) $ (0.36)
========== ========== =========== ==========
Shares outstanding 2,738,592 2,738,592 2,738,592 $2,738,592
========== ========== =========== ==========
</TABLE>
4
<PAGE> 5
KUSHI MACROBIOTICS CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Shares Common Shares Additional
----------------------------- ------------------------- Paid-in
Number Amount Number Amount Capital
---------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance - May 9, 1994 (inception) -- $ -- -- $ -- $ --
Issuance of common stock -- -- 1,762,793 1,763 2,012
Proceeds from private placement,
net of offering costs:
Allocated to common shares 144,759 145 197,540
Allocated to preferred shares 144,759 1,448 503,137 504,585
Net loss - inception to December 31, 1994 -- -- -- -- --
---------- ----------- --------- -------- ----------
Balance - December 31, 1994 144,759 1,448 1,907,552 1,908 702,689
---------- ----------- --------- -------- ----------
Proceeds of private placement,
net of costs:
Allocated to common shares 39,692 39 55,526
Allocated to preferred shares 39,692 397 139,320
Cost of common stock retired
(unaudited) -- -- (58,371) (58) (67)
Founders' common stock retired
(unaudited) -- -- (200,351) (200) (229)
Proceeds from initial public offering,
net of costs 1,100,000 1,100 4,642,371
Cost of common stock retired (105,067) (105)
Warrants issued as payment for
services rendered 256,250
Other 534
Net loss for the year ended
December 31, 1995 -- -- -- -- --
---------- ----------- --------- -------- ----------
Balance - December 31, 1995 184,451 1,845 2,683,455 2,684 5,796,394
Conversion of preferred shares
to common shares (66,542) (666) 66,542 66 600
Warrants issued to charity 225,000
Warrants issued as payment for
services rendered 75,000
Net loss for the six months ended
June 30, 1996 (2,019,186) (2,019,186)
---------- ----------- --------- -------- ----------
Balance June 30, 1996 117,909 $ 1,179 2,749,997 $ 2,750 $6,096,994
========== =========== ========= ======== ==========
<CAPTION>
Accumulated
Deficit Total
----------- -----------
<S> <C> <C>
Balance - May 9, 1994 (inception) $ -- $ --
Issuance of common stock -- 3,775
Proceeds from private placement,
net of offering costs:
Allocated to common shares 197,685
Allocated to preferred shares
Net loss - inception to December 31, 1994 (68,494) (68,494)
----------- -----------
Balance - December 31, 1994 (68,494) 637,551
----------- -----------
Proceeds of private placement,
net of costs:
Allocated to common shares 55,565
Allocated to preferred shares 139,717
Cost of common stock retired
(unaudited) -- (125)
Founders' common stock retired
(unaudited) (429)
Proceeds from initial public offering,
net of costs 4,643,471
Cost of common stock retired (105)
Warrants issued as payment for
services rendered 256,250
Other 534
Net loss for the year ended
December 31, 1995 (2,669,581) (2,669,581)
----------- -----------
Balance - Decmber 31, 1995 (2,738,075) 3,062,848
Conversion of preferred shares
to common shares 0
Warrants issued to charity 225,000
Warrants issued as payment for
services rendered 75,000
Net loss for the six months ended
June 30, 1996
----------- -----------
Balance June 30, 1996 $(4,757,261) $ 1,343,662
=========== ===========
</TABLE>
5
<PAGE> 6
KUSHI MACROBIOTICS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1996 1995
------------ ---------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,019,186) $(991,867)
----------- ---------
Adjustments to reconcile net loss to net cash used
by operating activities:
Loss on sale of equipment 66,297 --
Depreciation and amortization 194,863 6,478
Amortization of discount on notes payable -- 321,667
Contributions and consulting fees 300,000 --
Changes in assets and liabilities:
Accounts receivable (47,086) --
Vendor advance 175,884 --
Prepaid expenses and other current assets 43,355 (4,024)
Inventories 291,621 (139,775)
Accrued expenses and other current liabilities (11,746) 113,669
----------- ---------
Total Adjustments 1,013,188 298,015
----------- ---------
Net cash used by operating activities (1,005,998) (693,852)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in security deposits 2,642 --
Rent concession received -- --
Payments for property and equipment -- (15,990)
Proceeds from sale of property and equipment 27,222 --
Restricted cash and equivalents -- 350,000
----------- ---------
Net cash used by investing activities 29,864 334,010
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial issuance of common stock and warrants -- --
Proceeds from private placement -- 255,850
Preferred dividends paid -- --
Payment of notes payable -- --
Costs associated with private placement -- (5,000)
Payment of deferred registration costs -- (114,486)
Cost of stock retired -- (554)
----------- ---------
Net cash provided by financing activities -- 135,810
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (976,134) (224,032)
CASH AND CASH EQUIVALENTS - beginning 2,069,501 446,563
----------- ---------
CASH AND CASH EQUIVALENTS - end $ 1,093,367 $ 222,531
=========== =========
</TABLE>
6
<PAGE> 7
KUSHI MACROBIOTICS CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 - GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for the
interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation and which
are of a normal recurring nature have been included. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year. These
statements should be read in conjunction with the financial
statements and notes that are included in the Company's Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission on
March 29, 1996.
DEVELOPMENT STAGE ENTERPRISE
The Company was a development stage enterprise through December 31,
1995. The six months ended June 30, 1996 is the first period which it
is considered an operating company.
MERGER
On May 30, 1996, the Board of Directors approved a merger agreement
with American Phoenix Group Inc. ("APHX") which, as amended, provide
that the APHX shareholders will own 85% of the combined company and
the Company's shareholders will own 15%. The Company has formed a new
corporation, Kushi Natural Foods Corp. ("Kushi"), and will transfer
to Kushi substantially all of the assets and liabilities of the
existing Kushi Cuisine(TM)food business. EacH of the Company's
shareholders will receive three shares of Kushi for each share of the
Company's common stock held on a record date to be established prior
to the merger. The Company will also issue to each holder of a share
of the Company's common stock as of the record date one warrant to
purchase an additional share of the Company's common stock. The
warrants will be exercisable on the same terms and conditions as the
Company's currently outstanding warrants.
At the closing of the merger (and simultaneously therewith), the
Company will change its name to American Phoenix Group Inc. and its
shares will be distributed to the former stockholders of APHX and the
Company (post merger) in a tax-free distribution. Although the
Company will be the surviving entity following the merger, the
shareholders of APHX will obtain a majority of the voting rights in
the Company, and, accordingly, for financial reporting purposes, APHX
will be deemed to be the acquiring entity.
7
<PAGE> 8
NOTE 1 - GENERAL (continued)
MANAGEMENT
In December 1995, the Company entered into a Consulting Agreement
with ACG International, Inc. ("ACG") pursuant to which ACG reviewed
the Company's operations with special emphasis on identifying cost
containment and revenue enhancement opportunities. The Company hired
the Managing Partner of ACG as its President and Chief Executive
Officer. In April 1996, the new President resigned and was replaced
by the Company's Chairman.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market (net realizable
value), determined on the first-in, first-out (FIFO) basis.
Inventories at December 31, 1995 and June 30, 1996, consist of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
Finished goods $382,846 $640,560
Ingredients 6,297 109,266
Packaging, labels, etc. - 71,148
-------- --------
389,143 820,974
Valuation allowance 150,000 290,210
-------- --------
Total Inventories $239,143 $530,764
======== ========
</TABLE>
NOTE 3 - SHAREHOLDERS' EQUITY
PRIVATE PLACEMENT
In October 1994, the Company offered for sale 80 units of securities
with each unit consisting of a $10,000 promissory note, 5,000 shares
each (2,335 after reverse split) of preferred stock at $1.00 per
share and common stock at $.01 per share. The notes, which bore
interest at 10% per annum, were payable December 15, 1996 or out of
the proceeds of an initial public offering ("IPO"), whichever is
sooner. The Company set aside an amount equal to two-thirds of the
Note proceeds in an interest bearing account ("restricted funds"). In
the event the Company did not become a public company or secure
additional private financing of at least $1.5 million within ten
months from the notes' issuance, these funds would have been
distributed pro rata to the note holders in partial payment of the
Notes.
During December 1994 and January 1995, the Company sold 79 units at
an offering price of $15,050 per unit, for an aggregate of $1,185,950
before offering costs. The Company allocated $922,616 to 184,451
shares each of preferred and common stock, which management believes
approximates the fair market value of the stock at the time of
issuance. The balance of $263,616 ($3,333 per $10,000 note) was
allocated to the notes, which have a face value of $790,000.
Management believes that the discount of two-thirds was adequate to
reflect the fair value of the debt. The discount was amortized over a
ten-month period, the expected term of the notes. For the period
ended December 31, 1994 and for the nine months ended September
8
<PAGE> 9
NOTE 3 - SHAREHOLDERS' EQUITY (continued)
PRIVATE PLACEMENT (continued)
30, 1995, $20,667 and $505,999, respectively, was amortized as
interest expense. The IPO (as defined below) was completed in August
1995, accordingly, the unamortized discount at June 30, 1995, of
$184,333, was charged to interest expense during July and August
1995.
In April 1995, the Company requested that each note holder release
his portion of the money in the fund set aside for repayment of the
notes to be used to accelerate operations. At June 30, 1995,
individual note holders consented to the release of an aggregate of
$463,333. An additional $43,334 of restricted funds were released to
operations by investors in July 1995, for an aggregate of $506,667.
The funds made available were used to further develop the Company's
product line and to acquire food ingredients and packaging materials
with long purchasing lead times.
The notes payable and accrued interest thereon were subsequently paid
in full on August 21, 1995, after the Company completed an initial
public offering of common stock and warrants.
INITIAL PUBLIC OFFERING
The Company's Registration Statement for the IPO was declared
effective by the Securities and Exchange Commission on August 11,
1995. The offering of 1,100,000 shares of common stock at $5.00 per
share and 1,610,000 common stock purchase warrants, including the
Underwriter's exercise of an over-allotment option for 210,000
warrants, at $.15 per warrant, generated gross proceeds of
$5,741,500. Net proceeds from the offering were $4,863,974, after
deducting $574,150 for the Underwriter's 10% discount; $155,122 for
the Underwriter's 3% non-accountable expense allowance and
reimbursable expenses; $100,000 for the Underwriter's financial
consulting fee; and $48,254 for legal fees paid by the Company at the
closing of the IPO.
The Company granted to the Underwriter, for a period of 45 days from
August 11, 1995, the effective date of the IPO, an over-allotment
option to purchase up to 165,000 additional shares of the Company's
common stock and 210,000 warrants at the IPO price less an
Underwriter's 10% discount and 3% non-accountable expense allowance.
The Underwriter exercised the option to purchase the warrants but did
not exercise the option to purchase additional shares of common
stock. The Underwriter also received warrants to purchase 110,000
shares of common stock at an initial exercise price of $8.25 per
share and 140,000 common stock purchase warrants at an initial
exercise price of $.15 per warrant to purchase common stock at
$10.3125 per share for a period of four years commencing one year
from the date of the IPO.
Professional fees and other costs of approximately $210,000 (e.g.,
blue sky qualification fees, printing costs, etc.) incurred in
connection with the offering were charged to additional paid-in
capital upon completion of the offering.
9
<PAGE> 10
NOTE 3 - SHAREHOLDERS' EQUITY (continued)
ISSUANCE OF WARRANTS IN EXCHANGE FOR SERVICES
In 1996, the Company issued 65,00 common stock purchase warrants to
its counsel for legal services previously provided; 160,000 common
stock purchase warrants to an entity in exchange for such entity
providing consulting services to the Company; and 200,000 common
stock purchase warrants to an orphanage in honor of a member of the
Company's board of Directors. These issuances were each exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LEASE
In August 1995, the Company entered into a five-year lease for 27,000
square feet of warehouse space located in Parsippany, NJ. The lease
provides for monthly payments of approximately $10,000 during the
term of the lease. The Company occupied such space beginning in
September 1995 and moved out in April 1995. In April 1996, the
Company entered into an agreement with a subtenant to sublet the
warehouse from the Company for substantially the same terms and for
the same period as the Company's lease with the landlord. The
subtenant will pay rent directly to the landlord during the term of
the agreement. The Company remains liable for performance on the
lease if the subtenant defaults on the agreement.
LITIGATION
During March 1996, the Company terminated its Vice President of Sales
for cause. He then instituted a suit against the Company in Superior
Court in Stamford, CT claiming wrongful termination and is asking for
$1,000,000 in damages plus interest and expenses. The plaintiff is
also seeking a prejudgment attachment of $1,000,000 of the Company's
assets. A hearing has been held on the application for attachment and
briefs have been filed, but no decision has yet been rendered.
Outside counsel for the Company has advised that at this stage in the
proceedings, they cannot offer an opinion as to the probable outcome.
The Company is vigorously defending its position but a $50,000
provision for loss has been charged to operations at June 30, 1996
NOTE 5 SUBSEQUENT EVENTS
TERMINATION OF EMPLOYMENT AND CONSULTING AGREEMENTS
In July 1996, the Board of Directors approved the termination of the
existing consulting and employment contracts subject to, and upon
closing of the Company's merger with APHX. The Board approved total
cash settlements of $380,500 and the issuance of an additional
700,000 warrants.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was formed as a natural foods company marketing premium
quality breakfast cereals, pasta & sauce combinations, rice and bean medleys,
soups, condiments and snacks under the Kushi Cuisine brand name. From its
inception in May 1994 until December 31, 1995, the Company was a development
stage enterprise devoting all of its efforts and resources to developing thirty
one (31) premium quality macrobiotic food products. The activities undertaken
during the Company's development phase included market research, product concept
development and formulation, and design and implementation of marketing and
public relations programs. The Company's operations were funded during the
development stage with a private placement offering of notes and stock completed
in January 1995, and an initial public offering of common stock and common stock
purchase warrants in August 1995. The Company began selling and shipping
products in December 1995. The majority of the Company's sales have been to
distributors that in turn sell the products to retailers, and ultimately
consumers. Initial sell-in requires numerous sales calls, sampling, follow-up
sales calls, buyer deliberations, and price and delivery negotiations with
customers. The Company's disappointing financial performance reflects the time
consuming and costly process of gaining nationwide distribution for a new
product line that lacks established brand identity in the food business.
In December 1995, the Board of Directors determined that the business
prospects for the Kushi Cuisine product line were not sufficiently encouraging
to protect and grow shareholders' equity. The Board retained the services of a
consulting firm to help identify revenue enhancement and cost reduction
opportunities, and to help identify and evaluate merger and acquisition
candidates. In January 1996, the Company reduced overhead costs by eliminating
personnel and closing a warehouse and distribution center located in New Jersey.
On May 30, 1996, the Board of Directors approved a merger agreement
with American Phoenix Group Inc. ("APHX") which, as amended, provides that the
APHX shareholders will own 85% of the combined company and the Company's
shareholders will own 15%. The Company has formed a new corporation, Kushi
Natural Food Corp. ("Kushi"), and will transfer to Kushi substantially all of
the assets and liabilities of the existing Kushi Cuisine food business. All of
the common shares of Kushi will be distributed to the Company's shareholders
prior to the merger with APHX.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1996 Compared to June 30, 1995
During the six months ended June 30, 1996, the Company established
relationships with and began shipping Kushi Cuisine products to major
distributors. The Company generated net revenues of approximately $118,000 and
$300,000 for the three and six months ended June 30, 1996, respectively. The
Company had no revenues in the comparative periods in 1995. Sales to date have
principally been initial shipments to new customers and repeat orders have been
disappointing. Management may reduce the number of products offered in the
future (currently 26) based on feedback from customers. Total cost of sales were
$83,000 or 70% of revenues for the three months and $222,200 or 74% for the six
months ended June 30, 1996. Introductory allowances and price discounts of as
much as 25% of listed prices reduced net revenues and compressed gross margins
during the periods. The Company recorded an inventory valuation allowance for
slow moving items of $150,000 during the three months ended June 30, 1996.
11
<PAGE> 12
Total operating expenses of approximately $890,500 were recorded for
the three months and $2,064,800 for the six months ended June 30, 1996, compared
to $332,000 and $640,600 during the same periods in 1995, when the Company had
limited operations. Operating expenses during the current period included
non-recurring or non-operating charges totaling $360,000; including legal fees
of $70,000 related to ongoing litigation and $40,000 for the Company's planned
merger with American Phoenix Group, Inc., $65,000 of consulting fees for product
and market evaluations, $75,000 reflecting the value ascribed to 60,000 common
stock purchase warrants issued for services, and $110,000 of investment banking
fees. Excluding the aforementioned non-recurring and non-operating charges,
operating expenses during the current period were approximately $530,000,
including payroll, temporary personnel and related costs of $106,000, consulting
costs and professional fees of $60,000, advertising, promotional and other
selling costs of $55,000, distribution and warehouse storage costs of $35,000,
travel and entertainment expenses of $25,000, insurance costs of $20,000, rent
and related expense of $16,000, and inventory write-down and obsolescence
charges of $157,000.
The Company incurred no interest expense during the six months ended
June 30, 1996. During the six months ended June 30, 1995, total interest expense
was $366,700, principally due to the amortization of notes payable discount.
Total interest income generated during the six month period was $35,700 compared
to $15,400 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $1,237,000 at June 30,
1996 compared to $2,879,000 at December 31, 1995, and a working capital deficit
of ($312,000) at June 30, 1995. The increase in working capital compared to June
30, 1995 of approximately $1,549,000 was due to the infusion of cash from the
net proceeds of the initial public offering ("IPO") of the Company's common
stock and warrants. The IPO, which became effective on August 11, 1995,
generated approximately $4,863,974 of net proceeds. At June 30, 1996, the
Company had total cash and cash equivalents of $1,093,000.
Working capital at June 30, 1996, declined by $1,642,000 compared to
December 31, 1995. The decline in working capital during the current period
reflects the ongoing costs of launching the Kushi Cuisine product line and
slower than anticipated revenue growth to date. Current revenue trends have been
flat to declining as there are fewer new distribution opportunities and orders
from existing customers have been weak. Despite marked reductions in operating
costs, revenues and margins are not adequate to support the business.
Accordingly, the Board of Directors determined in December 1995, that merger and
acquisition or alliances with other companies are necessary to protect the
interest of stockholders.
On June 1, 1996, American Phoenix Group Inc. and Kushi Macrobiotics
Corp. executed a definitive agreement and plan of merger of the two companies.
After the merger of APHX and KMAC is consummated and the Kushi food business is
spun off, the food company will retain substantially all of its assets and other
resources. However, given the weak performance of the Kushi Cuisine product line
to date, the Kushi food business will endeavor to merge or seek alliances with
other natural food businesses to ensure its long term viability. The Company
currently has the cash resources necessary to complete its merger with APHX. In
addition, management believes, but can give no assurance that, cash resources
available after the merger will be adequate to fund the operations of the food
business through December 31, 1996.
12
<PAGE> 13
KUSHI MACROBIOTICS CORP.
PART II
Item 1. Legal Proceedings -
During March 1996, the Company terminated its Vice President of
Sales for cause. He then instituted a suit against the Company in
Superior Court in Stamford, CT claiming wrongful termination and is
asking for $1,000,000 in damages plus interest and expenses. The
plaintiff is also seeking a prejudgment attachment of $1,000,000 of
the Company's assets. A hearing has been held on the application for
attachment and briefs have been filed, but no decision has yet been
rendered. Outside counsel for the Company has advised that at this
stage in the proceedings, they cannot offer an opinion as to the
probable outcome. The Company is vigorously defending its position
but a $50,000 provision for loss has been charged to operations at
June 30, 1996
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6(a.) Exhibits
Item 6(b.) Reports on Form 8-K - None
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
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EXHIBIT PAGE
- ------- ----
<S> <C>
2.1 Agreement and Plan of Merger By and Among Kushi 1
Macrobiotics Corp. and American Phoenix Group Inc.
and Kushi Cuisine Corp.
</TABLE>
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KUSHI MACROBIOTICS CORP.
By: /s/ DANIEL A. FRANCE
------------------------------------------
VP, Chief Financial and Accounting Officer
Dated: August 14, 1996
15
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger By and Among Kushi
Macrobiotics Corp. and American Phoenix Group Inc.
and Kushi Cuisine Corp.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
KUSHI MACROBIOTICS CORP.
AND
AMERICAN PHOENIX GROUP, INC.
AND
KUSHI CUISINE CORPORATION
DATED: JUNE 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AGREEMENT AND PLAN OF MERGER.......................................................... 1
ARTICLE I............................................................................. 1
THE MERGER....................................................................... 1
1.1 Surviving corporation................................................. 1
1.2 Articles of Incorporation............................................. 1
1.3 By-Laws............................................................... 1
1.4 Directors............................................................. 2
1.5 Officers.............................................................. 2
1.6 Effective Time........................................................ 2
1.7 Additional Actions.................................................... 2
ARTICLE II............................................................................ 3
CONSIDERATION; CONVERSION OF SHARES.............................................. 3
2.1 Merger Consideration.................................................. 3
2.2 Conversion of Shares; Treatment of Warrants, Options, and Convertible
Securities............................................................ 3
2.3 Cancellation of Certificates.......................................... 4
2.4 No Fractional Securities.............................................. 5
2.5 Closing............................................................... 5
ARTICLE III........................................................................... 6
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO APHX.............................. 6
3.1 Corporate Existence and Power; Qualification; Subsidiaries............ 6
3.2 Corporate and Governmental Authorization; Contravention............... 6
3.3 Capitalization........................................................ 7
3.4 Financial Statements of APHX; Changes................................. 7
3.5 No Undisclosed Liabilities............................................ 9
3.6 Compliance with Laws.................................................. 10
3.7 Tax Matters........................................................... 10
3.8 Title to Properties; Absence of Liens and Encumbrances, Etc........... 11
3.9 Plant Facilities...................................................... 11
3.10 Condition of Plants, Equipment, Etc................................... 11
3.11 Insurance............................................................. 11
3.12 Agreements, Plans, Arrangements, Etc.................................. 12
3.13 Intellectual Properties............................................... 14
3.14 Permits, License, Etc................................................. 14
3.15 Litigation............................................................ 15
3.16 Accounts and Notes Receivable......................................... 15
3.17 Inventories........................................................... 15
3.18 No Interest in Competitors, Etc....................................... 15
3.19 Customers, Suppliers.................................................. 16
3.20 Books and Records..................................................... 16
3.21 Employees, Labor Relations, Etc....................................... 16
3.22 Environmental Matters................................................. 17
3.23 Employee Benefit Plans, Etc........................................... 18
3.24 SEC Filings........................................................... 22
3.25 Information........................................................... 22
3.26 Directors and Executive Officers...................................... 23
ARTICLE IV............................................................................ 23
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO KMC............................... 23
4.1 Corporate Existence and Power; Qualification; Subsidiaries............ 23
4.2 Corporate and Governmental Authorization; Contravention............... 23
</TABLE>
i
<PAGE> 3
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<CAPTION>
<S> <C>
4.3 Capitalization........................................................ 24
4.4 Financial Statements of KMC; Changes.................................. 24
4.5 No Undisclosed Liabilities............................................ 27
4.6 Compliance with Laws.................................................. 27
4.7 Tax Matters........................................................... 27
4.8 Title to Properties; Absence of Liens and Encumbrances, Etc........... 27
4.9 Plant Facilities...................................................... 28
4.10 Condition of Plants, Equipment, Etc................................... 28
4.11 Insurance............................................................. 28
4.12 Agreements, Plans, Arrangements, Etc.................................. 28
4.13 Intellectual Properties............................................... 30
4.14 Permits, License, Etc................................................. 31
4.15 Litigation............................................................ 31
4.16 Accounts and Notes Receivable......................................... 31
4.17 Inventories........................................................... 32
4.18 No Interest in Competitors, Etc....................................... 32
4.19 Customers, Suppliers.................................................. 32
4.20 Books and Records..................................................... 32
4.21 Employees, Labor Relations, Etc....................................... 32
4.22 Environmental Matters................................................. 33
4.23 Employee Benefit Plans, Etc........................................... 34
4.24 SEC Filings........................................................... 38
4.25 Information........................................................... 38
4.26 Kushi Cuisine......................................................... 39
ARTICLE V............................................................................. 39
CONDUCT OF BUSINESS OF APHX AND KMC PRIOR TO THE EFFECTIVE TIME .................. 39
5.1 Conduct of Business of APHX........................................... 39
5.2 Conduct of Business of KMC............................................ 41
5.3 KMC Spin Off.......................................................... 42
ARTICLE VI............................................................................ 43
ADDITIONAL AGREEMENTS............................................................ 43
6.1 Access to Properties and Records...................................... 43
6.2 Registration Statement................................................ 43
6.3 Stockholders, Approvals............................................... 43
6.4 Restricted Stock...................................................... 44
6.5 Reasonable Efforts; Etc............................................... 44
6.6 Material Events....................................................... 44
6.7 Tax Consequences...................................................... 44
6.8 Exclusivity........................................................... 45
6.9 Certificate of Incorporation and Directors of KMC..................... 45
6.10 Indemnification....................................................... 45
6.11 Quarterly Financial Statements........................................ 46
ARTICLE VII........................................................................... 46
CONDITIONS TO THE OBLIGATIONS OF KMC............................................. 46
7.1 Representations and Warranties True................................... 46
7.2 Performance........................................................... 46
7.3 Authorization of Merger............................................... 47
7.4 Registration Statement; Blue Sky Laws................................. 47
7.5 Restrictive Legends................................................... 47
7.6 Absence of Litigation................................................. 47
7.7 Opinion of Counsel.................................................... 48
7.8 Appraisal Rights...................................................... 48
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
7.9 Certificates of Merger................................................ 48
<S> <C>
7.10 Consents.............................................................. 48
7.11 No Material Change in Financial Statements............................ 48
7.12 Directors and Executive Officers...................................... 48
7.13 Option and Voting Trust Agreement..................................... 48
ARTICLE VIII.......................................................................... 48
CONDITIONS TO THE OBLIGATIONS OF APHX....................................... 48
8.1 Representations and Warranties True................................... 48
8.2 Performance........................................................... 49
8.3 Authorization of Merger............................................... 49
8.4 Registration Statement; Blue Sky Laws................................. 49
8.5 Absence of Litigation................................................. 49
8.6 Opinion of Counsel.................................................... 50
8.7 Certificates of Merger................................................ 50
8.8 Consents.............................................................. 50
8.9 Director Resignations................................................. 50
8.10 Inclusion on NASDAQ System............................................ 50
8.11 Hold Harmless and Indemnification Agreement........................... 50
ARTICLE IX............................................................................ 50
TERMINATION...................................................................... 50
9.1 Termination........................................................... 50
9.2 Effect of Termination................................................. 51
ARTICLE X............................................................................. 52
MISCELLANEOUS PROVISIONS......................................................... 52
10.1 Amendment.............................................................. 52
10.2 Waiver of Compliance................................................... 52
10.3 Notices................................................................ 52
10.4 Assignment............................................................. 53
10.5 No Third Party Beneficiaries........................................... 53
10.6 Expenses............................................................... 53
10.7 Public Announcements................................................... 54
10.8 Brokers and Finders.................................................... 54
10.9 Further Agreements..................................................... 54
10.10 Counterparts........................................................... 54
10.11 Entire Agreement....................................................... 54
10.12 Governing Law.......................................................... 54
10.13 Descriptive Headings................................................... 55
10.14 Specific Performance................................................... 55
</TABLE>
iii
<PAGE> 5
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<S> <C>
EXHIBITS
6.12 KMC Restated Articles of Incorporation
7.7 Form of Opinion of APHX Counsel
8.7 Form of Opinion of KMC Counsel
SCHEDULES
1.4 List of Directors of Surviving Corporation
1.5 List of Officers of Surviving Corporation
APHX Representations and Warranties/Covenants
3.1 Subsidiaries
3.2 Conflicts and Consents
3.3 Contracts Relating to Stock
3.4 Changes Since Balance Sheet Date
3.5 Undisclosed Liabilities
3.6 Compliance with Laws
3.7 Taxes
3.8 Title to Properties; Liens and Encumbrances
3.9 Plant Facilities
3.11 Insurance
3.12 Contracts
3.13 Intellectual Properties
3.14 Permits
3.15 Litigation
3.16 Accounts and Notes Receivable
3.18 Related Party Transactions, Etc.
3.21 Labor Matters
3.22 Environmental Matters
3.23 Employee Benefit Plans
3.24 SEC Filings
3.26 Directors and Executive Officers
5.1 Capital Expenditures
KMC Representations and Warranties/Covenants
4.1 Subsidiaries
4.2 Conflicts and Consents
4.4 Changes Since Balance Sheet Date
4.5 Undisclosed Liabilities
4.6 Compliance with Laws
4.7 Taxes
4.8 Title to Properties; Liens and Encumbrances
4.9 Plant Facilities
4.11 Insurance
4.12 Contracts
4.13 Intellectual Properties
4.14 Permits
4.15 Litigation
4.16 Accounts and Notes Receivable
4.18 Related Party Transactions, Etc.
4.21 Labor Matters
4.22 Environmental Matters
4.23 Employee Benefit Plans
</TABLE>
iv
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated May , 1996 by and among KUSHI
MACROBIOTICS CORP., a corporation organized under the laws of the State of
Delaware ("KMC"), AMERICAN PHOENIX GROUP, INC., a corporation organized under
the laws of the State of Nevada ("APHX") and KUSHI CUISINE CORPORATION, an
existing or to be formed Delaware corporation ("Cuisine").
WHEREAS, the respective Boards of Directors of KMC and APHX have approved
the merger of APHX with and into KMC (the "Merger"), pursuant to which KMC will
be the surviving corporation and the holders of APHX Common Stock will be
entitled to receive the consideration provided for in this Agreement, all upon
the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements set forth herein, and intending to be legally bound
hereby, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 SURVIVING CORPORATION. In accordance with the provisions of this
Agreement, the Delaware General Corporation Law (the "Delaware Act") and the
Nevada Revised Statutes (the "Nevada Act"), at the Effective Time (as that term
is hereinafter defined in Section 1.6 hereof) APHX shall be merged with and into
KMC, with KMC being the surviving corporation in the Merger (hereinafter
sometimes called the "Surviving Corporation"). At the Effective Time, the
separate existence of APHX shall cease and the Surviving Corporation shall
continue its corporate existence under the laws of the State of Delaware.
Without limiting the generality of the foregoing, from and after the Effective
Time, the Surviving Corporation shall possess all of the rights, privileges,
immunities, powers and purposes, and shall assume and be liable for all of the
liabilities, obligations and penalties, of each of KMC and APHX, and the Merger
shall have all of the effects provided for in the Delaware Act and the Nevada
Act.
1.2 ARTICLES OF INCORPORATION. At the Effective Time, the Certificate of
Incorporation of KMC as in effect at the Effective Time shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law.
1.3 BY-LAWS. At the Effective Time, the By-Laws of KMC as in effect at the
Effective Time shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law.
1.4 DIRECTORS. On and after the Effective Time, the directors of the
Surviving Corporation shall be those persons who are listed on Schedule 1.4, all
such directors to hold office until their respective successors are duly elected
and qualified in the manner provided in the Restated Articles of Incorporation
and By-laws of the Surviving Corporation, or as otherwise provided by law.
1.5 OFFICERS. On and after the Effective Time, the officers of the
Surviving Corporation shall be those persons who are listed on Schedule 1.5,
each to hold the office(s) set forth opposite their respective names on such
Schedule, all such officers to hold office until their respective successors are
duly elected and qualified in the manner provided in the Restated Certificate of
Incorporation and By-Laws of the Surviving Corporation, or as otherwise provided
by law.
1.6 EFFECTIVE TIME. As soon as practicable following the Closing (as that
term is hereinafter defined in Section 2.5 hereof), Certificates of Merger or
any similar document required by state law to effect the Merger (the
"Certificates of Merger") shall be filed with the Secretaries of State of the
States of Nevada and Delaware. The Merger shall become effective upon the filing
the last of such certificates. The time when the Merger shall become effective
is herein referred to as the "Effective Time."
1.7 ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other acts or things are necessary or
desirable to vest, perfect or confirm, of record or otherwise, in the Surviving
corporation, its right, title or interest in or to any of the rights, properties
or assets of APHX acquired or to be acquired by reason of,
1
<PAGE> 7
or as a result of, the Merger, or otherwise to carry out the purposes of this
Agreement (including, but not limited to, any applications which may be required
in order to allow the Surviving Corporation to transact business in any
jurisdiction), the Surviving Corporation and its proper officers and directors
shall be authorized to execute and deliver, in the name and on behalf of APHX,
all such deeds, bills of sale, assignment and assurances and to do, in the name
and on behalf of APHX, all such other acts and things necessary or desirable to
vest, perfect or confirm any and all right, title or interest in, to or under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out the purposes of this Agreement.
ARTICLE II
CONSIDERATION; CONVERSION OF SHARES
2.1 MERGER CONSIDERATION. Except as set forth in Section 2.2(d) hereof,
the consideration payable in the Merger to holders of shares of APHX Common
Stock, par value $.01 per share ("APHX Common Stock"), and, to the holders of
warrants, options, convertible securities and other rights to purchase APHX
Common Stock upon exercise or conversion of the same, shall consist solely of
shares of Common Stock, par value $.001 per share, of KMC ("KMC Common Stock"),
such shares of KMC Common Stock to be issuable in accordance with the terms of
this Agreement.
2.2 CONVERSION OF SHARES; TREATMENT OF WARRANTS, OPTIONS, AND CONVERTIBLE
SECURITIES. (a) Upon completion of the Merger, the holders of APHX Common Stock
shall own an aggregate of seventy percent of the total number of shares of
Common Stock of the Surviving Corporation. Accordingly, each holder of APHX
Common Stock (other than APHX Dissenting Shares, as that term is hereinafter
defined in Section 2.2(d) below) shall, upon completion of the Merger, own a
percentage of the total number of shares of Common Stock of the Surviving
Corporation equal to the product of seventy percent multiplied by his percentage
ownership of APHX Common Stock immediately prior to the merger. (Said percentage
will be referred to as the "Exchange Percentage.")
(b) (i) Each warrant to acquire shares of APHX Common Stock (a
"Warrant") that is outstanding and unexercised at the Effective Time shall,
by virtue of the merger and without any action on the part of the holder
thereof, and subject to the other terms and conditions thereof,
automatically be deemed to be exercisable for that number of shares of KMC
Common Stock the holder of such Warrant would have received in the Merger
pursuant to Section 2.2(a) had such holder exercised such Warrant in full
immediately prior to the Effective Time, and the price per share of KMC
Common Stock issuable after the Effective Time upon exercise of such
Warrant shall equal seventy percent of the exercise price of the Warrant
immediately prior to the Merger.
(ii) Each option to acquire shares of APHX Common Stock issued, or
agreed or committed to be issued, under the APHX 1987 Stock Option Plan
or otherwise (an "Option") that is outstanding and unexercised at the
Effective Time shall, by virtue of the Merger and without any action on
the part of the holders thereof, and subject to the other terms and
conditions thereof, automatically be assumed by KMC and shall be
exercisable for that number of shares of KMC Common Stock the holder of
such option would have received in the Merger pursuant to Section 2.2(a)
had such holder exercised such Option in full (assuming, for the purpose
of this calculation only, that there is no limitation on the vesting of
the right to exercise such option) immediately prior to the Effective
Time, and the price per share of KMC Common Stock issuable after the
Effective Time upon exercise of such option shall equal seventy percent
of the exercise price of the Option immediately prior to the Merger. Any
term or condition respecting the vesting of the right to exercise such
Option shall remain unaffected by the Merger; provided, however, that
any period during which the holder of such Option shall have served as
an employee or consultant, as the case may be, of APHX prior to the
Merger shall be counted toward determining the vesting of the right to
exercise such option after the Effective Time.
(iii) Each note, debenture, or other security of APHX which is
convertible into shares of APHX Common Stock (a "Convertible security")
and that is outstanding and unconverted at the
2
<PAGE> 8
Effective Time shall, by virtue of the Merger and without any action on
the part of the holder thereof, and subject to the other terms and
conditions thereof, automatically be deemed to be convertible into that
number of shares of KMC Common Stock the holder of such Convertible
Security would have received in the Merger pursuant to Section 2.2(a)
had such holder converted such Convertible Security in full immediately
prior to the Effective Time, and the price per share of KMC Common
Stock, issuable after the Effective Time upon conversion of such
Convertible Security shall equal seventy percent of the exercise price
of the Convertible Security immediately prior to the Merger.
(iv) APHX Warrants, Options and Convertible Securities are
hereinafter referred to collectively as the "APHX Derivative
securities." Except as provided in clauses (i), (ii) and (iii) above,
the terms and conditions of the APHX Derivative Securities in effect
prior to the Effective Time shall continue in effect after the Effective
Time.
(c) Each share of APHX Common Stock held in the APHX treasury as of
the Effective Time, if any, shall, by virtue of the Merger, be canceled
without payment of any consideration thereof.
(d) Notwithstanding the foregoing, any shares of APHX Common Stock
issued and outstanding immediately prior to the Effective Time which are
held by shareholders of APHX who have not voted such shares in favor of the
Merger and who have complied with all other relevant provisions of Section
78.492 of the Nevada Act (the "APHX Dissenting Shares") shall not be
converted into shares of KMC Common Stock in the manner contemplated by
Section 2.2(a) above, and the rights of holders of APHX Dissenting Shares
shall be governed by the provisions of the Nevada Act.
2.3 CANCELLATION OF CERTIFICATES. The Surviving Corporation shall
designate Continental Stock Transfer & Trust Company (the "Exchange Agent") to
act as exchange agent in effecting the exchange of certificates representing
APHX Common Stock (other than APHX Dissenting Shares) for certificates
representing the shares of KMC Common Stock into which such shares of APHX
Common Stock have been converted. The Exchange Agent shall send a letter of
transmittal to the holders of APHX Common Stock offering to exchange the
certificates representing such shares of APHX Common Stock for certificates
representing shares of KMC Common Stock. Notwithstanding the foregoing, from and
after the Effective Time, all such outstanding shares of APHX Common Stock when
so converted shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist. From and after the Effective Time, each
certificate or instrument which prior to the Effective Time represented shares
of APHX Common Stock or APHX Derivative Securities, as applicable, shall be
deemed to represent only the right to receive the certificates of KMC Common
Stock or the right to acquire shares of KMC Common Stock contemplated by Section
2.2 hereof, and the holder of each such certificate or instrument shall cease to
have any rights with respect to the shares of APHX Common Stock formerly
represented thereby, in the case of certificates formerly representing shares of
APHX Common Stock, or with respect to the shares of APHX Common Stock issuable
upon exercise or conversion thereof, in the case of instruments formerly
representing APHX Derivative Securities, except as otherwise provided by law.
2.4 NO FRACTIONAL SECURITIES. Notwithstanding anything to the contrary
contained in this Agreement, no fractional shares of KMC Common Stock shall be
issuable by KMC upon the conversion of shares of APHX Common Stock in the Merger
pursuant to Section 2.2(a) hereof or upon exercise or conversion of any APHX
Derivative Security. The number of shares of KMC Common Stock any APHX
shareholder or the holder of any APHX Derivative Security would otherwise be
entitled to receive pursuant to Section 2.2(a) or upon exercise or conversion of
such APHX Derivative Security shall be rounded to the nearest whole number of
shares so as to eliminate any fractional shares.
2.5 CLOSING. Subject to Section 9.1 hereof, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Heller, Horowitz & Feit, P.C., 292 Madison Avenue, New York, New
York 10017 at 10:00 A.M. local time, (i) as soon as practicable after the later
to occur of (x) the date of the stockholders' approval referred to in Section
6.3 hereof or (y) the day on which the last condition set forth in Articles VII
and VIII hereof shall have been fulfilled or waived, or (ii) at such other time
as KMC and APHX may mutually agree (the "Closing Date").
3
<PAGE> 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO APHX
APHX, represents and warrants to KMC as follows:
3.1 CORPORATE EXISTENCE AND POWER; QUALIFICATION; SUBSIDIARIES. APHX is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has all corporate powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted and to own or lease its properties, and is duly
qualified to do business and is in good standing in each jurisdiction in which
the conduct of its business or the ownership or leasing of its properties
requires such qualification. The copies of APHX's Articles of Incorporation and
By-laws that have been delivered to KMC are complete and correct and are in full
force and effect. APHX has no subsidiaries other than the four listed on
Schedule 3.1. APHX has not made any advances to or investments in, nor owns any
securities of, any domestic or foreign business entity, enterprise or
organization other than as set forth on Schedule 3.1.
3.2 CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The
execution, delivery and performance by APHX of this Agreement and the Merger
have been duly authorized by all necessary corporate action (other than the
approval of this Agreement and the Merger by the holders of a majority of the
outstanding shares of APHX Common Stock). This Agreement has been duly executed
and delivered by APHX. The execution and delivery of this Agreement do not and
the consummation of the transactions contemplated hereby is not prohibited by,
and will not violate or conflict with, any provision of the Articles of
Incorporation or By-laws of APHX, or, except as set forth on Schedule 3.2, any
provision of, or result in the acceleration of, result in any severance or
termination pay liability, constitute a default under, entitle any party to
accelerate (whether after the giving of notice or lapse of time or both) any
obligation under, result in the creation or imposition of any lien, charge,
pledge, security interest or other encumbrance upon any property of APHX
pursuant to any provisions of, or create any right on the part of any party to
modify, amend or terminate, any Contract (as such term is defined in Section 3.3
hereof), lien, instrument, order, Permit (as such term is defined in Section
3.14 hereof), arbitration award, judgment or decree to which APHX is a party or
by which any of them is bound. Other than the requirement to file the
Certificates of Merger with the Secretaries of State of the States of Nevada and
Delaware, as applicable, and except as set forth in Schedule 3.2, no
authorization, consent or approval of, or filing with, any domestic or foreign
public body or authority is necessary on the part of APHX for the consummation
by APHX of the transactions contemplated by this Agreement or the other
agreements referred to herein and the ownership and operation by the Surviving
Corporation of the business and properties of APHX after the Effective Time in
substantially the same manner as presently owned and operated, except where the
failure to give such notices, obtain such authorizations, consents or approvals
or make such filings would not, in the aggregate, have a material adverse effect
on the condition (financial or otherwise), business or operations of the
Surviving Corporation, or delay or prevent the consummation of the transactions
contemplated by this Agreement or prevent APHX from performing its obligations
hereunder. This Agreement is a valid, legal and binding agreement of APHX,
subject to applicable bankruptcy, insolvency, moratorium or other laws affecting
the enforcement of creditors' rights in general from time to time in effect and
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). As used herein, "Contracts"
shall mean any lease, license, mortgage, contract, sales order, purchase order
or other agreement, arrangement, understanding or commitment, whether written or
oral which is material to the business or properties of APHX or KMC, as the
context shall require.
3.3 CAPITALIZATION. (a) The shares of APHX Common Stock which are
currently outstanding have been duly authorized and are validly issued, fully
paid, nonassessable and free of preemptive rights. The authorized capital stock
of APHX consists of 50,000,000 shares of APHX Common Stock, of which 35,574,226
shares are issued and outstanding and 20,000,000 shares of Preferred Stock, none
of which are issued and outstanding.
(b) There are no subscriptions, options, warrants or other rights, calls,
agreements or commitments obligating APHX to issue, or repurchase, redeem or
otherwise acquire, capital stock or other securities of APHX, except as set
forth in Schedule 3.3.
4
<PAGE> 10
3.4 FINANCIAL STATEMENTS OF APHX; CHANGES. (a) APHX has heretofore
delivered to KMC its Form 10-KSB (the "APHX 10-KSB") for the year ended August
31, 1995 (the "APHX Balance Sheet Date") and its Forms 10-QSB for the periods
ended November 30, 1995 and February 29, 1996 (collectively, the "APHX Financial
Statements"). The APHX Financial Statements present fairly, in conformity with
generally accepted accounting principles applied on a consistent basis, except
as stated thereon, the financial position of APHX as of the APHX Balance Sheet
Date and the results of operations for the period then ended.
(b) Except as set forth in the APHX 10-KSB or in Schedule 3.4 hereto and
except as contemplated by this Agreement, since the APHX Balance Sheet Date:
(i) there has been no material adverse change in the business, assets,
financial condition or results of operations of APHX;
(ii) there has not been any direct or indirect redemption, purchase or
other acquisition by APHX of any of its capital stock, or any declaration,
setting aside or payment of any dividend or other distribution by APHX in
respect of its capital stock, and APHX has not authorized or proposed any
of the foregoing, or entered into any contract, agreement, commitment or
arrangement to do any of the foregoing, except as may be contemplated by
this Agreement and the agreements contemplated hereby or referred to
herein;
(iii) APHX has conducted its business in the ordinary course and
consistent with past practices;
(iv) there has been no damage, destruction or casualty loss (whether
or not covered by insurance) suffered by APHX materially adversely
affecting the business, assets, financial condition or results of
operations of APHX, nor has APHX been notified of any pending condemnation
proceeding concerning any of its properties;
(v) there have not been any defaults or breaches by APHX under
agreements to which it is a party or by which it is bound which, taken in
the aggregate, would have a material adverse effect upon the business,
assets, financial condition or results of operation of APHX;
(vi) APHX has not directly or indirectly, (A) issued, sold, pledged,
disposed of, or encumbered, or authorized, proposed or agreed to the
issuance, sale, pledge, disposition or encumbrance of, any shares of, or
any options, warrants or rights of any kind to acquire any shares of or any
securities convertible into or exchangeable for any of, the capital stock
of any class of APHX, or any other securities in respect of, in lieu of, or
in substitution for any such capital stock; (B) acquired (by merger,
consolidation, or acquisition of shares or assets) any corporation,
partnership or other business organization or division thereof or made any
investment either by purchase of shares or securities, contributions to
capital (other than to subsidiaries or affiliates) or property transfer;
(C) authorized any change in its capitalization or authorized, recommended
or proposed any release or relinquishment of any Contract right; or (D)
authorized any of the foregoing, or entered into or modified any contract,
agreement, commitment or arrangement to do any of the foregoing;
(vii) APHX has not incurred any obligation or liability (fixed or
contingent) with respect to its business or any of its assets, except (1)
trade or business obligations incurred in the ordinary course of business
consistent with past practice and (2) obligations and liabilities under
this Agreement or contemplated hereby;
(viii) APHX has not discharged or satisfied any mortgage, lien,
charge, claim or other encumbrance (collectively, "Encumbrance") or paid
any obligation or liability (fixed or contingent) except (1) current
obligations, obligations and liabilities included in the APHX Financial
Statements and (2) current obligations and liabilities incurred since the
APHX Balance Sheet Date in the ordinary course of business;
(ix) APHX has not mortgaged, pledged or subjected to any Encumbrance
any of its assets or properties;
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(x) APHX has not sold, transferred or leased any of its assets or
properties except for the sale of inventory, if any, in the ordinary course
of business;
(xi) APHX has not taken any action other than in the ordinary course
of business and consistent with past practice (none of which actions are
unreasonable or unusual) with respect to the grant of any severance or
termination pay (otherwise than pursuant to policies of APHX in effect on
the date hereof) or with respect to any increase of benefits payable under
its severance or termination pay policies in effect on the date hereof; and
(xii) APHX has not adopted or amended any bonus, profit sharing,
thrift, savings, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust,
plan, fund or other arrangement for the benefit or welfare of any employee
or increased in any manner the compensation or fringe benefits of any
employee or paid any benefit not required by any existing plan and
arrangement, except for salary increases for employees in the ordinary
course of business consistent with past practices.
3.5 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedules 3.4, 3.5,
3.12, 3.14, 3.15, 3.21, 3.22 and 3.23, there are no liabilities of APHX of any
kind whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, other than:
(a) liabilities disclosed or provided for in the APHX Financial
Statements; and
(b) liabilities incurred in the ordinary course of business consistent
with past practice since the APHX Balance Sheet Date.
3.6 COMPLIANCE WITH LAWS. Except as set forth in Schedule 3.6, APHX has
complied in all material respects with all applicable federal, state, local or
foreign laws, regulations or orders or any other requirements of any
governmental, regulatory or administrative agency or authority or court or other
tribunal (including, but not limited to, any laws, regulations, order or
requirement relating to securities, the environment, properties, business,
products, manufacturing processes, advertising, sales or employment practices,
terms and conditions of employment, occupational safety, health and welfare
conditions of occupied premises, environmental protection, air or water
pollution, product safety, and liability or civil rights) (each and all of the
foregoing being herein referred to as Law). APHX is not now charged with or to
its knowledge under investigation with respect to any violation of any
applicable Law where such violation could have a material adverse effect on its
business, assets, financial condition or results of operation. APHX has filed
all reports required to be filed with any governmental, regulatory or
administrative agency or authority where failure to file such report would have
a material adverse effect on its business, assets, financial condition or
results of operation.
3.7 TAX MATTERS. Except as set forth in Schedule 3.7, (a) APHX has duly
filed or will file with the appropriate government agencies all Tax (as
hereinafter defined below) returns required to be filed by it on or before the
Effective Time, (b) APHX has timely paid, or made provision on its books and
records by establishing a reserve for the payment of, all Taxes due with respect
to its operations prior to the Effective Time, including all Taxes shown as due
on all Tax returns described in clause (a) above and all estimated Tax payments
due on or before the Effective Time, (c) APHX has not executed or filed any
agreement extending the period for assessment or collection of any Taxes, nor is
APHX a party to any pending Litigation (as hereafter defined in Section 3.15
hereof) by any governmental authority for assessment or collection of any Taxes,
and no claims for assessment or collection of any Taxes have been asserted
against APHX, and (d) to the knowledge of APHX, no Tax returns of APHX are under
examination. APHX is not a "United States real property holding company" within
the meaning of Section 1445 of the Internal Revenue Code of 1986 as amended (the
"Code"). "Tax" or "Taxes" shall mean taxes of any kind payable to any federal,
state, local, or foreign taxing authority, including, without limitation, (A)
income, gross receipts, ad valorem, value added, sales, use, service, franchise,
profits, real or personal property, capital stock, license, payroll,
withholding, employment, social security, workers compensation, unemployment
compensation, utility, severance, production, excise, stamp, sales, liquor,
occupation, premium, windfall profits, transfer and gains taxes, (B) customs
duties, (C) interest, penalties, and additions to tax imposed with respect to
the above taxes, and (D) any damages, costs, expenses, fees or other liability
arising from such Tax or Taxes.
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3.8 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES, ETC. Except as
set forth in Schedule 3.8, APHX owns no real property and has good title to or a
legal, valid and enforceable right to use the other properties and assets used
in the conduct of its business (including without limitation the assets
reflected in the APHX Financial Statements except as since sold or otherwise
disposed of in the ordinary course of business), free and clear of all
Encumbrances, imperfections of or other matters affecting title, and any rights
of third parties whatsoever, except (i) the lien of taxes not yet due and
payable or being contested in good faith by appropriate proceedings, and (ii)
such imperfections of title and other Encumbrances, if any, which, individually
or in the aggregate, do not materially detract from the marketability, value, or
interfere with the present use, of the property or asset subject thereto or
otherwise impair the operations of its business (collectively, "Permitted
Encumbrances").
3.9 PLANT FACILITIES. Schedule 3.9 sets forth a correct and complete list
of all of the real properties, together with the buildings, plants,
improvements, and structures located thereon, owned or used by APHX in the
conduct of its business, indicating whether such property is owned or leased and
setting forth where such property is located.
3.10 CONDITION OF PLANTS, EQUIPMENT, ETC. The plants, buildings,
structures, equipment and other physical properties and assets owned, operated,
or leased by APHX are in good condition and repair (ordinary wear and tear which
are not such as to affect adversely the operation of APHX business excepted),
free of any structural or engineering defect, are suitable for the conduct of
APHX's business as presently conducted and as presently proposed to be
conducted, and do not require any maintenance or repairs except for routine
maintenance and repairs. All such physical properties and assets are in
conformity in all respects with all applicable Laws and other requirements
relating thereto currently in effect or scheduled to come into effect,
including, without limitation, Laws relating to environmental regulation and the
maintenance of occupational safety and health among the workforce.
3.11 INSURANCE. The business and the assets of APHX are covered by
insurance with property licensed insurance companies against casualty and other
losses customarily obtained to cover comparable businesses and assets in the
region in which such businesses and assets are located, in amounts, scope and
coverage which are reasonable in light of existing conditions. Schedule 3.11
sets forth a correct and complete list of all of the policies of insurance and
fidelity or surety bonds carried by APHX with respect to its business or any of
its assets (including prior policies to the extent that they continue to provide
coverage). APHX has not failed to give any notice or present any claim under
such insurance policies in due and timely fashion, and there are no claims by
APHX against any of such policies as to which any insurance company is denying
liability or defending under a reservation of rights clause.
3.12 AGREEMENTS, PLANS, ARRANGEMENTS, ETC. Except as set forth in Schedule
3.12 (which may refer to other specific Schedules hereto), APHX is not a party
to, nor is APHX or any of its properties and assets bound or affected by, any of
the following:
(a) a lease (whether as lessor or lessee) relating to real or personal
property;
(b) a license, sublicense, assignment or other Contract (whether as
licensor or licensee, assignor or assignee) relating to Intellectual
Property (as such term is defined in Section 3.13 hereof);
(c) an employment Contract or consulting Contract;
(d) a purchase Contract in excess of $20,000, or which is at an
excessive price in light of current market conditions or which is in excess
of the normal requirements of the business or which call for deliveries
beyond 90 days from the date hereof;
(e) a sales Contract in excess of $20,000, or which (individually or
together with any other sales Contracts) will result in any loss to APHX
and/or the Surviving Corporation upon performance thereof, or which quotes
prices which will not result in a normal profit or which call for
deliveries beyond 90 days from the date hereof;
(f) a Contract containing product warranties with respect to the
products manufactured or sold by APHX which deviate from the warranties
contained in APHX standard form sales order;
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(g) a Contract with any distributor, dealer, sales agent or
representative;
(h) a Contract with any manufacturer, supplier or customer with
respect to discounts or allowances or the return of inventory or
merchandise;
(i) a joint venture or partnership Contract;
(j) a Contract for the borrowing or lending of money or guaranteeing,
indemnifying or otherwise becoming liable for the obligations or
liabilities of another;
(k) a Contract with any bank, finance company or similar organization
which acquires from APHX consumer paper or Contracts for sale of
merchandise on credit;
(1) a Contract granting any person a security interest or other
Encumbrance on any of the assets of APHX, including, without limitation,
any factoring agreement or agreement for the assignment of inventory;
(m) a Contract for the construction or modification of any building or
structure or for the incurrence of any other capital expenditure;
(n) a Contract which restricts APHX from doing business anywhere in
the world;
(o) a Contract not entered into in the ordinary course of business;
(p) a Contract giving any party the right to renegotiate or require a
reduction in prices or the repayment of any amount previously paid;
(q) a Contract requiring the payment of royalties; or
(r) any other Contract which could have a material adverse effect on
the Surviving Corporation.
Correct and complete copies of all Contracts set forth in Schedule 3.12 or any
other Schedule hereto, including all amendments to date (or, where they are
oral, true and complete written summaries thereof), and true and complete copies
of all standard form Contracts used by APHX in the conduct of its business have
been delivered to KMC or its Representatives (as such term is defined in Section
3.24 hereof) prior to the date hereof. Each such Contract is valid, in full
force and effect and enforceable in accordance with its terms and APHX has
fulfilled, or taken all action reasonably necessary to enable it to fulfill when
due, all of their respective obligations under such Contracts. There has not
occurred any default, or any event which, with the lapse of time or the election
of any person other than APHX, or any combination thereof, will become a
default, by APHX, nor to the knowledge of APHX has there occurred any default by
others or any event which, with the lapse of time or the election of APHX, will
become a default by others under any material Contracts. Neither APHX, nor, to
the knowledge of APHX, any other party, is in arrears in respect of the
performance or satisfaction of the terms or conditions on its part to be
performed or satisfied under any of such Contracts and no waiver or indulgence
has been granted by any of the parties thereto.
3.13 INTELLECTUAL PROPERTIES. Schedule 3.13 sets forth a correct and
complete list of all patents, trademarks, trade names, service marks,
copyrights, and applications therefor (collectively, "Intellectual Properties")
used in the conduct of the business of APHX. Except as disclosed in Schedule
3.13, (a) APHX owns or possesses adequate licenses or other valid rights to use
(without the making of any payment to others or the obligation to grant rights
to others in exchange) all Intellectual Properties necessary to the conduct of
its business as presently being conducted and the consummation of the
transactions contemplated hereby will not alter or impair any of such rights;
(b) the validity of such rights and the title thereto of APHX, as applicable,
have not been questioned in any Litigation (as defined in Section 3.15 hereof)
to which it is a party, nor to the knowledge of APHX is any such Litigation
threatened; (c) the conduct of APHX business as now conducted does not infringe
or conflict with any Intellectual Properties of others; (d) there is no use of
any trademark, service mark or trade name owned by or licensed to APHX that has
heretofore been or is now being made, except by APHX or by an entity duly
licensed by it to use the same under a Contract disclosed in Schedule 3.12; and
(e) to the knowledge of APHX there is no infringement by others of any
Intellectual Properties owned by or licensed by or to APHX. All patents, patent
applications and rights to inventions
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heretofore owned or held by any employee or officer of APHX and relating to its
business in any manner have been duly effectively transferred to APHX. All
licenses and Contracts requiring the payment of royalties by APHX are referenced
and correctly described in the APHX 10-KSB.
3.14 PERMITS, LICENSE, ETC. APHX has all Permits (as hereafter defined
below) that are required in order to carry on its business as presently
conducted and is not in default of any thereof. Schedule 3.14 sets forth a
correct and complete list of all such Permits, all of which are in full force
and effect, and no suspension, cancellation or non-renewal of any of them is
threatened, nor does any basis for such suspension, cancellation or non-renewal
exist. As to any such Permit that has expired or is about to expire, APHX has
promptly applied for the renewal of same. A true and complete copy of each
Permit set forth in Schedule 3.14 has been previously delivered to KMC. As used
herein, "Permits" shall mean all licenses, permits, consent orders,
administrative orders, product approvals and registrations, authorizations,
franchises and other approvals from any domestic (federal, state or local) or
foreign governmental, public or self-regulatory body or authority the failure of
which to obtain would have a material adverse effect on the business or
properties of APHX or KMC as the content shall require.
3.15 LITIGATION. Except as set forth on Schedule 3.15, there is no claim,
action, suit, proceeding, arbitration, investigation or inquiry (each and all of
the foregoing items being herein referred to as "Litigation") pending before any
federal, state, municipal, foreign or other court or governmental,
administrative or self-regulatory body or agency, or any private arbitration
tribunal, or to the knowledge of APHX threatened, against, relating to or
affecting APHX with respect to its business or the transactions contemplated by
this Agreement; nor to the knowledge of APHX is there any basis for any such
Litigation. Neither APHX nor any officer, director or employee of APHX has been
permanently or temporarily enjoined or barred by order, judgment or decree of
any court or other tribunal or any agency or self regulatory body from engaging
in or continuing any conduct or practice in connection with its business. There
is not in existence any order, judgment or decree of any court or other tribunal
or any agency or self-regulatory body enjoining APHX from taking or requiring
APHX to take action of any kind with respect to its business or to which APHX is
subject or by which APHX is bound.
3.16 ACCOUNTS AND NOTES RECEIVABLE. Attached hereto as Schedule 3.16 is a
true, complete and correct listing of all of the receivables (including accounts
receivable, notes receivable, loans receivable and any advances) as of the APHX
Balance Sheet Date. All such receivables, net of any allowance for doubtful
accounts, have been reflected on the APHX Financial Statements, in accordance
with generally accepted accounting principles applied on a consistent basis
except as stated thereon. Except as set forth on Schedule 3.16, all accounts and
notes receivable reflected on the APHX Financial Statements or arising
thereafter and on or prior to the Effective Time arose from bona fide
transactions in the ordinary course of business.
3.17 INVENTORIES. The inventories of APHX reflected on the APHX Financial
Statements or thereafter acquired on or prior to the Effective Time consist of
items of a quality and quantity usable and salable in the ordinary course of
business and the value at which such inventories are carried are stated at the
lower of cost (on a first-in, first-out basis) or market in accordance with
generally accepted accounting principles consistently applied. The quantity of
inventories on hand at the Effective Time will be consistent with the
requirements of then outstanding sales activities of APHX.
3.18 NO INTEREST IN COMPETITORS, ETC. Schedule 3.18 hereto sets forth all
Contracts or other arrangements between APHX and any affiliate thereof for
space, facilities, personnel, management, computer, telephone or other services.
Except as set forth in Schedule 3.18, APHX does not owe any amount to, or have
any Contract with or commitment to, any of its shareholders, directors,
officers, employees or consultants (other than compensation for current services
not yet due and payable and reimbursement of expenses arising in the ordinary
course of business pursuant, in either case, to Contracts listed on Schedule
3.18), none of such persons owes any amount to APHX, and no property or assets
of any shareholders of APHX or any affiliate of any shareholders of APHX is used
by APHX.
3.19 CUSTOMERS, SUPPLIERS. Since the APHX Balance Sheet Date there has not
been any termination, cancellation or limitation of, or any modification or
change in, the business relationship of APHX with any customer or group of
customers or supplier or group of suppliers whose purchases or sales
individually or in the
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aggregate accounted for 10% or more of the gross sales or purchases of APHX, as
the case may be, for the twelve months ended on the APHX Balance Sheet Date nor
to the knowledge of APHX is any of the foregoing threatened by reason of the
consummation of the transactions contemplated hereby.
3.20 BOOKS AND RECORDS. The books of account and other financial and
corporate records of APHX are in all material respects complete and correct, are
maintained in accordance with good business practices and all Laws applicable to
APHX, and are accurately reflected in the APHX Financial Statements. The minute
books of APHX as previously made available to KMC and its counsel contain
accurate records of all meetings, and accurately reflect all other corporate
action of the shareholders and directors of APHX.
3.21 EMPLOYEES, LABOR RELATIONS, ETC. Except as set forth in Schedule
3.21, (a) APHX is not a party to any Contract or agreement with any labor
organization or other representative of APHX employees; (b) there is no unfair
labor practice charge or complaint pending or, to the best knowledge of APHX,
threatened, against APHX; (c) there is no labor strike, slowdown, work stoppage
or other material labor controversy in effect, or to the knowledge of APHX
threatened against or otherwise affecting APHX; (d) APHX, or the entities
existing prior to their acquisition by APHX, has not experienced any labor
strike, slowdown, work stoppage or other material labor controversy within the
past three years; (e) no representation question has been raised respecting any
of APHX's employees within the past three years, nor, to the best knowledge of
APHX are there any campaigns being conducted to solicit cards from APHX's
employees to authorize representation by any labor organization; (f) no
collective bargaining agreement relating to any of APHX employees is being
negotiated; (g) no action, suit, complaint, charge, arbitration, inquiry,
proceeding, or investigation by or before any court, governmental agency,
administrative agency or commission brought by or on behalf of any employee,
prospective employee, former employee, retiree, labor organization or other
representative of APHX's employees, is pending or, to the best knowledge of
APHX, threatened, against APHX; (h) APHX is not a party to, or otherwise bound
by, any consent decree with, or citation by, any government agency relating to
APHX employees or employment practices relating to APHX's employees; (i) APHX is
in compliance in all material respects with all applicable Laws and Contracts
relating to employment, employment practices, wages, hours, and terms and
conditions of employment, and has not engaged in any unfair labor practice or
discriminated on the basis of race, age, sex or otherwise in its employment
conditions or practices with respect to its employees; (j) APHX has paid in full
to all of its employees all wages, salaries, commissions, bonuses, benefits and
other compensation due and payable to such employees on or prior to the date
hereof; (k) APHX is in compliance with its obligations with respect to APHX
employees pursuant to the Worker Adjustment and Retraining Notification Act of
1988, and all other notification and bargaining obligations arising under any
collective bargaining agreement, statute or otherwise. Schedule 3.21 sets forth
the name, position, title or function and salary or wages of each employee of
APHX employed as of April 31, 1996 at an annual salary or wage (including in
each case commissions and bonuses) of $35,000 or more. Except as set forth on
Schedule 3.21, none of such employees has notified APHX of his or her intention
to resign or retire.
3.22 ENVIRONMENTAL MATTERS. (a) Schedule 3.22 lists all notices to APHX of
environmental violations or environmental claims and all reports made by APHX to
any foreign or domestic environmental agency and true and correct copies of all
such notices, claims and reports have previously been delivered to KMC.
(b) APHX currently conducts its business within the limits set forth in
each and every environmental Permit it holds, regardless of whether such Permits
are current, have expired or about to expire, and has conducted its business in
compliance with all terms and conditions of such Permits.
(c) Except as set forth in Schedule 3.22, no Permit of any foreign or
domestic environmental authority is required for, or by reason of, the Merger or
for the consummation and performance of this Agreement in any other respect.
(d) APHX has not conducted or operated or currently conducts or operates
storage areas, drum storage areas, surface impoundments, incinerators, land
fills, tanks, lagoons, ponds, waste piles, or deep well injection system for the
purpose of treatment, storage or disposal of hazardous waste as defined by the
Federal Resource conservation and Recovery Act, as amended ("RCRA"), or to which
any similar foreign Law is applicable, on any real property used or formerly
used by it.
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(e) APHX has not transported for off site disposal any hazardous waste or
substance as defined in either RCRA or the Federal Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"), or to which any similar
foreign Law is applicable, or entered into any contract or agreement, or
otherwise arranged, for the transportation, storage, or disposal of any such
hazardous substance or waste at any off site treatment, storage or disposal
facility.
(f) There has been no release or discharge by APHX of any hazardous
substance, as defined in CERCLA or in the Federal Superfund Amendment and
Reauthorizations Act of 1986 ("SARA") or to which any similar foreign Law is
applicable, or of a hazardous waste, as defined in RCRA or to which any similar
foreign Law is applicable, which would (i) constitute or have constituted a
violation of Law, or (ii) give rise to an obligation by APHX, or its assigns or
successors in interest, to effect any environmental cleanup or recommendation.
(g) No federal, state or local government or agency has asserted or created
an Encumbrance upon any or all of the real properties utilized by APHX in
conducting its business as a result of any use, spill, release, discharge or
cleanup of any hazardous substance or waste under CERCLA, SARA or RCRA or any
similar foreign Law nor has any such use, spill, release, discharge or cleanup
occurred which could result in the assertion or creation of such an Encumbrance.
3.23 EMPLOYEE BENEFIT PLANS, ETC. (a) Schedule 3.23 hereto contains a true
and complete list of each plan, Contract, program, policy or arrangement,
including, but not limited to, pension, bonus, section 401(k) plan, deferred
compensation, incentive compensation, stock purchase, supplemental retirement,
severance or termination pay, stock option, hospitalization, medical, life
insurance, dental, disability, salary continuation, vacation, supplemental
unemployment benefits, profit-sharing, or retirement plan, Contract, program,
policy or arrangement, maintained, contributed to, or required to be contributed
to, by APHX or by any of its subsidiaries or affiliates for the benefit of any
employee, whether or not any of the foregoing is funded, whether formal or
informal, whether or not subject to ERISA, and whether legally binding or not
(collectively, the "Benefit Plans"). APHX has delivered to KMC (i) true and
complete copies of all documents embodying or relating to the Benefit Plans,
including, without limitation, with respect to each Benefit Plan, all amendments
to the Benefit Plans, and any trust or other funding arrangement, including
certified financial statements which fairly present the assets and liabilities
of each of the Benefit Plans as of the date thereof (and there have been no
material changes in the assets and the liabilities since the date of such
financial statements), (ii) the most recent annual and periodic actuarial
valuations, if any, prepared for any Benefit Plan, (iii) the most recent annual
reports (series 5500 and all schedules thereto), if any, required under ERISA,
(iv) if the Benefit Plan is funded, the most recent annual and periodic
accounting of the Benefit Plan's assets, (v) the most recent determination
letter received from the Internal Revenue Service, if any, and (vi) a copy of
the most recent summary plan description together with the most recent summary
of modifications required under ERISA with respect to each such Benefit Plan,
and all employee communications relating to each such Benefit Plan.
(b) Except as specifically set forth in Schedule 3.23, (i) each of the
Benefit Plans which is an "employee pension benefit plan," within the meaning of
Section 3(2) of ERISA (each a "Pension Plan") and which is intended to meet the
requirements of Section 401(a) and, where applicable, Section 401(k) of the
Code, now meets, and since its inception has met, the requirements for
qualification under Section 401(a) and, where applicable, Section 401(k) of the
Code and its related trust is now, and since its inception has been, exempt from
taxation under Section 501(a) of the Code and nothing has occurred which would
adversely affect the qualified status of any such Pension Plan; (ii) APHX has
performed all obligations required to be performed by it under, and is not in
default under or in violation of, any and all of the Benefit Plans, and is in
compliance with, and each Benefit Plan has been operated and administered in
accordance with its provisions and in compliance with, the Laws governing each
such Benefit Plan, including, without limitation, rules and regulations
promulgated by the Department of Labor, the Pension Benefit Guaranty Corporation
and the Department of the Treasury pursuant to the provisions of ERISA and the
Code; (iii) no event has occurred and there has been no failure to act on the
part of APHX, a fiduciary of any Benefit Plan or a "plan official" (as defined
in Section 412 of ERISA) that violates Section 404 of ERISA or could subject the
Surviving Corporation, a Benefit Plan, a fiduciary or a plan official to the
imposition of any tax, penalty or other liability, whether by way of indemnity
or otherwise; (iv) there is no litigation pending, or to APHX's knowledge
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threatened (other than routine claims for benefits) against any Benefit Plan or
against the assets of any Benefit Plan; (v) there are no accrued but unpaid
contributions to any of the Benefit Plans; (vi) no reportable event (as defined
in Section 4043(e) of ERISA) for which the notice requirements have not been
waived, prohibited transaction (as defined in Section 406 of ERISA or Section
4975 of the Code), accumulated funding deficiency (as defined in section 302 of
ERISA or Section 412 or 418B of the Code) or plan termination (as defined in
Title IV of ERISA or Section 411(d) of the Code) has occurred with respect to
any of the Benefit Plans; (vii) the present value of accrued benefits (as agreed
to by KMC's actuary in writing) under any of the Benefit Plans that is covered
by Title IV of ERISA (except for any multi-employer plan as defined in ERISA
Section 3(37)) does not exceed the value of the assets of such Benefit Plans;
(viii) no filing, application or other matter with respect to any of the Benefit
Plans is pending with the Internal Revenue Service, Pension Benefit Guaranty
Corporation, Department of Labor or other governmental body; (ix) none of the
Benefit Plans has been terminated nor has the Pension Benefit Guaranty
Corporation or any other person stated its intention to or taken any action to
terminate any of the Benefit Plans and no trustee has been appointed by any
court to administer any of the Benefit Plans; and (x) in the case of any Benefit
Plan to which APHX makes contributions on behalf of employees under which
contributions are fixed pursuant to a collective bargaining agreement, the level
of contributions currently provided for in the applicable collective bargaining
agreement is sufficient to meet the funding requirements of ERISA applicable to
such plan, based on reasonable actuarial assumptions (as determined in writing
by the actuary employed by such Benefit Plan).
(c) Except as specifically set forth in Schedule 3.23, the execution and
delivery of, and performance of the transactions contemplated by, this Agreement
will not (either alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Benefit Plan or individual agreement that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, vesting or increase in benefits with respect to any employee, and
will not cause APHX and/or the Surviving Corporation to incur any multi-employer
plan or other withdrawal liability.
(d) Except as specifically set forth in Schedule 3.23, there is no, nor has
there ever been, any multi-employer plan (as defined in ERISA Section 3(37))
covering employees of APHX or a past or present withdrawal therefrom within the
meaning of Section 4201 and 4204 of ERISA.
(e) Except for multi-employer plans, APHX does not maintain any Benefit
Plan which is funded by a trust described in Section 501(c)(9) of the Code or
subject to the provisions of Section 505 of the Code.
(f) Except as specifically set forth in Schedule 3.23, no Benefit Plan
provides or is required to provide health, medical, death or survivor benefits
to any former or retired employee or beneficiary thereof, except to the extent
required under any state insurance law providing for a conversion option under a
group insurance policy or under Section 601 of ERISA.
(g) APHX has not incurred any liability (other than the payment of
premiums) to the PBGC in connection with any Benefit Plan covering any employees
of APHX, including any liability under Section 4069 of ERISA and any penalty
imposed under Section 4071 of ERISA, or ceased operations of any facility or
withdrawn from any such Benefit Plan in a manner which could subject it to
liability under Section 4063, 4064 or 4068(f) of ERISA, and there are no facts
or circumstances which might give rise to any liability of APHX to the Pension
Benefit Guaranty Corporation under Title IV of ERISA which could reasonably be
anticipated to result in any claims being made against the Surviving Corporation
by the Pension Benefit Guaranty Corporation.
(h) APHX does not maintain any Benefit Plan which is a "Group Health Plan"
(as such term is defined in Section 162(i)(2) of the Code) that has not been
administered and operated in all respects in compliance with the applicable
requirements of Section 601 of ERISA and Section 4980B of the Code and APHX is
not subject to any liability including, but not limited to, additional
contributions, fines or penalties or loss of tax deduction as a result of such
administration and operation. APHX does not maintain any Benefit Plan which is
an "Employee Welfare Benefit Plan" (as such term is defined in Section 3(1) of
ERISA) and has not provided any benefit which is a "Disqualified Benefit" (as
such term is defined in Section 4976(b) of the Code) for which an excise tax
would be imposed.
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(i) Except as specifically set forth in Schedule 3.23, full payment has
been made of all amounts which APHX is required, under applicable law or under
any Benefit Plan or any agreement relating to any Benefit Plan to which APHX is
a party, to have paid as contributions thereto as of the last day of the most
recent fiscal year of such Benefit Plan ended prior to the date hereof. APHX has
made adequate provision for reserves to meet contributions that have not been
made because they are not yet due under the terms of any Benefit Plan or related
agreements. Benefits under all Benefit Plans are as represented and have not
been increased subsequent to the date as of which documents have been provided.
(j) Except as set forth in Schedule 3.23, as of the date of this Agreement,
the aggregate current value of all accrued benefits (based upon actuarial
assumptions, if any, which have been furnished to and relied upon by KMC) under
all Benefit Plans which are subject to Title IV of ERISA and which are "Single
Employer Plans" (as such term is defined in Section 4001(a)(15) of ERISA) did
not exceed the aggregate current value of all assets of such Single Employer
Plans allocable to such vested accrued benefits, and since APHX's most recent
fiscal year end there has been (A) no adverse change in the financial condition
of any Single Employer Plan, (B) no change in the actuarial assumptions with
respect to any Single Employer Plan as a result of plan amendments, change in
applicable law or otherwise, which individually or in the aggregate, would
result in the aggregate current value of all accrued benefits to exceed the
aggregate current value of all such assets or require the provision of security
to any such Plan pursuant to Section 401(a)(29) of the Code.
(k) APHX has either adopted on a timely basis all amendments to Benefit
Plans which are required by the Tax Reform Act of 1986 so as to avoid
discrimination in participating or benefits in favor of highly compensated
employees or has complied with the requirements for obtaining "anti-cutback"
relief provided under Internal Revenue Service Notice 88-131 as modified by
Notice 89-92 by adopting appropriate amendments to such Benefit Plans.
(1) For purposes of this Section 3.23, any reference to the term "APHX"
shall be deemed to refer also to any entity which is under common control or
affiliated with APHX within the meaning of Section 4001 of ERISA and the rules
and regulations thereunder and/or Section 414 of the Code and the rules and
regulations thereunder.
3.24 SEC FILINGS. Except as set forth on Schedule 3.24, APHX has filed
with the Securities and Exchange Commission ("SEC"), and has previously
delivered to KMC true and complete copies of, all forms, reports, schedules,
statements, and other documents required to be filed by APHX under the
Securities Act or the Exchange Act. No form, report, schedule, statement or
other document filed by APHX with the SEC contained any untrue statement of a
material fact or omitted to state any material fact, at the time such document
was filed, necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, other than such facts
as were corrected in any subsequent form, report, schedule, statement or other
document filed by APHX with the SEC.
3.25 INFORMATION. None of the information supplied or to be supplied by
APHX or any of its agents, accountants, lawyers or other consultants or advisors
(each of the foregoing referred to herein as "Representative") for inclusion in
the proxy (or information statement) and registration statement on Form SB-2 or
any other appropriate form prepared in connection with the transactions
contemplated hereby or any amendment or supplement thereto has or will, at the
time that the proxy and registration statement was or any amendment is mailed,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or, in the case of any
such proxy and registration statement, necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the
meeting or consent in connection with which such proxy and registration
statement shall be mailed. None of the information and documents which have been
or may be furnished by APHX or any of its Representatives to KMC or its
Representatives in connection with the transactions contemplated hereby is or
will be materially false or misleading or contains or will contain any material
misstatement of fact or omits or will omit any material fact necessary to be
stated in order to make the statements therein not misleading. The APHX Form
10-KSB, and any amendment or supplement thereto, did not contain any material
misstatement of fact or omit any material fact necessary to be stated in order
to make the statements therein not misleading.
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3.26 DIRECTORS AND EXECUTIVE OFFICERS. There are no directors or executive
officers of APHX other than as set forth on Schedule 3.26.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO KMC
KMC represents and warrants to APHX as follows:
4.1 CORPORATE EXISTENCE AND POWER; QUALIFICATION; SUBSIDIARIES. KMC is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation. KMC has all corporate powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted and to own its properties, and is duly
qualified to do business and is in good standing in each jurisdiction in which
the conduct of its business or the ownership or leasing of its properties
requires such qualification. The copies of KMC's Restated Articles of
Incorporation and By-laws that have been delivered to APHX are complete and
correct and are in full force and effect. KMC has no subsidiaries, although as
contemplated in this Agreement it will form a subsidiary prior to the Effective
Time. KMC has not made any advances to or investments in, nor owns any
securities of, any domestic or foreign business entity, enterprise or
organization.
4.2 CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The
execution, delivery and performance by KMC of this Agreement and the Merger have
been duly authorized by all necessary corporate action (other than the approval
of this Agreement and the Merger by the holders of a majority of the outstanding
shares of KMC Common Stock). This Agreement has been duly executed and delivered
by KMC. The execution and delivery of this Agreement do not and the consummation
of the transactions contemplated hereby will not be prohibited by, or violate or
conflict with, any provision of the Restated Certificate of Incorporation or
By-laws of KMC, or the Delaware Act, or, except as set forth on Schedule 4.2,
any provision of, or result in the acceleration of, result in any severance or
termination pay liability, constitute a default under, entitle any party to
accelerate (whether after the giving of notice or lapse of time or both) any
obligation under, result in the creation or imposition of any lien, charge,
pledge, security interest or other encumbrance upon any property of KMC pursuant
to any provisions of, or create any right on the part of any party to modify,
amend or terminate, any Contract, lien, instrument, order, Permit (as such term
is defined in Section 3.14 hereof), arbitration award, judgment or decree to
which KMC is a party or by which it is bound. Other than the requirement to file
the Certificates of Merger with the Secretaries of State of the States of Nevada
and Delaware, as appropriate, and the other regulatory filings and approvals
referenced in Section 6.2 hereof, no authorization, consent or approval of, or
filing with, any domestic or foreign public body or authority is necessary on
the part of KMC for the consummation by KMC of the transactions contemplated by
this Agreement or the other agreements referred to herein and the ownership and
operation by the Surviving Corporation of the business and properties of APHX
and the NASDAQ listing and outstanding warrants of KMC after the Effective Time
in substantially the same manner as presently owned and operated, except where
the failure to give such notices, obtain such authorizations, consents or
approvals or make such filings would not, in the aggregate have a materially
adverse effect on the condition (financial or otherwise), business or operations
of the surviving corporation, or delay or prevent the consummation of the
transactions contemplated by this Agreement or prevent KMC from performing its
obligations hereunder. This Agreement is a valid, legal and binding agreement of
each of KMC, subject to applicable bankruptcy, insolvency, moratorium or other
laws affecting the enforcement of creditors' rights in general from time to time
in effect and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.3 CAPITALIZATION. (a) The shares of KMC Common Stock which are currently
outstanding have been duly authorized and are validly issued, fully paid,
nonassessable and free of preemptive rights. The authorized capital stock of KMC
consists of 15,000,000 shares of KMC Common Stock, of which 2,742,993 shares are
issued and outstanding and 5,000,000 shares of Preferred Stock, of which 124,913
shares are issued and outstanding.
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(b) There are no subscriptions, options, warrants or other rights, calls,
agreements or commitments obligating KMC to issue, or repurchase, redeem or
otherwise acquire, capital stock or other securities of KMC except as set forth
in Schedule 4.3.
(c) The shares of KMC Common Stock to be issued to the stockholders of APHX
pursuant to the Merger or upon exercise or conversion of any APHX Derivative
Security to the holder thereof, will be, upon such issuance, duly authorized and
validly issued, fully paid (assuming the exercise or conversion of such APHX
Derivative Security in accordance with its terms), nonassessable and free of
preemptive rights.
4.4 FINANCIAL STATEMENTS OF KMC; CHANGES. (a) KMC has heretofore delivered
to APHX its Form 10-KSB (the "KMC 10-KSB") for the year ended December 31, 1995,
(the "KMC Balance Sheet Date") and its Form 10-QSB for the period ended March
31, 1996 (collectively, the "KMC Financial Statements"). The KMC Financial
Statements present fairly, in conformity with generally accepted accounting
principles applied on a consistent basis, except as stated thereon, the
financial position of KMC as of the KMC Balance Sheet Date and the results of
operations for the period then ended.
(b) Except as set forth in KMC 10-KSB or in Schedule 4.4 hereto or in the
KMC Financial Statements and except as contemplated by this Agreement, since the
Balance Sheet Date:
(i) there has been no material adverse change in the business, assets,
financial condition or results of operations of KMC;
(ii) there has not been any direct or indirect redemption, purchase or
other acquisition by KMC of any of KMC's capital stock, or any declaration,
setting aside or payment of any dividend or other distribution by KMC in
respect of its capital stock, and KMC has not authorized or proposed any of
the foregoing, or entered into any contract, agreement, commitment or
arrangement to do any of the foregoing, except as may be contemplated by
this Agreement and the agreements contemplated hereby or referred to
herein;
(iii) KMC has conducted its business in the ordinary course and
consistent with past practices;
(iv) there has been no damage, destruction or casualty loss (whether
or not covered by insurance) suffered by KMC materially adversely affecting
the business, assets, financial condition or results of operations of KMC,
nor has KMC been notified of any pending condemnation proceeding concerning
any of its properties;
(v) there have not been any defaults or breaches by KMC under
agreements to which it is a party or by which it is bound which, taken in
the aggregate, would have a material adverse effect upon the business,
assets, financial condition or results of operation of KMC;
(vi) KMC has not directly or indirectly, (A) issued, sold, pledged,
disposed of, or encumbered, or authorized, proposed or agreed to the
issuance, sale, pledge, disposition or encumbrance of, any shares of, or
any options, warrants or rights of any kind to acquire any shares of or any
securities convertible into or exchangeable for any of, the capital stock
of any class of KMC or any other securities in respect of, in lieu of, or
in substitution for any such capital stock; (B) acquired (by merger,
consolidation, or acquisition of shares or assets) any corporation,
partnership or other business organization or division thereof or made any
investment either by purchase of shares or securities, contributions to
capital (other than to subsidiaries or affiliates) or property transfer;
(C) authorized any change in its capitalization or authorized, recommended
or proposed any release or relinquishment of any Contract right; or (D)
authorized any of the foregoing, or entered into or modified any contract,
agreement, commitment or arrangement to do any of the foregoing;
(vii) KMC has not incurred any obligation or liability (fixed or
contingent) with respect to its business or any of its assets, except (1)
trade or business obligations incurred in the ordinary course of business
consistent with past practice and (2) obligations and liabilities under
this Agreement or contemplated hereby;
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(viii) KMC has not discharged or satisfied any Encumbrance or paid any
obligation or liability (fixed or contingent) except (1) current
obligations, obligations and liabilities included in the KMC Financial
Statements and (2) current obligations and liabilities incurred since the
Balance Sheet Date in the ordinary course of business;
(ix) KMC has not mortgaged, pledged or subjected to any Encumbrance
any of the assets or properties of KMC;
(x) KMC has not sold, transferred or leased any of the assets or
properties of KMC, except for the sale of inventory in the ordinary course
of business;
(xi) KMC has not taken any action other than in the ordinary course of
business and consistent with past practice (none of which actions is
unreasonable or unusual) with respect to the grant of any severance or
termination pay (otherwise than pursuant to policies of KMC in effect on
the date hereof) or with respect to any increase of benefits payable under
its severance or termination pay policies in effect on the date hereof; and
(xii) KMC has not adopted or amended any bonus, profit sharing,
thrift, savings, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust,
plan, fund or other arrangement for the benefit or welfare of any employee
or increased in any manner the compensation or fringe benefits of any
employee or paid any benefit not required by any existing plan and
arrangement, except for salary increases for employees in the ordinary
course of business consistent with past practices.
4.5 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedules 4.4, 4.5,
4.12, 4.14, 4.15, 4.21, 4.22 and 4.23, there are no liabilities of KMC of any
kind whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, other than:
(a) liabilities disclosed or provided for in the KMC Financial
Statements; and
(b) liabilities incurred in the ordinary course of business consistent
with past practice since the Balance Sheet Date.
4.6 COMPLIANCE WITH LAWS. Except as set forth in Schedule 4.6, KMC has
complied in all material respects with all applicable Laws. KMC is not now
charged with or to its knowledge under investigation with respect to any
violation of any applicable Law where such violation could have a material
adverse effect on the business, assets, financial condition or results of
operation of KMC. KMC has filed all reports required to be filed with any
governmental, regulatory or administrative agency or authority where failure to
file such report would have a material adverse effect on the business, assets,
financial condition or results of operation of KMC.
4.7 TAX MATTERS. Except as set forth in Schedule 4.7, (a) KMC has duly
filed or will file with the appropriate government agencies all Tax returns
required to be filed by it on or before the Effective Time, (b) KMC has timely
paid, or made provision on its books and records by establishing a reserve for
the payment of, all Taxes due with respect to its operations prior to the
Effective Time, including all Taxes shown as due on all Tax returns described in
clause (a) above and all estimated Tax payments due on or before the Effective
Time, (c) KMC has not executed or filed any agreement extending the period for
assessment or collection of any Taxes, nor is KMC a party to any pending
Litigation by any governmental authority for assessment or collection of any
Taxes, and no claims for assessment or collection of any Taxes have been
asserted against KMC, and (d) to the knowledge of KMC, no Tax returns of KMC are
under examination. KMC is not a "United States real property holding company"
within the meaning of Section 1445 of the Code.
4.8 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES, ETC. Except as
set forth in Schedule 4.8, KMC owns no real property and has good title to or a
legal, valid and enforceable right to use the other properties and assets used
in the conduct of the business of KMC (including without limitation the assets
reflected in its balance sheet as at December 31, 1995 except as since sold or
otherwise disposed of in the ordinary course of business), free and clear of all
Encumbrances, imperfections of or other matters affecting title, and any rights
of third parties whatsoever, except Permitted Encumbrances.
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4.9 PLANT FACILITIES. Schedule 4.9 sets forth a correct and complete list
of all of the real properties, together with the buildings, plants,
improvements, and structures located thereon, owned or used by KMC in the
conduct of its business, indicating whether such property is owned or leased and
setting forth where such property is located.
4.10 CONDITION OF PLANTS, EQUIPMENT, ETC. The plants, buildings,
structures, equipment and other physical properties and assets owned, operated,
or leased by KMC are in good condition and repair (ordinary wear and tear which
are not such as to affect adversely the operation of KMC's business excepted),
free of any structural or engineering defect, are suitable for the conduct of
KMC's business as presently conducted and as presently proposed to be conducted,
and do not require any maintenance or repairs except for routine maintenance and
repairs. All such physical properties and assets are in conformity in all
respects with all applicable Laws and other requirements relating thereto
currently in effect or scheduled to come into effect, including, without
limitation, Laws relating to environmental regulation and the maintenance of
occupational safety and health among the workforce.
4.11 INSURANCE. The business and the assets of KMC are covered by
insurance with licensed insurance companies against casualty and other losses
customarily obtained to cover comparable businesses and assets in the region in
which such businesses and assets are located, in amounts, scope and coverage
which are reasonable in light of existing conditions. Schedule 4.11 sets forth a
correct and complete list of all of the policies of insurance and fidelity or
surety bonds carried by KMC with respect to KMC's business or any of its assets
(including prior policies to the extent that they continue to provide coverage).
KMC has not failed to give any notice or present any claim under such insurance
policies in due and timely fashion, and there are no claims by KMC against any
of such policies as to which any insurance company is denying liability or
defending under a reservation of rights clause.
4.12 AGREEMENTS, PLANS, ARRANGEMENTS, ETC. Except as set forth in Schedule
4.12 (which may refer to other specific Schedules hereto), KMC is not a party
to, nor is KMC or any of its properties and assets bound or affected by, any of
the following:
(a) a lease (whether as lessor or lessee) relating to real or personal
property;
(b) a license, sublicense, assignment or other Contract (whether as
licensor or licensee, assignor or assignee) relating to Intellectual
Property;
(c) an employment Contract or consulting Contract;
(d) a purchase Contract in excess of $20,000, or which is at an
excessive price in light of current market conditions or which is in excess
of the normal requirements of the business or which call for deliveries
beyond 90 days from the date hereof;
(e) a sales Contract in excess of $20,000, or which (individually or
together with any other sales Contracts) will result in any loss to KMC
and/or the Surviving Corporation upon performance thereof, or which quotes
prices which will not result in a normal profit or which call for
deliveries beyond 90 days from the date hereof;
(f) a Contract containing product warranties with respect to the
products manufactured or sold by KMC which deviate from the warranties
contained in KMC's standard form sales order;
(g) a Contract with any distributor, dealer, sales agent or
representative;
(h) a Contract with any manufacturer, supplier or customer with
respect to discounts or allowances or the return of inventory or
merchandise;
(i) a joint venture or partnership Contract;
(j) a Contract for the borrowing or lending of money or guaranteeing,
indemnifying or otherwise becoming liable for the obligations or
liabilities of another;
(k) a Contract with any bank, finance company or similar organization
which acquires from KMC consumer paper or Contracts for sale of merchandise
on credit;
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(1) a Contract granting any person a security interest or other
Encumbrance on any of the assets of KMC, including, without limitation, any
factoring agreement or agreement for the assignment of inventory;
(m) a Contract for the construction or modification of any building or
structure or for the incurrence of any other capital expenditure;
(n) a Contract which restricts KMC from doing business anywhere in the
world;
(o) a Contract not entered into in the ordinary course of business;
(p) a Contract giving any party the right to renegotiate or require a
reduction in prices or the repayment of any amount previously paid;
(q) a Contract requiring the payment of royalties; or
(r) any other Contract which could have a material adverse effect on
the Surviving Corporation.
Correct and complete copies of all Contracts set forth in Schedule 4.12 or any
other Schedule hereto, including all amendments to date (or, where they are
oral, true and complete written summaries thereof), and true and complete copies
of all standard form Contracts used by KMC in the conduct of its business have
been delivered to APHX or its Representatives prior to the date hereof. Each
such Contract is valid, in full force and effect and enforceable in accordance
with its terms and KMC has fulfilled, or taken all action reasonably necessary
to enable it to fulfill when due, all of its obligations under such Contracts.
Except as set forth in Schedule 4.12, there has not occurred any default, or any
event which, with the lapse of time or the election of any person other than
KMC, or any combination thereof, will become a default, by KMC, nor to the
knowledge of KMC has there occurred any default by others or any event which,
with the lapse of time or the election of KMC, will become a default by others
under any of such Contracts. Neither KMC nor to KMC's knowledge any other party
is in arrears in respect of the performance or satisfaction of the terms or
conditions on its part to be performed or satisfied under any of such Contracts
and no waiver or indulgence has been granted by any of the parties thereto.
4.13 INTELLECTUAL PROPERTIES. Schedule 4.13 sets forth a correct and
complete list of all Intellectual Properties used or presently proposed to be
used in the conduct of the business of KMC. Except as disclosed in Schedule
4.13, (a) KMC owns or possesses adequate licenses or other valid rights to use
(without the making of any payment to others or the obligation to grant rights
to others in exchange) all Intellectual Properties necessary to the conduct of
its business as presently being conducted and the business of KMC as presently
being conducted and the consummation of the transactions contemplated hereby
will not alter or impair any of such rights; (b) the validity of such rights and
the title thereto of KMC have not been questioned in any Litigation (as defined
in Section 3.15 hereof) to which KMC is a party, nor to the knowledge of KMC is
any such Litigation threatened; (c) to KMC's knowledge, the conduct of KMC's
business as now conducted does not infringe or conflict with any Intellectual
Properties of others; (d) there is no use of any trademark, service mark or
trade name owned by or licensed to KMC that has heretofore been or is now being
made, except by KMC or by an entity duly licensed by it to use the same under a
Contract disclosed in Schedule 4.12; and (e) to the knowledge of KMC there is no
infringement by others of any Intellectual Properties owned by or licensed by or
to KMC. All licenses and Contracts requiring the payment of royalties by KMC are
referenced and correctly described in the KMC 10-KSB.
4.14 PERMITS, LICENSE, ETC. KMC has all Permits that are required in order
to carry on its business as presently conducted and is not in default of any
thereof. Schedule 4.14 sets forth a correct and complete list of all such
Permits, all of which are in full force and effect, and no suspension,
cancellation or non-renewal of any of them is threatened, nor does any basis for
such suspension, cancellation or non-renewal exist. As to any such Permit that
has expired or is about to expire, KMC has promptly applied for the renewal of
same. A true and complete copy of each Permit set forth in Schedule 4.14 has
been previously delivered to APHX.
4.15 LITIGATION. Except as set forth on Schedule 4.15, there is no
Litigation pending before any federal, state, municipal, foreign or other court
or governmental, administrative or self-regulatory body or agency, or any
private arbitration tribunal, or to the knowledge of KMC threatened, against,
relating to or affecting KMC
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with respect to its business or the transactions contemplated by this Agreement;
nor to the knowledge of KMC is there any basis for any such Litigation. Neither
KMC nor any officer, director or employee of KMC has been permanently or
temporarily enjoined or barred by order, judgment or decree of any court or
other tribunal or any agency or self-regulatory body from engaging in or
continuing any conduct or practice in connection with KMC's business. There is
not in existence any order, judgment or decree of any court or other tribunal or
any agency or self-regulatory body enjoining KMC from taking or requiring KMC to
take action of any kind with respect to KMC's business or to which KMC is
subject or by which it is bound.
4.16 ACCOUNTS AND NOTES RECEIVABLE. Attached hereto as Schedule 4.16 is a
true, complete and correct listing of all of the receivables (including accounts
receivable, notes receivable, loans receivable and any advances) of KMC as of
the KMC Balance Sheet Date showing the dates upon which each such receivable
arose. All such receivables, net of any allowance for doubtful accounts, have
been reflected on the KMC Financial Statements in accordance with generally
accepted accounting principles applied on a consistent basis, except as stated
thereon. All accounts and notes receivable reflected on the KMC Financial
Statements or arising thereafter and on or prior to the Effective Time arose
from bona fide transactions in the ordinary course of business.
4.17 INVENTORIES. The inventories of KMC reflected on the KMC Financial
Statements or thereafter acquired on or prior to the Effective Time consist of
items of a quality and quantity usable and salable in the ordinary course of
business and the value at which such inventories are carried are stated at the
lower of cost (on a first-in, first-out basis) or market in accordance with
generally accepted accounting principles consistently applied. The quantity of
inventories on hand at the Effective Time will be consistent with the
requirements of then outstanding sales activities of KMC.
4.18 NO INTEREST IN COMPETITORS, ETC. Schedule 4.18 hereto sets forth all
Contracts or other arrangements between any affiliate of KMC and KMC for space,
facilities, personnel, management, computer, telephone or other services. Except
as set forth in the KMC 10-KSB or Schedule 4.18, KMC does not owe any amount to,
or have any Contract with or commitment to, any of its shareholders, directors,
officers, employees or consultants (other than compensation for current services
not yet due and payable and reimbursement of expenses arising in the ordinary
course of business pursuant, in either case, to Contracts listed on Schedule
4.18), none of such persons owes any amount to KMC, and no part of the property
or assets of any shareholder of KMC or any affiliate of any shareholder of KMC
is used by KMC.
4.19 CUSTOMERS, SUPPLIERS. Since the KMC Balance Sheet Date there has not
been any termination, cancellation or limitation of, or any modification or
change in, the business relationship of KMC with any customer or group of
customers or supplier or group of suppliers whose purchases or sales
individually or in the aggregate accounted for 10% or more of the gross sales or
purchases of KMC, as the case may be, for the twelve months ended on the Balance
Sheet Date nor to the knowledge of KMC is any of the foregoing threatened by
reason of the consummation of the transactions contemplated hereby.
4.20 BOOKS AND RECORDS. The books of account and other financial and
corporate records of KMC are in all material respects complete and correct, are
maintained in accordance with good business practices and all Laws applicable to
KMC, and are accurately reflected in the KMC Financial Statements. The minute
books of KMC as previously made available to APHX and its counsel contain
accurate records of all meetings, and accurately reflect all other corporate
action of the stockholders and directors of KMC.
4.21 EMPLOYEES, LABOR RELATIONS, ETC. Except as set forth in Schedule
4.21, (a) KMC is not a party to any contract or agreement with any labor
organization or other representative of KMC's employees; (b) there is no unfair
labor practice charge or complaint pending or, to the best knowledge of KMC,
threatened, against KMC; (c) there is no labor strike, slowdown, work stoppage
or other material labor controversy in effect, or to the knowledge of KMC
threatened against or otherwise affecting KMC; (d) KMC has not experienced any
labor strike, slowdown, work stoppage or other material labor controversy during
its existence; (e) no representation question has been raised respecting any of
KMC's employees during its existence, nor, to the best knowledge of KMC are
there any campaigns being conducted to solicit cards from KMC's employees to
authorize representation by any labor organization; (f) no collective bargaining
agreement relating to any of KMC's employees is being negotiated; (g) no action,
suit, complaint, charge, arbitration, inquiry, proceeding,
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or investigation by or before any court, governmental agency, administrative
agency or commission brought by or on behalf of any employee, prospective
employee, former employee, retiree, labor organization or other representative
of KMC's employees, is pending or, to the best knowledge of KMC, threatened,
against KMC; (h) KMC is not a party to, or otherwise bound by, any consent
decree with, or citation by, any government agency relating to KMC's employees
or employment practices relating to KMC's employees; (i) KMC is in compliance in
all material respects with all applicable Laws and Contracts relating to
employment, employment practices, wages, hours, and terms and conditions of
employment, and has not engaged in any unfair labor practice or discriminated on
the basis of race, age, sex or otherwise in its employment conditions or
practices with respect to its employees; (j) KMC has paid in full to all of
KMC's employees all wages, salaries, commissions, bonuses, benefits and other
compensation due and payable to such employees on or prior to the date hereof;
(k) KMC is in compliance with its obligations with respect to KMC's employees
pursuant to the Worker Adjustment and Retraining Notification Act of 1988, and
all other notification and bargaining obligations arising under any collective
bargaining agreement, statute or otherwise. Schedule 4.21 sets forth the name,
position, title or function and salary or wages of each employee of KMC employed
as of April 31, 1996 at an annual salary or wage (including in each case
commissions and bonuses) of $35,000 or more. Except as set forth on Schedule
4.21, none of such employees has notified KMC of his or her intention to resign
or retire.
4.22 ENVIRONMENTAL MATTERS. (a) Schedule 4.22 lists all notices to KMC of
environmental violations or environmental claims and all reports made by KMC to
any foreign or domestic environmental agency and true and correct copies of all
such notices, claims and reports have previously been delivered to KMC.
(b) KMC currently conducts its business within the limits set forth in each
and every environmental Permit it holds, regardless of whether such Permits are
current, have expired or about to expire, and has conducted its business in
compliance with all terms and conditions of such Permits.
(c) Except as set forth in Schedule 4.22, no Permit of any foreign or
domestic environmental authority is required for, or by reason of, the Merger or
for the consummation and performance of this Agreement in any other respect.
(d) KMC has not conducted or operated and currently does not conduct or
operate storage areas, drum storage areas, surface impoundments, incinerators,
land fills, tanks, lagoons, ponds, waste piles, or deep well injection system
for the purpose of treatment, storage or disposal of hazardous waste as defined
by RCRA, on any real property used or formerly used by it.
(e) KMC has not transported for off site disposal any hazardous waste or
substance as defined in either RCRA or CERCLA, or entered into any contract or
agreement, or otherwise arranged, for the transportation, storage, or disposal
of any such hazardous substance or waste at any offsite treatment, storage or
disposal of any such hazardous substance or waste at any off site treatment,
storage or disposal facility.
(f) There has been no release or discharge by KMC of any hazardous
substance, as the term is defined in CERCLA or in SARA or of a hazardous waste,
as the term is defined in RCRA, which would (i) constitute or have constituted a
violation of Law, or (ii) give rise to an obligation by KMC, its assigns or its
successors in interest, to effect any environmental cleanup or remediation.
(g) No federal, state or local government or agency has asserted or created
an Encumbrance upon any or all of the real properties utilized by KMC in
conducting its business as a result of any use, spill, release, discharge or
cleanup of any hazardous substance or waste, as those terms are defined in
CERCLA, SARA or RCRA nor has any such use, spill, release, discharge or cleanup
occurred which could result in the assertion or creation of such an Encumbrance.
4.23 EMPLOYEE BENEFIT PLANS, ETC. (a) Schedule 4.23 hereto contains a true
and complete list of each plan, Contract, program, policy or arrangement,
including, but not limited to, pension, bonus, section 401(k) plan, deferred
compensation, incentive compensation, stock purchase, supplemental retirement,
severance or termination pay, stock option, hospitalization, medical, life
insurance, dental, disability, salary continuation, vacation, supplemental
unemployment benefits, profit-sharing, or retirement plan, Contract, program,
policy or arrangement, maintained, contributed to, or required to be contributed
to, by KMC or by any of its
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subsidiaries or affiliates for the benefit of any employee, whether or not any
of the foregoing is funded, whether formal or informal, whether or not subject
to ERISA, and whether legally binding or not (collectively, the "Benefit
Plans"). KMC has delivered to APHX (i) true and complete copies of all documents
embodying or relating to the Benefit Plans, including, without limitation, with
respect to each Benefit Plan, all amendments to the Benefit Plans, and any trust
or other funding arrangement, including certified financial statements which
fairly present the assets and liabilities of each of the Benefit Plans as of the
date thereof (and there have been no material changes in the assets and the
liabilities since the date of such financial statements), (ii) the most recent
annual and periodic actuarial valuations, if any, prepared for any Benefit Plan,
(iii) the most recent annual reports (series 5500 and all schedules thereto), if
any, required under ERISA, (iv) if the Benefit Plan is funded, the most recent
annual and periodic accounting of the Benefit Plan's assets, (v) the most recent
determination letter received from the Internal Revenue Service, if any, and
(vi) a copy of the most recent summary plan description together with the most
recent summary of modifications required under ERISA with respect to each such
Benefit Plan, and all employee communications relating to each such Benefit
Plan.
(b) Except as specifically set forth in Schedule 4.23, (i) each of the
Benefit Plans which is an "employee pension benefit plan," within the meaning of
Section 3(2) of ERISA (each a "Pension Plan") and which is intended to meet the
requirements of Section 401(a) and, where applicable, Section 401(k) of the
Code, now meets, and since its inception has met, the requirements for
qualification under Section 401(a) and, where applicable, Section 401(k) of the
Code and its related trust is now, and since its inception has been, exempt from
taxation under Section 501(a) of the Code and nothing has occurred which would
adversely affect the qualified status of any such Pension Plan; (ii) KMC has
performed all obligations required to be performed by it under, and is not in
default under or in violation of, any and all of the Benefit Plans, and is in
compliance with, and each Benefit Plan has been operated and administered in
accordance with its provisions and in compliance with, the Laws governing each
such Benefit Plan, including, without limitation, rules and regulations
promulgated by the Department of Labor, the Pension Benefit Guaranty Corporation
and the Department of the Treasury pursuant to the provisions of ERISA and the
Code; (iii) no event has occurred and there has been no failure to act on the
part of KMC, a fiduciary of any Benefit Plan or a "plan official" (as defined in
Section 412 of ERISA) that violates Section 404 of ERISA or could subject the
Surviving Corporation, a Benefit Plan, a fiduciary or a plan official to the
imposition of any tax, penalty or other liability, whether by way of indemnity
or otherwise; (iv) there is no litigation pending, or to KMC's knowledge
threatened (other than routine claims for benefits) against any Benefit Plan or
against the assets of any Benefit Plan; (v) there are no accrued but unpaid
contributions to any of the Benefit Plans; (vi) no reportable event (as defined
in Section 4043(e) of ERISA) for which the notice requirements have not been
waived, prohibited transaction (as defined in Section 406 of ERISA or Section
4975 of the Code), accumulated funding deficiency (as defined in section 302 of
ERISA or Section 412 or 418B of the Code) or plan termination (as defined in
Title IV of ERISA or Section 411(d) of the Code) has occurred with respect to
any of the Benefit Plans; (vii) the present value of accrued benefits (as agreed
to by APHX's actuary in writing) under any of the Benefit Plans that is covered
by Title IV of ERISA (except for any multi-employer plan as defined in ERISA
Section 3(37)) does not exceed the value of the assets of such Benefit Plans;
(viii) no filing, application or other matter with respect to any of the Benefit
Plans is pending with the Internal Revenue Service, Pension Benefit Guaranty
Corporation, Department of Labor or other governmental body; (ix) none of the
Benefit Plans has been terminated nor has the Pension Benefit Guaranty
Corporation or any other person stated its intention to or taken any action to
terminate any of the Benefit Plans and no trustee has been appointed by any
court to administer any of the Benefit Plans; and (x) in the case of any Benefit
Plan to which KMC makes contributions on behalf of employees under which
contributions are fixed pursuant to a collective bargaining agreement, the level
of contributions currently provided for in the applicable collective bargaining
agreement is sufficient to meet the funding requirements of ERISA applicable to
such plan, based on reasonable actuarial assumptions (as determined in writing
by the actuary employed by such Benefit Plan).
(c) Except as specifically set forth in Schedule 4.23, the execution and
delivery of, and performance of the transactions contemplated by, this Agreement
will not (either alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Benefit Plan or individual agreement that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, vesting or increase in
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benefits with respect to any employee, and will not cause KMC and/or the
Surviving Corporation to incur any multi-employer plan or other withdrawal
liability.
(d) Except as specifically set forth in Schedule 4.23, there is no, nor has
there ever been, any multi-employer plan (as defined in ERISA Section 3(37))
covering employees of KMC or a past or present withdrawal therefrom within the
meaning of Section 4201 and 4204 of ERISA.
(e) Except for multi-employer plans, KMC does not maintain any Benefit Plan
which is funded by a trust described in Section 501(c)(9) of the Code or subject
to the provisions of Section 505 of the Code.
(f) Except as specifically set forth in Schedule 4.23, no Benefit Plan
provides or is required to provide health, medical, death or survivor benefits
to any former or retired employee or beneficiary thereof, except to the extent
required under any state insurance law providing for a conversion option under a
group insurance policy or under Section 601 of ERISA.
(g) KMC has not incurred any liability (other than the payment of premiums)
to the PBGC in connection with any Benefit Plan covering any employees of KMC,
including any liability under Section 4069 of ERISA and any penalty imposed
under Section 4071 of ERISA, or ceased operations of any facility or withdrawn
from any such Benefit Plan in a manner which could subject it to liability under
Section 4063, 4064 or 4068(f) of ERISA, and there are no facts or circumstances
which might give rise to any liability of KMC to the Pension Benefit Guaranty
Corporation under Title IV of ERISA which could reasonably be anticipated to
result in any claims being made against the Surviving Corporation by the Pension
Benefit Guaranty Corporation.
(h) KMC does not maintain any Benefit Plan which is a "Group Health Plan"
(as such term is defined in Section 162(i)(2) of the Code) that has not been
administered and operated in all respects in compliance with the applicable
requirements of Section 601 of ERISA and Section 4980B of the Code and KMC is
not subject to any liability including, but not limited to, additional
contributions, fines or penalties or loss of tax deduction as a result of such
administration and operation. KMC does not maintain any Benefit Plan which is an
"Employee Welfare Benefit Plan" (as such term is defined in Section 3(1) of
ERISA) and has not provided any benefit which is a "Disqualified Benefit" (as
such term is defined in Section 4976(b) of the Code) for which an excise tax
would be imposed.
(i) Except as specifically set forth in Schedule 4.23, full payment has
been made of all amounts which KMC is required, under applicable law or under
any Benefit Plan or any agreement relating to any Benefit Plan to which KMC is a
party, to have paid as contributions thereto as of the last day of the most
recent fiscal year of such Benefit Plan ended prior to the date hereof. KMC has
made adequate provision for reserves to meet contributions that have not been
made because they are not yet due under the terms of any Benefit Plan or related
agreements. Benefits under all Benefit Plans are as represented and have not
been increased subsequent to the date as of which documents have been provided.
(j) Except as set forth in Schedule 4.23, as of the date of this Agreement,
the aggregate current value of all accrued benefits (based upon actuarial
assumptions, if any, which have been furnished to and relied upon by APHX) under
all Benefit Plans which are subject to Title IV of ERISA and which are "Single
Employer Plans" (as such term is defined in Section 4001(a)(15) of ERISA) did
not exceed the aggregate current value of all assets of such Single Employer
Plans allocable to such vested accrued benefits, and since KMC's most recent
fiscal year end there has been (A) no adverse change in the financial condition
of any Single Employer Plan, (B) no change in the actuarial assumptions with
respect to any Single Employer Plan as a result of plan amendments, change in
applicable law or otherwise, which individually or in the aggregate, would
result in the aggregate current value of all accrued benefits to exceed the
aggregate current value of all such assets or require the provision of security
to any such Plan pursuant to Section 401(a)(29) of the Code.
(k) KMC has either adopted on a timely basis all amendments to Benefit
Plans which are required by the Tax Reform Act of 1986 so as to avoid
discrimination in participating or benefits in favor of highly compensated
employees or has complied with the requirements for obtaining "anti-cutback"
relief provided under Internal Revenue Service Notice 88-131 as modified by
Notice 89-92 by adopting appropriate amendments to such Benefit Plans.
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(1) For purposes of this Section 4.23, any reference to the term "KMC"
shall be deemed to refer also to any entity which is under common control or
affiliated with KMC within the meaning of Section 4001 of ERISA and the rules
and regulations thereunder and/or Section 414 of the Code and the rules and
regulations thereunder.
4.24 SEC FILINGS. KMC has filed with the SEC, and has previously delivered
to APHX true and complete copies of, all forms, reports, schedules, statements,
and other documents required to be filed by KMC under the Securities Act or the
Exchange Act, except for any non-filings or noncompliance which are not in the
aggregate material to the financial condition, results of operations or business
of KMC or which will not prevent or delay in any material respect the
consummation of the transactions contemplated hereby. No form, report, schedule,
statement or other document filed by KMC with the SEC contained any untrue
statement of a material fact or omitted to state any material fact, at the time
such document was filed, necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, other
than such facts as were corrected in any subsequent form, report, schedule,
statement or other document filed by KMC with the SEC.
4.25 INFORMATION. None of the information concerning KMC incorporated by
reference, or any other information supplied or to be supplied by KMC or its
Representatives for inclusion, in the proxy (or information statement) and
registration statement on Form SB-2 or any other appropriate form prepared in
connection with the transactions contemplated hereby or any amendment or
supplement thereto has or will, at the time that the proxy and registration
statement was or any amendment is mailed, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or, in the case of any such proxy and registration statement,
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy (or information statement) for the meeting or
consent in connection with which such proxy (or information statement) and
registration statement shall be mailed. None of the information and documents
which have been or may be furnished by KMC or any of its Representatives to APHX
or its Representatives in connection with the transactions contemplated hereby
is or will be materially false or misleading or contains or will contain any
material misstatement of fact or omits or will omit any material fact necessary
to be stated in order to make the statements therein not misleading.
4.26 KUSHI CUISINE. Cuisine has been or will be formed by KMC solely for
the purpose of executing and delivering this Agreement and consummating the
transactions contemplated hereby, including owing and operating the business
operations of KMC at the Effective Time. Since the date of its incorporation,
Cuisine will not have engaged in nor transacted any business activity of any
nature whatsoever other than activities related to its corporate organization
and the execution and delivery of this Agreement. Prior to the Effective Time,
Cuisine will have no assets or properties or debts, liabilities or obligations
of any kind whatsoever, and other than this Agreement, Cuisine is not party to
any contract, agreement or undertaking of any nature.
ARTICLE V
CONDUCT OF BUSINESS OF APHX
AND KMC PRIOR TO THE EFFECTIVE TIME
5.1 CONDUCT OF BUSINESS OF APHX. During the period commencing on the date
hereof and continuing until the Effective Time, APHX agrees that it, except as
otherwise expressly contemplated by this Agreement or agreed to in writing by
KMC:
(a) will carry on its business only in the ordinary course and
consistent with past practice;
(b) will not declare or pay any dividend on or make any other
distribution (however characterized) in respect of shares of its capital
stock;
(c) will not, directly or indirectly, redeem or repurchase, or agree
to redeem or repurchase, any shares of its capital stock;
(d) will not amend its Articles of Incorporation or By-Laws;
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(e) will not issue, or agree to issue, any shares of its capital stock
(except pursuant to the exercise and/or conversion of currently outstanding
Derivative Securities), or any options, warrants or other rights to acquire
shares of its capital stock, or any securities convertible into or
exchangeable for shares of its capital stock;
(f) will not combine, split or otherwise reclassify any shares of its
capital stock;
(g) will not sell or pledge, or agree to sell or pledge, any shares of
its capital stock;
(h) will use all reasonable efforts to preserve intact its present
business organization, keep available the services of its officers and key
employees and preserve its relationships with clients and others having
business dealings with it to the end that its goodwill and ongoing business
shall not be materially impaired at the Effective Time;
(i) will not, except as set forth in Schedule 5.1,(A) make any capital
expenditures individually in excess of $25,000 or in the aggregate in
excess of $50,000, (B) enter into or terminate (except in the ordinary
course of business and consistent with past practice) any lease of, or
purchase or sell, any real property, (C) enter into any leases of personal
property involving individually in excess of $10,000 annually or in the
aggregate in excess of $25,000 annually, (D) incur or guarantee any
additional indebtedness for borrowed money, (E) create or permit to become
effective any security interest, mortgage, lien, charge or other
Encumbrance on its properties or assets, or (F) enter into any agreement to
do any of the foregoing;
(j) will not, other than in the ordinary course of business, adopt or
amend any Benefit Plan for the benefit of Employees, or enter into any
agreement to do the same;
(k) will promptly advise KMC of the commencement of, or threat of (to
the extent that such threat comes to the knowledge of APHX), any claim,
action, suit, proceeding or investigation against, relating to or involving
APHX or any of its directors, officers, employees, agents or consultants in
connection with its business or the transactions contemplated hereby;
(1) will maintain in full force and effect all insurance policies
maintained by APHX on the date hereof; and
(m) will not enter into any agreement to dissolve, merge, consolidate
or, except in the ordinary course, sell any material assets of APHX.
5.2 CONDUCT OF BUSINESS OF KMC. During the period commencing on the date
hereof and continuing until the Effective Time, KMC agrees that it, except as
otherwise expressly contemplated by this Agreement or agreed to in writing by
APHX:
(a) will carry on its business only in the ordinary course and
consistent with past practice;
(b) will not declare or pay any dividend on or make any other
distribution (however characterized) in respect of shares of its capital
stock;
(c) will not, directly or indirectly, redeem or repurchase, or agree
to redeem or repurchase, any shares of its capital stock;
(d) will not amend its Certificate of Incorporation or By-Laws;
(e) will not issue, or agree to issue, any shares of its capital stock
(except pursuant to the exercise and/or conversion of currently outstanding
options and warrants), or any options, warrants or other rights to acquire
shares of its capital stock or any securities convertible into or
exchangeable for shares of its capital stock;
(f) will not combine, split or otherwise reclassify any shares of its
capital stock;
(g) will not sell or pledge, or agree to sell or pledge, any shares of
its capital stock;
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(h) will use all reasonable efforts to preserve intact its present
business organization, keep available the services of its officers and key
employees and preserve its relationships with clients and others having
business dealings with it to the end that its goodwill and ongoing business
shall not be materially impaired at the Effective Time;
(i) will not, (A) make any capital expenditures individually in excess
of $25,000 or in the aggregate in excess of $50,000, (B) enter into or
terminate (except in the ordinary course of business and consistent with
past practice) any lease of, or purchase or sell, any real property, (C)
enter into any leases of personal property involving individually in excess
of $10,000 annually or in the aggregate in excess of $25,000 annually, (D)
incur or guarantee any additional indebtedness for borrowed money, (E)
create or permit to become effective any security interest, mortgage, lien,
charge or other Encumbrance on its properties or assets, or (F) enter into
any agreement to do any of the foregoing;
(j) will not, other than in the ordinary course of business, adopt or
amend any Benefit Plan for the benefit of Employees, or enter into any
agreement to do any of the foregoing;
(k) will promptly advise APHX of the commencement of, or threat of (to
the extent that such threat comes to the knowledge of KMC), any claim,
action, suit, proceeding or investigation against, relating to or involving
KMC or any of its directors, officers, employees, agents or consultants in
connection with its business or the transactions contemplated hereby;
(1) will maintain in full force and effect all insurance policies
maintained by KMC on the date hereof; and
(m) will not enter into any agreement to dissolve, merge, consolidate
or, except in the ordinary course, sell any material assets of KMC.
Notwithstanding the foregoing, KMC shall be entitled to (i) negotiate and enter
into agreements with its employees, consultants and brokers to terminate all
contractual obligations and issue securities in settlement thereof and (ii)
transfer, as of the Effective Time, all of its operational assets to Cuisine.
5.3 KMC SPIN OFF. Prior to the Merger, KMC will (i) form Cuisine, and (ii)
resolve its outstanding liabilities associated with consulting and employment
contracts. At the Closing of the Merger (and simultaneously therewith), KMC will
(1) transfer to Cuisine all of the assets and liabilities of KMC other than the
liabilities of KMC related to (a) the lease obligations for the warehouse
facility located in Parsippany, New Jersey and the office facility located in
Stamford, Connecticut, (b) the warrants to purchase 2,135,000 shares of KMC
Common Stock at $6.25 per share, and (c) warrants held by the underwriter of
KMC's initial public offering to purchase 110,000 shares of KMC Common Stock at
$8.25 per share and 140,000 warrants to purchase KMC Common Stock at $10.3125
per share, and (2) in exchange for and consideration of the foregoing, receive
and distribute to the stockholders of the Surviving Corporation in a tax-free
distribution, shares of Cuisine's common stock notwithstanding possible
opportunities for such individuals with APHX and/or KMC after the Merger. Mr.
Michio Kushi shall be the initial Chairman of Cuisine and shall appoint its
initial board of directors. At the discretion of KMC, Cuisine can be formed
using a different name, but in such event, all references herein to "Cuisine"
shall be deemed to be references to such other named entity.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 ACCESS TO PROPERTIES AND RECORDS. Between the date of this Agreement
and the Effective Time, APHX will provide KMC and its Representatives and KMC
will provide APHX and its Representatives, with full access, during business
hours, to their respective premises and properties and their respective books
and records (including, without limitation, contracts, leases, insurance
policies, litigation files, minute books, accounts, working papers and tax
returns filed and in preparation) and each will cause its officers to furnish to
the other and its authorized advisors such additional financial, tax and
operating data and other information pertaining to its business as the other
shall from time to time reasonably request. All of such data and
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information shall be subject to the terms and conditions of the confidentiality
agreements dated April 18, 1996 and May 6, 1996, between APHX and KMC.
6.2 REGISTRATION STATEMENT. As soon as reasonably practicable after the
execution and delivery of this Agreement, KMC and APHX shall prepare and file
with the SEC a joint registration and proxy statement on Form S-4 or a
registration statement on Form SB-2, as counsel for the parties shall determine
(the "Registration Statement"), which shall cover all of the shares of KMC
Common Stock to be issued in connection with the Merger, and shall use all
reasonable efforts to have the Registration Statement declared effective by the
SEC as promptly as practicable. KMC shall also take such actions as may be
required under state blue sky or securities laws in connection with such
issuance of shares of KMC Common Stock in connection with the Merger. APHX shall
cooperate fully with KMC and shall furnish KMC with all information concerning
APHX and its shareholders and shall take all such other action as KMC may
reasonably request in connection with any such actions.
6.3 STOCKHOLDERS' APPROVALS. Promptly after the effectiveness of the
Registration Statement and compliance with all state securities and blue sky
laws, each of KMC and APHX shall take all action necessary to convene meetings
of their respective stockholders for the purpose of voting upon the transactions
contemplated hereby and such other matters as may be appropriate at such
meetings or obtain their approval through submission of written consents, and in
connection therewith shall in a timely manner mail to the respective
stockholders the Proxy Statement contained in the Registration Statement if a
Form S-4 is used, or, if a Form S-4 is not used, an Information Statement and,
if necessary after the Proxy Statement shall have been mailed, shall promptly
and in a timely manner circulate amended or supplemental materials and if
necessary materials necessary for re-soliciting proxies, and in the event a
meeting is not held, that all of the stockholders will be promptly informed of
the action taken. Each of KMC and APHX will, through its respective Board of
Directors, recommend to its respective stockholders approval of the transactions
contemplated by this Agreement.
6.4 RESTRICTED STOCK. Shares of KMC Common Stock to be issued to APHX
shareholders pursuant to the terms of this Agreement in exchange for APHX
securities that are "restricted" securities within the meaning of Rule 144
promulgated under the Securities Act shall, notwithstanding the fact that they
will be registered, contain a legend indicating that such shares are restricted
from transfer until the date when the holding period would have ended had the
Merger not occurred.
6.5 REASONABLE EFFORTS; ETC. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations,
whether before or after the Effective Time, to consummate and make effective the
transactions contemplated by this Agreement, including obtaining any consents,
authorizations, exemptions and approvals from, and making all filings with, any
governmental or regulatory authority, agency or body which are necessary in
connection with the transactions contemplated by this Agreement; provided that
the obligation of the parties to use reasonable efforts as required by this
Section 6.5 shall not obligate any party to incur unreasonable costs or
expenses.
6.6 MATERIAL EVENTS. At all times prior to the Effective Time, each party
shall promptly notify the others in writing of the occurrence of any event which
will or may result in the failure to satisfy any of the conditions specified in
Article VII or Article VIII hereof.
6.7 TAX CONSEQUENCES. From and after the Effective Time, none of the
parties will take any position in or with regard to their respective Federal,
state or local income tax returns (or any amendments thereto) that is
inconsistent with the treatment of the Merger as a tax-free reorganization for
Federal income tax purposes under Section 368(a)(2)(E) of the Code or with
respect to the tax consequences contemplated thereby (including those related to
the basis of stock and assets).
6.8 EXCLUSIVITY. Without in any way limiting Article X hereof, in
consideration for the substantial expenditure of time, effort and expense to be
undertaken by each party in connection with its investigation of the other
party, each party agrees that neither it nor any of its affiliates will solicit
or initiate any discussions
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with or supply confidential or other information to, any other prospective
purchasers of the stock or assets of KMC or APHX between the date hereof and
, 1996.
6.9 CERTIFICATE OF INCORPORATION AND DIRECTORS OF KMC. On or prior to the
Effective Time, KMC shall take all action necessary under the Delaware Act in
order to adopt the Amended and Restated Articles of Incorporation of KMC in the
form attached hereto as Exhibit 6.9 and to file the same with the Secretary of
State of Delaware.
6.10 INDEMNIFICATION. (a) In the event the Merger shall become effective,
then from and after the Effective Time, the Surviving Corporation (the
"Indemnifying Party") shall indemnify, defend and hold harmless each person who
is now, or who becomes prior to the Effective Time, an officer or director of
KMC, APHX or Cuisine (the "Indemnified Parties") against (i) all losses, claims,
damages, costs, expenses, liability or judgment or amounts paid with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld) in settlement of or in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on, or arising in whole or
in part out of the fact that such person is or was an officer or director of
KMC, APHX or Cuisine, whether pertaining to any matter existing or occurring at
or prior to the Effective Time, and whether asserted or claimed prior to, at, or
after, the Effective Time (the "Indemnified Liabilities") and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to this Agreement or the transactions contemplated
hereby, including, without limitation, any Indemnified Liabilities arising under
or out of any state or federal securities laws, in each case to the fullest
extent permitted by law (and the Surviving Corporation shall pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the fullest extent permitted by law upon receipt of any
undertaking that may be required by law).
(b) Any Indemnified Party wishing to claim indemnification under this
Section 6.10 shall notify KMC or the Surviving Corporation promptly upon
learning of any such claim, action, suit, proceeding or investigation (but the
failure to notify the Indemnifying Party should not relieve it from any
liability which it may have under this Section 6.10 except to the extent such
failure prejudices such party).
(c) The provisions of this Section 6.10 are intended to be for the benefit
of, and shall be enforceable by each Indemnified Party, and his or her heirs and
representatives.
6.11 QUARTERLY FINANCIAL STATEMENTS. Prior to the Effective Time, APHX and
KMC shall deliver to the other party as soon as available, but in any event no
later than 45 days after the end of each quarterly period of its fiscal year (or
such later period as may be permitted for the filing of quarterly financial
statements under the Exchange Act), unaudited balance sheets and the related
unaudited statements of income and retained earnings and unaudited statements of
cash flows for each such quarter.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF KMC
The obligation of KMC to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction, on or prior to the Closing Date,
of each of the following conditions (any of which may be waived in writing by
KMC in its sole discretion):
7.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of APHX which are contained in this Agreement, or contained in any
Schedule, certificate or other instrument or document delivered or to be
delivered pursuant to this Agreement, other than the representation and warranty
set forth in Section 3.3(a) with respect to the number of issued and outstanding
shares of APHX Common Stock and the representations and warranties set forth in
Section 3.3(b), shall be true and correct in all material respects at and as of
the Closing Date as though such representations and warranties were made on and
as of the Closing Date except for changes expressly permitted or contemplated by
the terms of this Agreement, and at the Closing, APHX shall have delivered to
KMC a certificate (signed on its behalf by its President and the Chief Financial
Officer) to that effect with respect to all such representations and warranties.
27
<PAGE> 33
7.2 PERFORMANCE. APHX shall have performed and complied in all material
respects with all of its obligations under this Agreement which are required to
be performed or complied with on or prior to the Closing Date, and at the
Closing, APHX shall have delivered to KMC a certificate (signed on its behalf by
its President and its Chief Financial officer) to that effect with respect to
all such obligations required to have been performed or complied with by APHX on
or before the Closing Date.
7.3 AUTHORIZATION OF MERGER. This Agreement and the consummation of the
transactions contemplated hereby (including, but not limited to, the adoption of
the Amended and Restated Articles of Incorporation of KMC) shall have been duly
approved and adopted (i) by the requisite affirmative vote of the stockholders
of KMC and (ii) by the requisite affirmative vote of the stockholders of APHX,
in each case in accordance with applicable law and (in the case of KMC) the
rules and regulations of the National Association of Securities Dealers, Inc.
7.4 REGISTRATION STATEMENT; BLUE SKY LAWS. The Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
7.5 RESTRICTIVE LEGENDS. The transfer agent for the Surviving Corporation
shall have been delivered a list of the shares that require a legend pursuant to
Section 6.4 and shall have been instructed to place the following legend on each
certificate representing shares of KMC Common Stock issued to any shareholder of
APHX pursuant to the Merger:
"The sale or other transfer of the shares represented by this
certificate is not permitted unless effected pursuant to an effective
registration statement or in the opinion of counsel to the Company it is
effected in compliance with Rule 144 or another exemption from the
registration requirements of the Securities Act of 1933, as amended."
7.6 ABSENCE OF LITIGATION. No statute, rule or regulation shall have been
enacted or promulgated, and no order, decree, writ or injunction shall have been
issued and shall remain in effect, by any court or governmental or regulatory
body, agency or authority which restrains, enjoins or otherwise prohibits the
consummation of the transactions contemplated hereby, and no action, suit or
proceeding before any court or governmental or regulatory body, agency or
authority shall have been instituted by any person (or instituted or threatened
by any governmental or regulatory body, agency or authority), and no
investigation by any governmental or regulatory body, agency or authority shall
have been commenced with respect to the transactions contemplated hereby or with
respect to APHX which, in the reasonable judgment of KMC's Board of Directors,
would have a material adverse effect on the transactions contemplated hereby or
on the business of APHX.
7.7 OPINION OF COUNSEL. APHX shall have delivered to KMC the opinion of
counsel to APHX, in the form annexed as Exhibit 7.7 hereto.
7.8 APPRAISAL RIGHTS. The holders of more than ten (10%) percent of the
issued and outstanding shares of APHX Common Stock shall not have demanded
appraisal rights in respect of the Merger.
7.9 CERTIFICATES OF MERGER. APHX shall have executed and delivered to KMC
counterparts of the Certificates of Merger to be filed with the Secretaries of
State of the States of Nevada and Delaware in connection with the Merger.
7.10 CONSENTS. KMC, APHX and Cuisine shall have obtained all necessary
consents, authorizations or approvals of, and made any necessary filings with,
any governmental, public or self-regulatory body or authority or any other third
party to the consummation of the transactions contemplated hereby, or executions
therefrom or waivers thereof, and any requisite waiting period with respect
thereto shall have expired.
7.11 NO MATERIAL CHANGE IN FINANCIAL STATEMENTS. There shall be no
material difference between the APHX Financial Statements and APHX's quarterly
financial statements filed with the SEC from the date hereof until the Closing
Date reflecting a material adverse difference in the business, assets, financial
condition or results of operations of APHX.
28
<PAGE> 34
7.12 DIRECTORS AND EXECUTIVE OFFICERS. APHX shall deliver to KMC at the
Closing a list of all of its directors and executive officers.
7.13 OPTION AND VOTING TRUST AGREEMENT. The controlling shareholders of
APHX shall have executed an Option and Voting Trust Agreement reasonably
satisfactory to them and to KMC.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF APHX
The obligation of APHX to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction, on or prior to the Closing Date,
of each of the following conditions (any of which may be waived in writing by
APHX in its sole discretion):
8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of KMC contained in this Agreement, or contained in any Schedule,
certificate or other instrument or document delivered or to be delivered
pursuant to this Agreement, other than the representation and warranty set forth
in Section 4.3(a) with respect to the number of issued and outstanding shares of
KMC Common Stock and the representations and warranties set forth in Section
4.3(b), shall be true and correct in all material respects at and as of the
Closing Date as though such representations and warranties were made on and as
of the Closing Date except for changes expressly permitted or contemplated by
the terms of this Agreement, and at the Closing, KMC shall have delivered to
APHX a certificate (signed on its behalf by its President and its Chief
Financial Officer) to that effect with respect to all such representations and
warranties made by such entity.
8.2 PERFORMANCE. KMC shall have performed and complied in all material
respects with all of its obligations under this Agreement which are required to
be performed or complied with on or prior to the Closing Date, and at the
Closing, KMC shall have delivered to APHX a certificate, signed on its behalf by
its President and its Chief Financial Officer, to that effect with respect to
all such obligations required to have been performed or complied with on or
before the Closing Date.
8.3 AUTHORIZATION OF MERGER. This Agreement and the consummation of the
transactions contemplated hereby (including, but not limited to, the adoption of
the Amended and Restated Articles of Incorporation of KMC), shall have been duly
approved and adopted by (i) the requisite affirmative vote of the stockholders
and directors of KMC, as appropriate and, (ii) by the requisite affirmative vote
of the stockholders of APHX, in each case in accordance with applicable law and
(in the case of KMC) the rules and regulations of the National Association of
Securities Dealers, Inc.
8.4 REGISTRATION STATEMENT; BLUE SKY LAWS. The Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
8.5 ABSENCE OF LITIGATION. No statute, rule or regulation shall have been
enacted or promulgated, and no order, decree, writ or injunction shall have been
issued and shall remain in effect, by any court or governmental or regulatory
body, agency or authority which restrains, enjoins or otherwise prohibits the
consummation of the transactions contemplated hereby, and no action, suit or
proceeding before any court or governmental or regulatory body, agency or
authority shall have been instituted by any person (or instituted or threatened
by any governmental or regulatory body, agency or authority) and no
investigation by any governmental or regulatory body, agency or authority shall
have been commenced with respect to the transactions contemplated hereby or with
respect to KMC which, in the reasonable judgment of APHX's Board of Directors,
would have a material adverse effect on the transactions contemplated hereby or
on the business of KMC.
8.6 OPINION OF COUNSEL. KMC shall have delivered to APHX the opinion of
counsel to KMC, substantially in the form annexed as Exhibit 8.6 hereto.
29
<PAGE> 35
8.7 CERTIFICATE OF MERGER. KMC shall have executed and delivered to APHX
counterparts of the Certificates of Merger to be filed with the Secretaries of
State of the States of Nevada and Delaware in connection with the Merger.
8.8 CONSENTS. KMC, APHX and Cuisine shall have obtained all necessary
consents, authorizations or approvals of, and made any necessary filings with,
any governmental, public or self-regulatory body or authority or any other third
party to the consummation of the transactions contemplated hereby, or executions
therefrom or waivers thereof, and any requisite waiting period with respect
thereto shall have expired.
8.9 DIRECTOR RESIGNATIONS. KMC shall have received the written
resignations, and resolved and paid all contractual obligations, of all officers
and directors of KMC who, on and after the Effective Time, shall no longer serve
in such capacity.
8.10 INCLUSION ON NASDAQ SYSTEM. KMC Common Stock shall be authorized for
inclusion on the National Association of Securities Dealers Automated Quotation
System, and there shall have been no involuntary trading halt, as of the
Effective Time, of KMC Common Stock in the over-the-counter market imposed by
the National Association of Securities Dealers, Inc.
8.11 HOLD HARMLESS AND INDEMNIFICATION AGREEMENT. Cuisine shall have
executed a Hold Harmless and Indemnification Agreement in favor of APHX,
reasonably satisfactory to APHX, respecting any claims, liabilities or causes of
actions arising from the Stamford and Parsippany leases currently held by KMC
and to be transferred to Cuisine.
ARTICLE IX
TERMINATION
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether prior to or after approval of this Agreement and the
transactions contemplated hereby by the stockholders of APHX and/or KMC:
(a) by the mutual written consent of the Boards of Directors of APHX
and KMC;
(b) by either APHX or KMC
(i) if any court or governmental or regulatory agency, authority or
body shall have enacted, promulgated or issued any statute, rule,
regulation, ruling, writ or injunction, or taken any other action,
restraining, enjoining or otherwise prohibiting the transactions
contemplated hereby and all appeals and means of appeal therefrom have
been exhausted;
(ii) if the Effective Time shall not have occurred on or before
, 1996; provided, however, that the right to terminate this
Agreement pursuant to this Section 9.1(b)(ii) shall not be available to
any party whose breach of any representation or warranty or failure to
perform or comply with 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
(iii) if the stockholders of KMC and/or APHX shall have failed to
approve the Merger.
(c) by APHX, if any of the conditions specified in Article VIII have
not been met in all material respects or waived prior to such time as such
condition can no longer be satisfied; or
(d) by KMC, if any of the conditions specified in Article VII shall
not have been met in all material respects or waived prior to such time as
such condition can no longer be satisfied.
9.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement, this Agreement shall forthwith become void and there shall be no
liability on the part of any of the parties hereto or their respective officers
or directors, except for Sections 10.6 and 10.8 and the last sentence of Section
6.1, which shall remain in full force and effect, and except that nothing herein
shall relieve any party from liability for a breach of this Agreement prior to
the termination hereof.
30
<PAGE> 36
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 AMENDMENT. This Agreement may be amended only by written agreement
between APHX and KMC prior to the Effective Time, whether prior to or after
approval hereof by the stockholders of KMC and/or the stockholders of APHX, but
after any such approval no amendment shall be made to the Exchange Ratio
pursuant to which outstanding shares of APHX Common Stock are converted into
shares of KMC Common Stock pursuant to the Merger, without the further approval
of such stockholders.
10.2 WAIVER OF COMPLIANCE. Except as otherwise provided in this Agreement,
any failure of any of the parties to comply with any obligation, covenant or
agreement contained herein may be waived only by a written notice from the party
or parties entitled to the benefits thereof. No failure by any party hereto to
exercise, and no delay in exercising, any right hereunder, shall operate as a
waiver thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or future exercise of that right by that party.
10.3 NOTICES. All notices and other communications hereunder shall be
deemed given if given in writing and delivered personally, by registered or
certified mail, return receipt requested, postage prepaid, or by overnight
courier to the party to receive the same at its respective address set forth
below (or at such other address as may from time to time be designated by such
party to the others in accordance with this Section 10.3):
(a) if to APHX, to:
Mr. Bruce Pilley, Chairman
Mr. Patrick N. DiCarlo, President and CEO
American Phoenix Group, Inc.
1042 Castlerock
Santa Ana, California 92705
with copies to:
Smith & Simpson
1901 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
Attention: Douglas K. Simpson, Esq.
(b) if to KMC, to:
Mr. Daniel A. France
Kushi Macrobiotics Corp.
Three Stamford Landing, Suite 210
Stamford, Connecticut 06902
with copies to:
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
Attn: Irving Rothstein, Esq.
All such notices and communications hereunder shall be deemed given when
received, as evidenced by the signed acknowledgment of receipt of the person to
whom such notice or communication shall have been personally delivered, the
acknowledgment of receipt returned to the sender by the applicable postal
authorities or the confirmation of delivery rendered by the applicable overnight
courier service.
10.4 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Neither this Agreement nor any rights, duties
or obligations hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other parties hereto.
31
<PAGE> 37
10.5 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.12
hereof to the contrary, neither this Agreement nor any provision hereof nor any
Schedule, certificate or other instrument delivered pursuant hereto, nor any
agreement to be entered into pursuant hereto or any provision hereof, is
intended to create any right, claim or remedy in favor of any person or entity,
other than the parties hereto and their respective successors and permitted
assigns.
10.6 EXPENSES. Each party shall pay its own expenses in connection with
this Agreement, the agreements to be entered into pursuant hereto and the
transactions contemplated hereby; provided, however, that if the Merger is
consummated pursuant to this Agreement, all such expenses of APHX (which shall
include the reasonable fees and disbursements of its attorney's, accountants and
other professionals) incurred on behalf of APHX in connection with the
transactions contemplated hereby shall be the responsibility of the Surviving
Corporation.
10.7 PUBLIC ANNOUNCEMENTS. Promptly upon execution and delivery of this
Agreement, KMC and APHX shall issue a press release in such form as they shall
mutually agree. Thereafter, and prior to the consummation of the Merger or the
termination of this Agreement, none of the parties hereto shall, except as
mutually agreed by KMC and APHX, or except as may be required by law or
applicable regulatory authority (including, without limitation, the rules
applicable to NASDAQ listed companies), issue any reports, releases,
announcements or other statements to the public relating to the transactions
contemplated hereby.
10.8 BROKERS AND FINDERS. APHX and KMC each represent and warrant to the
other that no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission based on arrangements made by or on behalf
of either party hereto that has not been, or will not be by Closing, satisfied.
10.9 FURTHER AGREEMENTS. The parties acknowledge and agree that if,
following any breach of any of the representations and warranties of the parties
set forth in this Agreement, the existence of which is disclosed in writing
signed by the disclosing party and submitted to the non-breaching party prior to
the Effective Time, and the parties thereafter nevertheless proceed to
consummate the transactions contemplated hereby, it shall be conclusively
presumed, in the absence of written agreement of the parties to the contrary,
that the breach so disclosed has been waived by the non-breaching party and no
party shall be liable therefor in damages, whether pursuant to this Agreement or
otherwise.
10.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.11 ENTIRE AGREEMENT. This Agreement, and the Schedules, certificates
and other instruments and documents delivered pursuant hereto, together with the
other agreements referred to herein and to be entered into pursuant hereto,
embody the entire agreement of the parties and there are no other agreements or
understandings, written or oral, among the parties relating to, the subject
matter hereof, other than the Confidentiality Agreements. This Agreement
supersedes all prior agreements and understandings, written or oral, between the
parties other than the Confidentiality Agreements.
10.12 GOVERNING LAW. The parties hereby agree that this Agreement, and the
respective rights, duties and obligations of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to principles of conflicts of law thereunder, except for
the provisions of Article I hereto setting forth the provisions for
consummating, and the effects of, the Merger, which shall be governed by and
construed in accordance with the Delaware Act and/or the Nevada Act to the
extent that the Delaware Act and/or the Nevada Act is applicable by its terms.
10.13 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
10.14 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event this Agreement were not to be performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof in addition to any other remedies at
law or equity.
32
<PAGE> 38
IN WITNESS WHEREOF, KMC, APHX and Cuisine have caused this Agreement to be
duly executed and delivered as of the date first above written.
KUSHI MACROBIOTICS CORP.
By: /s/ Daniel A. France
--------------------------------------
Name: Daniel A. France
Title: Chief Financial and
Chief Operating Officer
AMERICAN PHOENIX GROUP, INC.
By: /s/ Patrick N. DiCarlo
--------------------------------------
Name: Patrick N. DiCarlo
Title: Agent in Fact
KUSHI CUISINE CORPORATION
a corporation in formation
By: /s/ Daniel A. France
--------------------------------------
Name: Daniel A. France
Title: As Agent For
Michio Kushi, Chairman
33
<PAGE> 39
<TABLE>
<C> <S>
STATE OF
COUNTY OF ss.:
</TABLE>
On this day of , 1996, before me personally came
, to me known and known to me to be the of Kushi
Macrobiotics Corp. and who executed the foregoing instrument, and he duly
acknowledged to me that he executed the same.
--------------------------------------
Notary Public
<TABLE>
<C> <S>
STATE OF
COUNTY OF ss.:
</TABLE>
On this day of , 1996, before me personally came
, to me known and known to me to be the of
American Phoenix Group, Inc. and who executed the foregoing instrument, and he
duly acknowledged to me that he executed the same.
--------------------------------------
Notary Public
34
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,093,367
<SECURITIES> 0
<RECEIVABLES> 47,086
<ALLOWANCES> 0
<INVENTORY> 239,143
<CURRENT-ASSETS> 1,433,290
<PP&E> 72,627
<DEPRECIATION> (12,430)
<TOTAL-ASSETS> 1,543,527
<CURRENT-LIABILITIES> 167,365
<BONDS> 0
0
1,179
<COMMON> 2,750
<OTHER-SE> 1,339,733
<TOTAL-LIABILITY-AND-EQUITY> 1,543,527
<SALES> 298,469
<TOTAL-REVENUES> 298,469
<CGS> 222,169
<TOTAL-COSTS> 2,064,840
<OTHER-EXPENSES> 30,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,019,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,019,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,019,186)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
