<PAGE> 1
As filed with the Securities and Exchange Commission on August 22, 1996
Registration No.
-----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------------------
KUSHI MACROBIOTICS CORP.
(Name of small business issuer in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
-------------------------------
2099
(Primary Standard Industrial Classification Code Number)
13-3768554
(I.R.S. Employer Identification No.)
Three Stamford Landing, Suite 210
Stamford, Connecticut 06905
(203) 973-2929
(Address and telephone number of registrant's principal
executive offices and principal place of business)
-------------------------------
DANIEL A. FRANCE
Kushi Macrobiotics Corp.
Three Stamford Landing, Suite 216
Stamford, Connecticut 06905
(203) 321-1290
(Name, address and telephone number,
of agent for service)
------------------------------------
Copies to:
RICHARD F. HOROWITZ, ESQ.
MAY ORENSTEIN, ESQ.
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
Telephone: (212)685-7600
Facsimile: (212)696-9459
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of the registration statement
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to be To Be Price Per Offering Registration
Registered Registered(1) Security Price Fee(2)
___________________ __________ ________ _____ ___
Common Stock, 16,251,465 $ 1.44 $23,464,813 $4,692.90
$.001 Par Value
(1) Includes 15,583,314 shares to be issued upon the Merger based upon
the number of shares of the Common Stock, par value $.001 per share
of Kushi outstanding on the date hereof plus up to an additional
668,151 shares which will become issuable upon the Merger in the
event that holders of the outstanding shares of the Preferred Stock
of Kushi exercise conversion rights with respect to their shares of
Preferred Stock prior to the Merger.
(2) Calculated pursuant to paragraph (f) of rule 457 and the Securities
Act of 1933, on the basis of the average of the high and low price
on August 13, 1996 ($.67) of the number of shares (35,022,109
(est.)) of the Common Stock, par value .01 of American Phoenix
Group, Inc. to be canceled upon the Merger.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
KUSHI MACROBIOTICS CORP.
CROSS REFERENCE SHEET
Form S-4 Location in Information
Item Number and Caption Statement/Prospectus
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus
Facing Page; Cross
Reference Sheet; Outside
Front Cover Page of Joint
Information
Statement/Prospectus
2. Inside Front and Outside Back Cover
pages of Prospectus "Available Information";
"Table of Contents"
3. Risk Factors, Ratio of Earnings to
Fixed Charges and other Information.
"Summary of Joint
Information Statement";
"Certain Risk Factors";
"Introduction"; "The Merger
- Terms of the Merger";
"Unaudited Pro Forma
Financial Information
4. Terms of the Transaction "Summary of Joint
Information Statement";
"The Merger - Kushi's
Reasons for the Merger";
"The Merger - American
Phoenix's Reasons for the
Merger".
5. Pro Forma Financial Information
"Summary of Joint
Information Statement";
Kushi and American Phoenix
Unaudited Pro Forma
Combined Financial
Information.
6. Material Contacts with the Company "Summary of Joint
Being Acquired Information Statement";
7. Additional Information Required for
Reoffering by Persons and parties
Deemed to be Underwriters *
8. Interest of Named Experts and Counsel. *
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 Registrants *
11. Incorporation of Certain Information *
by Reference
12. Information with Respect to S-2 or S-3
Registrants *
13. Incorporation of Certain Information "Incorporation of Certain
by Reference Documents by Reference"
14. Information with Respect to Registrants "Summary of Joint Information
other than S-3 or S-2 Registrations Statement";
"The Companies -- Kushi"
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2
or S-3 Companies *
17. Information with Respect to Companies "Summary of Joint Information
other than S-3 or S-2 Companies Statement";
"Certain Risk Factors";
"The Companies -- American
Phoenix; Kushi and American
Phoenix Unaudited Pro Forma
Combined Financial
Statements"
18. Information if Proxies, Consents or
Authorizations are to be Solicited *
19. Information if Proxies, Consents or "Summary of Joint Information
Authorizations are not be Solicited, Statement"; "Directors and
or in an Exchange Offer Executive Officers of the
Surviving Corporation"
- - - - - - - -
*Item is omitted because answer is negative or Item is inapplicable.
<PAGE> 3
PROSPECTUS PRELIMINARY COPY FOR THE
INFORMATION OF THE SEC ONLY
KUSHI MACROBIOTICS CORP.
16,251,465 Shares of Common Stock
To Be Issued in Connection With
A Merger Transaction With
AMERICAN PHOENIX GROUP, INC.
KUSHI MACROBIOTICS CORP AND AMERICAN PHOENIX GROUP, INC.
JOINT INFORMATION STATEMENT
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
This Joint Information Statement is being furnished to
stockholders of Kushi Macrobiotics Corp., a Delaware corporation ("Kushi"), and
shareholders of American Phoenix Group, Inc., a Nevada corporation ("American
Phoenix"), in connection with an Agreement and Plan of Merger, dated June 1,
1996, as amended and restated July 12, 1996 (as so and restated amended, the
"Merger Agreement"), providing for the merger (the "Merger") of American Phoenix
into and with Kushi, pursuant to which (A) Kushi would be the surviving
corporation (the "Surviving Corporation"), (B) all of the issued and outstanding
shares of Common Stock, par value $.01 per share, of American Phoenix ("American
Phoenix Stock") would automatically convert into that number of shares of Common
Stock, par value $.001 per share, of Kushi ("Kushi Stock") as (assuming no
exercise of dissenters' rights by the stockholders of either Kushi or American
Phoenix), would constitute eighty-five (85%) percent of the shares of Kushi
Stock issued and outstanding as of the Effective Time of the Merger (the
"Effective Time"), (C) each outstanding warrant, option, convertible security or
other right to acquire a share of American Phoenix Stock ("American Phoenix
Derivative Securities") would automatically be deemed exercisable or convertible
into that fraction of a share of Kushi Stock into which each share of American
Phoenix Stock was converted upon the Merger. The continued listing of Kushi
Stock on NASDAQ is a condition of American Phoenix's obligation to consummate
the Merger. The Merger Agreement contemplates the pre-Merger spin-off of the
natural foods business of Kushi to the stockholders of Kushi (the "Spin-Off").
The Merger Agreement also provides that prior to the Effective Time of the
Merger a dividend will be declared on each outstanding share of Kushi Stock
consisting of a Warrant to purchase one share of Surviving Corporation Stock.
See "The Merger--Terms of the Merger." This Joint Information Statement also
constitutes a Prospectus of Kushi under the Securities Act of 1933, as amended,
for the issuance upon the Merger of Kushi Stock to holders of American Phoenix
Stock. This Prospectus only covers shares of Kushi Stock issuable pursuant to
the Merger to holders of American Phoenix Stock as of the Effective Time and
does not cover shares of Kushi Stock which are issued after the Effective Time
to holders of American Phoenix Derivative Securities upon the exercise or
conversion of such American Phoenix Derivative Securities. The issuance by
Kushi of such shares of Kushi Stock following consummation of the Merger, and
the subsequent resale thereof by the holders, must be covered either by a
separate registration statement or an applicable exemption from the registration
requirements under the Securities Act of 1933, as amended.
On August 15, 1996, the closing sales price per share on the
NASDAQ System for the Common Stock of Kushi, par value $.001 per share was
$1.88.
SEE "THE MERGER--CERTAIN RISK FACTORS" FOR A DISCUSSION OF
CERTAIN MATERIAL RISK FACTORS RELEVANT TO THE MERGER AND TO THE BUSINESSES AND
OPERATIONS OF KUSHI AND AMERICAN PHOENIX THAT SHOULD BE CONSIDERED BY THE
STOCKHOLDERS OF AMERICAN PHOENIX AND THE STOCKHOLDERS OF KUSHI.
THE SHARES OF KUSHI STOCK ISSUABLE IN CONNECTION WITH THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT INFORMATION STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
____________
The date of this Joint Information Statement and Prospectus is August
, 1996. This Joint Information Statement and Prospectus is being mailed to
shareholders of American Phoenix and stockholders of Kushi on or about _______,
1996.
AVAILABLE INFORMATION
Kushi and American Phoenix are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). Such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at certain of the SEC's Regional Offices located at
75 Park Place, New York, New York 10007; 230 South Dearborn Street, Chicago,
Illinois 60604; and Suite 500 East, 5757 Wilshire Blvd., Los Angeles CA 90036.
Copies of such material can be obtained from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Kushi has filed with the SEC a Registration Statement
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Kushi Stock offered by the Prospectus comprising this Joint
Information Statement. This Joint Information Statement does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. Reference
is hereby made to the Registration Statement and to the exhibits listed therein,
which can be inspected at the public reference facilities of the SEC referenced
above, and copies of which can be obtained from the SEC at prescribed rates as
indicated above.
No person has been authorized to give any information or make
any representations not contained in this Joint Information Statement in
connection with the transactions reported hereby and, if given or made, such
information or representations must not be relied upon as having been authorized
by Kushi or any of its subsidiaries or American Phoenix or any of its
subsidiaries. This Joint Information Statement does not constitute an offer to
sell any securities other than the Kushi Stock covered by this Joint
Information Statement or an offer to sell, or a solicitation of an offer to buy,
in any jurisdiction where, or to any person to whom, it is unlawful to make such
an offer.
This Joint Information Statement/Prospectus incorporates
documents by reference which are not presented herein or delivered herewith.
Kushi will provide without charge to each person, including any beneficial
owner, to whom a copy of this Joint Information Statement/Prospectus is
delivered, upon written or oral request of such person, a copy of any or all of
the documents that have been incorporated by reference in this Joint Information
Statement (not including exhibits to the information that is incorporated by
reference into this Joint Information Statement/Prospectus unless such exhibits
are specifically incorporated by reference into the information that this Joint
Information Statement/Prospectus incorporates). Such requests should be
directed to the Secretary, Kushi Macrobiotics Corp., Three Stamford Landing,
Suite 210, Stamford CT 06902 (telephone: (203) 973-2929. In order to ensure
timely delivery of the documents, any request should be made by ___________,
1996.
<PAGE> 4
JOINT INFORMATION STATEMENT
TABLE OF CONTENTS
Summary of Joint Information Statement
JOINT INFORMATION STATEMENT-Introduction
THE MERGER
Kushi's Reasons for the Merger
American Phoenix' Reasons for the Merger
Certain Risk Factors
Terms of the Merger
- General
- Conversion of Shares
- Issuance of Additional Shares Pending the Merger
- Treatment of Options, Warrants and Convertible Securities
- Fractional Shares
- Exchange of Certificates
- Representations, Warranties and Covenants
- Conditions Precedent to Consummation of Merger
- Termination and Amendment
- Board of Directors and Management of Kushi,
American Phoenix and Kushi Foods following the Merger
- Interest of Management of Kushi and American Phoenix in the Merger
- Certain Income Tax Consequences of the Merger, Spin-off and
Warrant Distribution
- Accounting Treatment
- Rights of Security Holders
- Description of Kushi Stock and Warrants
- Expenses of the Merger
- Restrictions on Resale of Kushi
Stock by Former American Phoenix Stockholders
- Dissenters' Rights
Kushi and American Phoenix Unaudited Pro Forma Combined Financial Statements 15
THE COMPANIES
American Phoenix
Kushi
Directors and Executive Officers of the Surviving Corporation
Experts
Legal Opinion
Index to Financial Statements
Financial Statements
Appendices:
A. Amended and Restated Agreement and Plan of Merger
(excluding Exhibits and Schedules)
B. Nevada Dissenters' Rights Statute
C. Delaware Dissenters' Rights Statute
<PAGE> 5
SUMMARY OF JOINT INFORMATION STATEMENT
The following is a brief summary of certain information contained
elsewhere in this Joint Information Statement. This summary is qualified in its
entirety by reference to the more detailed information and financial statements
appearing elsewhere in this Joint Information Statement and the documents
incorporated by reference herein, including the appendices to this Joint
Information Statement.
The Companies
Kushi. Kushi, a Delaware corporation, was organized as a natural
foods company to market premium quality breakfast cereals, pasta and sauce
combinations, snacks and other foods under the Kushi Cuisine brand name. From
its inception in May 1994 to December 1995, Kushi had been a development stage
enterprise devoting all of its efforts and resources to market research, product
concept development, marketing and public relations programs. Kushi began
selling and shipping products in December 1995. Responding to slower than
anticipated revenue growth and other indications, early in 1996 the management
of Kushi determined that the business prospects for its product line were not
sufficiently encouraging to protect stockholders' equity. Accordingly, Kushi
management thereafter redirected corporate strategy toward the identification
and development of opportunities for strategic alliances and business
combinations. The principal executive offices of Kushi are located at
Three Stamford Landing, Suite 210, Stamford, CT 06902. (telephone 203-973-2929).
American Phoenix. American Phoenix, a Nevada corporation, was
organized in 1989 to engage in the environmental and construction business.
These operations were discontinued in 1994. American Phoenix has since been in
the development stage. American Phoenix seeks to create shareholder value by
acquiring, financing and developing technology-related companies. Presently,
American Phoenix is an international holding company which continues to seek
acquisitions which, in the opinion of management, are likely to yield enhanced
shareholder value and long-term growth.
American Phoenix has three subsidiaries: Marine Turbine
Australian Pty., Ltd. ("MTA"), an Australian proprietary limited company;
Masling Industries Pty. ("Masling"), an Australian proprietary limited company;
and Tokan Holdings, Inc. ("Tokan"), a Delaware corporation through which
American Phoenix has a minority interest in Barlile Corp., Ltd. ("Barlile"), an
Australian entity engaged in a variety of agricultural ventures.
MTA has developed a prototype modular power unit (MPU) for use
in high speed ocean pursuit craft. The MPU employs an innovative proprietary
gearbox technology which yields improved performance and efficiency. American
Phoenix also derives revenue from a portfolio of promissory notes. Masling is
an aircraft component overhaul and engineering facility.
The principal executive offices of American Phoenix are located at
5 Park Plaza, Suite 1260, Irvine California, 92714 (telephone: 714-224-2525).
<PAGE> 6
Certain Factors
Under applicable state law, consummation of the Merger Agreement
requires the approval by the respective boards of directors and by the holders
of a majority of the voting securities of the constituent corporations to the
Merger. These approvals have been obtained. Accordingly, subject to the terms
and conditions of the Merger Agreement, Kushi and American Phoenix are
authorized to consummate the transactions contemplated by the Merger Agreement
without seeking or obtaining any additional or further consents from their
respective stockholders. A shareholder of American Phoenix or of Kushi may, as
an alternative to becoming a stockholder of the Surviving Corporation, exercise
dissenters' rights of appraisal under the laws of the state of incorporation of
the constituent corporation to the Merger of which he, she or it is a
shareholder. By valid exercise of dissenters' rights, a dissenting shareholder
may obtain the "fair value" of his, her or its shares of Kushi Stock or American
Phoenix Stock as determined in accordance with state law. Procedures for the
exercise of dissenters' rights in the jurisdictions of Delaware and Nevada (the
states of incorporation of Kushi and American Phoenix, respectively) include a
judicial appraisal of equity securities for which dissenters' rights are validly
exercised. See "The Merger- Terms or the Merger-Dissenters' Rights."
In connection with deciding whether to exercise dissenters' rights
in lieu of becoming a stockholder in the Surviving Corporation, a holder of
shares of Kushi Stock or American Phoenix Stock should consider certain factors
relevant to the Merger and to the businesses and operations of Kushi and
American Phoenix. American Phoenix shareholders should consider that since at
the Effective Time, Kushi will have no assets, the Merger will result in a
dilution in the net tangible book value per share of American Phoenix Stock.
Kushi stockholders should consider that American Phoenix is in the development
stage and effectively has a limited operating history, intends to operate in a
variety of highly competitive industries which experience rapid technological
change, is likely to require significant additional capital to meet its business
objectives, and is depended upon current management that may have little direct
experience in the industries of the companies that American Phoenix may acquire.
In addition, stockholders of Kushi and American Phoenix should evaluate the risk
that the Surviving Corporation will be unable to realize all or some of the
benefits anticipated from the Merger. See "The Merger--Certain Risk Factors."
Approval of the Merger; Principal Terms Thereof
The Merger Agreement has been approved by the unanimous vote of
the members of the Board of Directors of Kushi and American Phoenix. Acting by
written consent in lieu of meetings, stockholders representing majority of
outstanding shares of Kushi Stock and American Phoenix Stock have consented to
the Merger. Such approvals satisfy applicable requirements for board and
stockholder approval of the transactions contemplated by the Merger Agreement.
The Merger Agreement, a conformed copy (without exhibits) of
which is attached hereto as Appendix A, provides that, at the Effective Time,
American Phoenix will be merged with and into Kushi and the corporate existence
of American Phoenix will terminate. Upon consummation of the Merger, holders of
shares of American Phoenix Stock (except those stockholders who properly assert
dissenters' rights under applicable state law), will receive pro rata in
accordance with their holdings of American Phoenix Stock, shares of Kushi Stock
which, in the aggregate, represent eighty-five (85%) percent of all shares of
Kushi Stock outstanding after the Merger. Shares of Kushi Stock outstanding
immediately prior to the Merger will remain outstanding upon the Merger. See
"The Merger -- Terms of the Merger -- General; Conversion of Shares."
The Merger Agreement provides that each outstanding warrant, option or other
right to purchase, or note or debenture convertible into, shares of American
Phoenix Stock will remain outstanding and will be exercisable for, or
convertible into, as applicable, that number of shares of Kushi Stock that the
holder thereof would have received in the Merger had such holder exercised such
warrant or option, or converted such note or debenture, in full immediately
prior to the Merger. See "The Merger--Terms of the Merger--Treatment of
Options, Warrants and Convertible Securities; Fractional Shares."
The Merger Agreement contemplates that prior to the Effective
Time, Kushi shall (i) transfer and assign substantially all of its assets and
certain of its liabilities to Kushi Natural Foods Corp., an entity newly-
organized under Delaware law ("Kushi Foods") for the purpose of pursuing the
natural foods business of Kushi and (ii) declare all of the issued and
outstanding common stock, par value .01, per share of Kushi Foods ("Kushi Foods
Stock") as a dividend to the pre-Merger stockholders of Kushi (the "Kushi Foods
Dividend"). The Merger Agreement also provides for the declaration of a
dividend on each share of Kushi Stock outstanding prior to the Merger consisting
of a warrant (a "pre-Merger Warrant") entitling the holder thereof to purchase
one share of Surviving Corporation Stock. The consummation of the Merger
is subject to certain terms and conditions, including the continued inclusion on
the National Association of Securities Dealers Automated Quotations System
("NASDAQ") of Kushi Stock. See "The Merger--Terms of the Merger--Conditions
Precedent to Consummation of the Merger."
<PAGE> 7
The Merger Agreement may be terminated by the mutual written
consent of the Boards of Directors of Kushi and American Phoenix at any time
prior to the Effective Time of the Merger and by either party if (i) the Merger
is enjoined or prohibited by a court or governmental entity, (ii) the Effective
Time has not occurred on or before December 31, 1996 through no fault of the
terminating party. See "The Merger--Terms of the Merger-- Termination and
Amendment".
The Merger will become effective upon filing Certificates of Merger
with the Delaware Secretary of State and the Nevada Secretary of State.
Board of Directors and Management of Kushi and American Phoenix Following the
Merger; Interest of Management of Kushi and American Phoenix in the Merger
The Merger Agreement provides that immediately following the
Effective Time the Board of Directors of Kushi shall be comprised entirely of
members selected by American Phoenix. See "The Merger--Terms of the Merger--
Board of Directors and Management of the Surviving Corporation Following the
Merger";
Certain Income Tax Consequences
The Merger and the Spin-off are each intended as a tax-free
reorganizations for federal income tax purposes. Subject to a successful
challenge to such a classification by the Internal Revenue Service, no gain or
loss for U.S. federal income tax purposes will be recognized by (i) shareholders
of American Phoenix with respect to their receipt of shares of Kushi Stock in
exchange for their shares of American Phoenix Stock (other than with respect to
cash received pursuant to the exercise of dissenters' rights) or (ii) by
stockholders of Kushi with respect to the distribution to them of the capital
stock of Kushi Foods. Stockholders of Kushi may recognize a gain upon their
receipt of pre-Merger Warrants to the extent that the combined value of the
Kushi Foods distribution and the pre-Merger Warrants received exceeds their tax
basis in their Kushi Stock. Stockholders of either constituent corporation who
receive cash pursuant to the assertion of dissenters' rights will recognize gain
or loss, if any, for U.S. federal income tax purposes. STOCKHOLDERS SHOULD
CONSULT WITH THEIR OWN TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF THE MERGER
AND SPIN-OFF WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES, INCLUDING THE
APPLICABILITY OF VARIOUS STATE AND LOCAL TAX LAWS, AND THE TAX LAWS OF ANY
FOREIGN JURISDICTIONS. See "The Merger--Terms of the Merger--Certain Income Tax
Consequences of the Merger."
Accounting Treatment
The Merger will be accounted for as a reverse purchase. See "The Merger --
Terms of the Merger -- Accounting Treatment".
Dissenters' Rights
Holders of shares of Kushi and American Phoenix Stock who comply
with the requirements of applicable state law will be entitled to assert
dissenters' rights of appraisal with respect to their shares and to receive the
"fair value" of such shares in cash. FAILURE TO TAKE ANY STEP IN CONNECTION
WITH THE EXERCISE OF SUCH RIGHTS MAY RESULT IN TERMINATION OR WAIVER OF
DISSENTERS' RIGHTS. See "The Merger--Terms of the Merger--Dissenters' Rights"
and Appendices B and C, which set forth the applicable provisions of statutes
enacted in Delaware and Nevada, respectively, providing for dissenters' rights.
Shares Held by Directors, Executive Officers and their Affiliates
Directors and executive officers of Kushi and their respective
affiliates held 49.43% of the issued and outstanding shares of Kushi Stock as of
July 31, 1996. Directors and executive officers of American Phoenix and their
respective affiliates approximately held 34% of the issued and outstanding
shares of American Phoenix Stock as of June 30, 1996. Under the laws of the
states of Delaware and Nevada, the written consent to a plan of merger by
stockholders holding at least a majority of the voting power is sufficient to
authorize a merger.
<PAGE> 8
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
Selected Historical Financial Data
The following table sets forth certain historical financial
information of American Phoenix as of May 31, 1996 and for the nine months ended
May 31, 1996 and 1995 and as of and for the year ended August 31, 1995. This
information should be read in conjunction with the separate historical financial
statements and the notes thereto of American Phoenix appearing elsewhere in this
Joint Information Statement/Prospectus.
Nine Months Ended Year Ended
May 31, August 31,
--------------------------- ------------
1996(1) 1995 1995
------------ ------------ ------------
(Unaudited) (Unaudited)
Consolidated Statement of
Operations Data;
Revenues $ 3,476,191 $ 6,269 $ 6,269
Net Income (loss) 1,796,761 $ (129,233) $(2,794,438)
Earnings (loss)
per common share $ 0.07 $ (0.01) $ (0.30)
Weighted average
number of common
shares outstanding 26,500,000 9,268,000 9,268,000
May 31, August 31,
1996(1) 1995
------------ ------------
(Unaudited)
Consolidated Balance
Sheet Data;
Working capital deficit $(4,078,844) $(3,008,929)
Total Assets $18,596,526 $ 433,507
Shareholders' equity (deficiency) $10,521,667 $(2,576,461)
Book value per common share(2) $ 0.65 $ 0.57
(1) American Phoenix acquired all of the outstanding capital stock of Masling
Industries Pty. Ltd. ("Masling"), effective February 16, 1996, in a
transaction accounted for as a purchase. The accompanying financial
information includes the result of operations of Masling from the date of
its acquisition by American Phoenix. American Phoenix acquired
approximately $9.7 million principal amount in unsecured promissory notes
for 3,000,000 shares plus American Phoenix's note for $3,000,000 effective
February 27, 1996 and also acquired 552,100 common shares of Barlile Corp.
Ltd. valued at approximately $833,000 in exchange for 1,195,642 common
shares of American Phoenix.
(2) Computed based on the number of shares outstanding of American Phoenix
common stock to be received upon consummation of the Merger assuming
a conversion ratio of one share of American Phoenix stock for .4936
of Kushi stock.
<PAGE> 9
No selected historical financial information for Kushi is presented since
concurrent with the Merger, Kushi's shareholders will receive 100% interest in a
newly formed subsidiary who will have received through transfer by Kushi all
assets and the assumption of all liabilities of Kushi prior to the merger.
Therefore no assets or liabilities are carried from Kushi.
Selected Pro Forma Combined Financial Data
The following table sets forth certain historical financial information of
American Phoenix after giving effect to the Merger, as if it had been
consummated, with respect to statement of operations data, at the beginning of
the periods presented, or, with respect to balance sheet data, as of the dates
presented. The following table presents such information as if the Merger had
been accounted for as a reverse acquisition. Under this reverse acquisition,
the historical operations reflect the operations of the survivor, American
Phoenix, as Kushi's historical activities are treated as discontinued operations
and are excluded.
Summary Financial Information
Pro Forma Summary Financial Information Reflecting
American Phoenix After Giving Effect to the Merger
(Unaudited)
Nine Months Ended Year Ended
May 31, August 31,
--------------------------- ------------
1996(1) 1995 1995
------------ ------------ ------------
Consolidated Statement of
Operations Data
Revenues $ 3,476,191 $ 6,269 $ 6,269
Income from continuing
operations $ 1,796,761 $ (129,233) $(2,794,438)
Income from continuing
operations per common share $ 0.09 $ (0.01) $ (0.15)
Weighted average
number of shares(1) 19,119,371 19,119,371 19,119,371
May 31, August 31,
1996(1) 1995
------------ ------------
Consolidated Balance
Sheet Data;
Working capital deficit $(4,078,844) $(3,008,929)
Total Assets $18,495,526 $ 433,507
Shareholders' equity (deficiency) $10,521,667 $(2,576,461)
Book value per common share(1) $ 0.55 $ (0.13)
(1) This calculation assumes the issuance of 16,251,465 common shares of Kushi
in exchange for 32,922,109 common shares of American Phoenix. The
weighted average number of shares and book value per common share were
computed using the pro forma number of shares outstanding subsequent to
merger of 19,119,371 shares.
<PAGE> 10
KUSHI MACROBIOTICS CORP
AMERICAN PHOENIX GROUP, INC.
-------------
JOINT INFORMATION STATEMENT
_____________
INTRODUCTION
This Joint Information Statement is furnished to stockholders of Kushi
Macrobiotics Corp, a Delaware corporation ("Kushi") and to stockholders of
American Phoenix Group, Inc., a Nevada corporation ("American Phoenix"), in
connection with proposed merger of American Phoenix to and with Kushi.
Kushi, American Phoenix and Kushi Natural Foods Corp., a Delaware
corporation ("Kushi Foods"), have entered into an Agreement and Plan of Merger
dated as of June 1, 1996, amended as of July 12, 1996, (as so amended, the
"Merger Agreement"). A conformed copy of the Merger Agreement (without the
Exhibits or Schedules thereto) is attached to this Joint Information Statement
as Appendix A. Under the terms of the Merger Agreement, American Phoenix will
merge into and with Kushi and the corporate existence of American Phoenix Stock
will cease. Upon the Merger, the former stockholders of American Phoenix will
hold an aggregate of 85% of the Common Stock, par value .001 per share, of the
Surviving Corporation ("Surviving Corporation Stock"). The shares of Kushi
Stock outstanding immediately prior to the Merger shall be unaffected by the
Merger and shall constitute 15% of all shares of Surviving Corporation Stock
outstanding after the Merger. The Merger Agreement also provides for the
transfer and assignment of the natural foods business of Kushi to Kushi Foods,
the distribution of all of the capital stock of Kushi Foods as a dividend to the
pre-Merger stockholders of Kushi and the distribution as a dividend to such
stockholders of warrants for the purchase of shares in the Surviving
Corporation. The shares of capital stock of Kushi Foods and the Warrants to be
distributed to Kushi stockholders (and the shares underlying such Warrants) are
not covered by this Prospectus or any other effective registration statement.
Accordingly, such shares and warrants may be "restricted securities" under the
Securities Act of 1933 and Rule 144 promulgated thereunder.
This Joint Information Statement is being mailed or given to
stockholders of Kushi and shareolders of American Phoenix on or about August
__, 1996. The information set forth in this Joint Information Statement
concerning Kushi has been furnished by Kushi and the information concerning
American Phoenix has been furnished by American Phoenix.
Kushi has filed a registration statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") registering the shares of Kushi Stock to be issued to shareholders of
American Phoenix upon consummation of the Merger. This Joint Information
Statement constitutes the prospectus of Kushi included as part of the
Registration Statement. The principal executive offices of Kushi are located at
Three Stamford Landing, Suite 210, Stamford, CT 06902 (telephone: (203) 973-
2929). The principal executive offices of American Phoenix are located at 5
Park Plaza, Suite 1260, Irvine, CA. 92714 (telephone: (714) 224-2525).
<PAGE> 11
THE MERGER
Kushi's Reasons for the Merger
The Board of Directors of Kushi has unanimously approved the
Merger and the other transactions contemplated by the Merger Agreement and
believes that the Merger is in the best interests of the stockholders of Kushi
for the following reasons:
-- Upon the consummation of the Merger and the Spin-Off, the holders
of Kushi Stock will hold in the aggregate 15% of outstanding Surviving
Corporation Stock and 100% of the capital stock of Kushi Foods. Thus, upon the
Merger, the Kushi stockholders will experience an immediate increase in the net
tangible book value of their investment in the business of Kushi in that the
combined net tangible book value of their shares of Surviving Corporation Stock
and of Kushi Foods will be greater than the net tangible book value of their
holdings of Kushi Stock as of immediately prior to the Effective Time.
Specifically, based upon the net tangible book value of American Phoenix as of
May 31, 1996 and of Kushi as of June 30, 1996, Kushi Stockholders will
experience an immediate increase of 117% of the net tangible book value of their
holdings.
-- In addition to the Surviving Corporation Stock and Kushi Foods
Stock to be held by the Kushi stockholders upon the Merger and Spin-Off, a pre-
Merger Warrant representing the right to purchase a share of Surviving
Corporation Stock at a price of $3.75 per share will be distributed as a
dividend on each share of Kushi Stock outstanding prior to the Merger. In the
opinion of management, the pre-Merger Warrants, combined with the Kushi
Stockholders' 15% interest in the equity of the Surviving Corporations represent
a substantial benefit to Kushi stockholders. Moreover, to the extent that the
management of the Surviving Corporation is able to achieve its objective of the
augmenting stockholder value through the acquisition and development of
technology-related companies, the interests of the present Kushi Stockholders'
in the Surviving Corporation will allow such stockholders to benefit
substantially from such achievement.
-- The Merger will not result in any dilution of the interests of
Kushi stockholders in the pre-Merger business of Kushi. Such interest will
continue in the form of their 100% ownership of Kushi Foods.
American Phoenix's Reasons for the Merger
The Board of Directors of American Phoenix has unanimously approved
the Merger, and for the reasons set forth below, believes that the Merger is in
the best interests of American Phoenix and the stockholders of American Phoenix.
-- The ability to attract outside capital to meet the costs and
expenses associated with the acquisition and development of emerging
technologies is essential to achieving American Phoenix's goal of creating
shareholder value. Among the factors that have contributed to American
Phoenix's past difficulty in attracting new investment is the 1995 delisting of
American Phoenix Stock from the American Stock Exchange. Since October 1995,
American Phoenix Stock has been trading over-the-counter. Although the
Surviving Corporation must meet the NASDAQ initial listing requirements after
the Merger, American Phoenix management believes that the Merger facilitates
inclusion in the NASDAQ Market and that NASDAQ listing potentially enhances the
ability of American Phoenix to attract capital investment. Kushi Stock is
listed on the NASDAQ Market ("NASDAQ") Small Cap tier of the NASDAQ Stock
Market. It is also anticipated that a trading market in Surviving Corporation
Stock will be enhanced by listing on the NASDAQ Market.
<PAGE> 12
-- The Merger will also create a potential source of funding for
business and operations presently being conducted by American Phoenix.
Concurrently with its initial public offering of shares of Kushi Stock, Kushi
offered and sold 1,610,000 redeemable common stock purchase warrants
("Warrants"). The Warrants are also listed on the NASDAQ Market. In addition,
1,575,000 Warrants have been issued to certain officers, directors and
consultants of Kushi and approximately 2,749,997 pre-Merger Warrants will be
issued to holders of Kushi Stock prior to the Effective Time. Each of the
outstanding Warrants upon exercise, entitles the owner thereof to purchase one
share of Kushi Stock at a price of $3.75 per share. Upon the Merger, all
Warrants will continue to represent the right to purchase one share of Surviving
Corporation Stock. In the event that the market price of share of the Surviving
Corporation exceeds the exercise price of the Warrants, it can be anticipated
that a percentage of outstanding Warrants will be exercised. The management of
American Phoenix has determined that the outstanding Warrants provide the
Surviving Corporation with cost-effective access to potential additional
financing. At or prior to consumation of the Merger, Kushi will attempt to have
an effective registration statement under the Securities Act of 1933 as amended
(the "Act") covering the issuance of the shares of Surviving Corporation Stock
upon exercise of the Warrants.
After taking into consideration the factors set forth above,
the American Phoenix Board determined that the Merger was in the best interests
of the stockholders of American Phoenix.
Certain Risk Factors
In addition to the other information contained in this Joint
Information Statement, holders of shares of American Phoenix Stock and Kushi
Stock should carefully consider the factors set forth below in connection with
the Merger and related transactions and in evaluating the likelihood that the
Surviving Corporation will be able to realize the intended benefits of the
Merger. Although all necessary stockholders approval of the Merger Agreement
has already been obtained and stockholders are not being asked to consent to the
Merger or the related transactions, the factors set forth below bear upon the
decision of stockholders regarding the exercise of dissenters' rights. Prior to
the Effective Time, all of the operating assets of Kushi will be transferred to
Kushi Foods which will be owned by the pre-Merger stockholders of Kushi.
Holders of American Phoenix Stock will not, upon the Merger, acquire any
interest in Kushi Foods or the pre-Merger business of Kushi. Accordingly, the
business and prospects of the pre-Merger Kushi are not factors to be considered
in connection with the Merger.
DILUTIVE EFFECT. Upon the Merger, American Phoenix stockholders
will experience an immediate dilution in the net tangible book value of their
investment in the business of American Phoenix in that the net tangible book
value of their shares of American Phoenix Stock will be greater than the net
tangible book value of the shares of Surviving Corporation Stock received by
them upon the Merger. Specifically, American Phoenix shareholders will
experience an immediate dilution of 15% of the net tangible book value of their
holdings of American Phoenix Stock based upon the net tangible book value of
American Phoenix of May 31, 1996 and of Kushi as of June 30, 1996.
NO ASSURANCE THAT POTENTIAL BENEFIT FROM THE EXERCISE OF WARRANTS
WILL BE REALIZED; NECESSITY OF AN EFFECTIVE REGISTRATION STATEMENT. The
potential of the Warrants to provide a source of additional capital is an
important reason influencing the decision of management of American Phoenix to
enter into the Merger Agreement. There can be no assurance, however, that the
market price of the Surviving Corporation Stock will at any time during the term
of Warrants reach a level that would result in the exercise of the Warrants.
Moreover, the Warrants can only be exercised if there is a current registration
statement. At present, there is no effective registration statement covering
the issuance of Kushi Stock upon exercise of the Warrants. At or prior to
consumation of the Merger, Kushi will endeavor to have an effective registration
statement under the Securities Act covering issuance ofthe Kushi Stock issuable
upon exercise of the Warrants. If the Surviving Corporation is unable to
maintain a current registration statement for any reason, or if the market price
of Surviving Corporation Stock does not exceed the exercise price of the
Warrants during the term thereof, the benefits of the primary impetus for the
Merger will not be realized.
<PAGE> 13
DILUTIVE EFFECT OF WARRANT EXERCISE. Although in the opinion of
management of American Phoenix the infusion of capital resulting from exercise
of the Warrants would benefit the Surviving Corporation by providing a source of
funding for the acquisition and development expenses associated with its
corporate objectives, any such exercise of Warrants would dilute the percentage
ownership of the Surviving Corporation held by the stockholders of the Surviving
Corporation as of the Effective Time. Moreover, the issuance of substantial
amounts of Surviving Corporation Stock upon the exercise of the Warrants could
negatively impact the market price of such stock. In addition, since the
stockholders of Kushi will acquire their equity in the Surviving Corporation at
a cost (based upon the net tangible per share value of Kushi Stock)
substantially below the cost (based upon the net tangible per share value of
American Phoenix Stock) at which American Phoenix Shareholders will acquire
their equity in the Surviving Corporation, the American Phoenix Shareholders
will bear most of the risk of loss.
INCURRENCE OF LIABILITIES RELATING TO THE PRE-MERGER OPERATIONS OF
KUSHI. From the date of its inception and thereafter, Kushi has incurred debts
and liabilities relating to the operation of its natural foods business.
Pursuant to the Merger Agreement, in conjunction with the Spin-Off, all of the
liabilities of Kushi, subject to specified exceptions, will be transferred to
Kushi Foods. Although this transfer of liabilities is valid and effective as
between the Surviving Corporation and Kushi Foods, the Surviving Corporation
will remain liable to third parties for all of claims and debts arising out of
the pre-Spin-Off business of Kushi. Moreover, notwithstanding the Spin-Off,
Kushi, as the Surviving Corporation, will remain liable on the two leaseholds
entered into by Kushi in connection with its natural foods business, although
Kushi Foods will provide the Surviving Corporation with a contractual
indemnification of such leasehold obligations.
In the event that the assets of Kushi Foods are insufficient to
satisfy any claim, obligation or liability arising out of the pre-Spin-Off
operations of Kushi, a creditor of Kushi Foods may seek satisfaction of any such
claim, obligation or liability from the assets of the Surviving Corporation.
From and after the Merger, the assets of Kushi, as the Surviving Corporation,
will include all of the assets formerly held by American Phoenix. Thus, the
assets formerly owned by American Phoenix, may become subject to claims based
upon the pre-Merger operations of Kushi. Any such claims which may arise, to
the extent that they are material and to the extent that the assets of Kushi
Foods are insufficient to satisfy such claims, may adversely affect the
financial condition of the Surviving Corporation. See "The Companies -- Kushi -
- - Legal Proceedings".
NO ASSURANCE OF PUBLIC MARKET FOR COMMON STOCK OR WARRANTS.
Although the development of an active and liquid trading market for Surviving
Corporation Stock is a key objective in proceeding with the Merger, there can be
no assurance such a market in Surviving Corporation Stock will develop or, if
developed, will be sustained after completion of the Merger. Further, while
consummation of the Merger is conditioned on Surviving Corporation Stock being
listed for trading on NASDAQ, no assurance can be given that the Surviving
Corporation will meet the criteria applicable to it for maintaining a listing on
NASDAQ upon the Merger and on an ongoing basis thereafter. The NASDAQ By-Laws
require that upon a change of control (such as will occur upon the Merger) a
listed issuer must comply with all requirements applicable to initial inclusion.
Currently, the NASDAQ criteria requires an applicant for inclusion to have: (i)
two registered and active market makers, (ii) total assets of at least $4
million, (iii) minimum bid price per share of $3.00, (iv) 300 stockholders, and
(v) 100,000 shares held by non-insiders which shares must have a market value of
at least $100,000.
<PAGE> 14
POSSIBLE ISSUANCE OF ADDITIONAL SHARES WITHOUT STOCKHOLDER
APPROVAL. In addition to approximately 24,201,741 shares of Surviving
Corporation Stock that will be authorized but unissued and not reserved for
specific purposes, an additional 7,605,540 shares of Surviving Corporation Stock
will be unissued but reserved for issuance pursuant to stock plans of the
Surviving Corporation, upon exercise of Kushi Warrants, upon conversion of the
117,909 shares of the Preferred Stock, par value $.01 of the Surviving
Corporation ("Kushi Preferred Stock") and for issuance upon exercise or
conversion of American Phoenix Derivative Securities. Although there are no
present plans, agreements, commitments or undertakings with respect to the
issuance after the Merger of additional shares, or securities convertible into
any such shares by the Surviving Corporation, any shares issued after the Merger
would dilute the percentage ownership of the Surviving Corporation held by the
stockholders of the Surviving Corporation as of the Effective Time and could
have an adverse impact on the market price of the Surviving Corporation Stock.
The following additional factors should be considered in
connection with evaluating the business and prospects of American Phoenix which,
upon the Merger will be pursued by the Surviving Corporation.
LIMITED OPERATING HISTORY. The current corporate strategy of
American Phoenix is to identify, acquire and develop companies with emerging
technologies. This strategy will continue to be pursued by the Surviving
Corporation. American Phoenix has only a limited history operating under
its present corporate strategy. Between August 1994 and August 1995, American
Phoenix discontinued all operations in its original environmental business and
entered a development stage. American Phoenix first generated revenues during
the second quarter ending February 29, 1996. Currently, American Phoenix's
revenues are generated principally by its subsidiary MTA, manufacturer of high
speed interdiction boats and Masling, an engineering and aircraft maintenance
facility, subsidiary of MTA. American Phoenix also earns revenue from its
investment note receivable portfolio. MTA has not begun commercial production
of its principal product. There can be no assurance that American Phoenix will
be profitable or that subsidiaries will generate significant revenue from
product sales or services. The likelihood of success of American Phoenix must
be considered in light of the problems, experiences, difficulties, complications
and delays frequently encountered in connection with the operation and
development of new and expanding businesses.
Competition. Management anticipates that the industries in which
the Surviving Corporation will operate will be intensely competitive. This
competition is expected to increase with the pace of technological developments.
Current and future competitors may have significantly greater financial,
technical, manufacturing and marketing resources than the Surviving Corporation
and its subsidiaries.
RAPID TECHNOLOGICAL CHANGE. The industries which have in the
past been targeted by American Phoenix are characterized by rapid technological
change. As a result, other technologies may emerge that offer technological,
price or other marketing advantages over technologies to which American
Phoenix's presently or hereafter becomes committed. Lower profit margins
frequently are obtained on newer products than might be typical of mature
products. American Phoenix focuses on companies with emerging technologies
which are not likely to have mature products or substantial market share.
Characteristically of participants in industries experiencing rapid
technological change, American Phoenix's subsidiaries are likely to use product
components that are not of standard industry design and products and services
supplied by a small number of suppliers. Although these suppliers may be
replaceable, American Phoenix could face significant production delays if any
components or services were to become unavailable. The Surviving Corporation's
ability to exploit emerging technologies will be subject to all of the foregoing
risks as well as being dependent upon its ability to develop and market
applications of emerging technologies.
<PAGE> 15
ADDITIONAL FUNDING MAY BE REQUIRED. Achievement of Management's
objectives will be dependent upon its ability to access significant capital.
Current Management believes that it can raise sufficient capital through private
placements, registered public offerings or exercise of outstanding Surviving
Corporation Warrants. If, for any reasons, sufficient capital is unavailable,
the ability to develop and market existing businesses and to acquire new or
additional businesses will be adversely affected.
DILUTION. In the recent past, American Phoenix has sought to
acquire technologies and assets though the issuance or exchange of the capital
stock of American Phoenix, rather than cash. After the Merger, management
anticipates that the Surviving Corporation will continue to seek acquisition and
merger transactions that can be effected in this manner. If the net tangible
book value of such businesses or assets divided by the number of shares issued
in connection with such transaction is less than the net tangible book value of
the American Phoenix shares outstanding prior to such transaction, the then
current owners of Surviving Corporation Stock will suffer immediate dilution in
the net tangible book value of their investment. No assurance can be given that
such transactions will not result in dilution to existing stockholders.
INTERNATIONAL RISKS. American Phoenix's subsidiaries currently
operate in Australia and are expected to conduct substantial business activities
in the Pacific Rim. Foreign manufacturing and sales activities are subject to
the risks of operating in an international environment. These risks include
unstable political and economic environments, local labor laws and customs,
local laws and taxes, the potential imposition of trade or foreign exchange
restrictions, tariff increases and transportation delays. In addition,
financial results are subject to fluctuations in foreign currency exchange rates
within the countries where it operates. The risk of foreign exchange losses has
been mitigated by the conduct of most of American Phoenix's foreign business
transactions in local currency. It is anticipated that this practice will be
continued by the Surviving Corporation.
DEPENDENCE UPON MANAGEMENT. The Surviving Corporation will be
dependent upon the international expertise of its new management team and
financial advisors to meet its strategic objectives. None of these persons
necessarily have significant operational or marketing experience in the
industries in which companies that the Surviving Corporation may acquire will
compete.
<PAGE> 16
TERMS OF THE MERGER
This section of the Joint Information Statement does not contain a
complete explanation or description of the Merger Agreement and is qualified in
its entirety by reference to the terms of the Merger Agreement, a conformed copy
of which (without the exhibits or schedules thereto) is attached to this Joint
Information Statement as Appendix A and incorporated herein by reference.
General
The Merger Agreement provides for the Merger of Kushi and American
Phoenix. Upon effectiveness of the Merger, American Phoenix will be merged with
and into Kushi, the separate existence of American Phoenix will cease and Kushi
will be the Surviving Corporation. As a consequence of the Merger, title to all
of the property and assets of American Phoenix will be vested in Kushi and Kushi
will be subject to all of the liabilities of American Phoenix.
The Merger Agreement contemplates the pre-Merger Spin-off of the
natural foods business of Kushi to Kushi stockholders. The Spin-off will be
accomplished by (i) the transfer and assignment of substantially all of the
assets and certain of the liabilities of Kushi to Kushi Foods and (ii) the
declaration by Kushi of a dividend, on each share of Kushi Stock outstanding as
of a record date prior to the Effective Time of Kushi Foods Stock, the
distribution of such dividend (the "Kushi Foods Distribution") to be contingent
upon consummation of the Merger. The Kushi Foods Distribution will comprise all
of the outstanding capital stock of Kushi Foods.
The Merger Agreement also provides for the declaration by Kushi of
a dividend on each share of Kushi Stock outstanding as of a record date prior to
the Merger consisting of a Redeemable Surviving Corporation Stock Purchase
Warrant ("pre-Merger Warrant"). Distribution of the pre-Merger Warrant dividend
will be contingent upon the consummation of the Merger. Each pre-Merger
Warrant, upon exercise, will entitle the owner thereof to purchase one share of
Surviving Corporation Stock during the period ending on August 10, 2000 at a
price (subject to certain anti-dilution adjustments) of $3.75 per share.
The Merger Agreement provides that, as soon as practicable
following satisfaction of all conditions to the Merger, Certificates of Merger
will be filed with the Secretary of State of Delaware and the Secretary of State
of Nevada. The Merger will become effective upon the acceptance for filing of
such Certificates of Merger by the Secretary of State of Delaware and the Nevada
Secretary of State (the "Effective Time"). It is currently expected that the
Merger will occur on or shortly after _____________, 1996. Either party may
terminate the Merger Agreement if the Merger has not occurred on or before
December 31, 1996, provided that the failure of the Effective Time to occur on
or before such date does not result from a breach of the Merger Agreement by the
terminating party. See "Terms of the Merger--Termination and Amendment".
Conversion of Shares.
The Merger Agreement provides that, upon consummation of the
Merger, all shares of American Phoenix Stock issued and outstanding immediately
prior to the Merger, except for those shares owned by shareholders who properly
assert dissenters' rights under the Nevada dissenters' rights statute (see "The
Merger--Terms of the Merger--Dissenters' Rights"), would, at the effective time
of the Merger (the "Effective Time"), automatically convert into that number of
shares of Common Stock, par value $.001 per share, of the Surviving Corporation
("Surviving Corporation Stock") as (assuming no exercise of dissenters' rights
by the stockholders of either Kushi or American Phoenix) would constitute
eighty-five (85%) percent of the shares of Surviving Corporation outstanding
immediately following the Merger. Based upon the number of issued and
outstanding shares of Kushi Stock and American Phoenix Stock on July 31, 1996
(and assuming the pre-Merger conversion of shares of Kushi Preferred Stock
currently outstanding) on the Merger, each share of American Phoenix Stock will
automatically convert to .4936 of a share of Kushi Stock. The number of shares
of Kushi Stock to be issued to holders of American Phoenix stock will be
determined on the basis of shares of American Phoenix Stock and Kushi Stock
outstanding at the Effective Time.
<PAGE> 17
Upon the Merger, shares of Kushi Stock held by Kushi stockholders
immediately prior to the Merger will (assuming no exercise of dissenters' rights
by the stockholders of either Kushi or American Phoenix) constitute fifteen
(15%) percent of the Surviving Corporation Stock outstanding immediately
following the Merger and shall otherwise remain unaffected by the Merger. The
exercise of dissenters' rights by holders of shares of American Phoenix Stock
will, if it occurs, reduce the post-Merger ratio of outstanding shares of
Surviving Corporation Stock held by the former stockholders of American Phoenix
to total outstanding shares of Surviving Corporation Stock. Conversely, the
exercise of dissenters' rights by holders of Kushi Stock will, if it occurs,
reduce the post-Merger ratio of outstanding shares of Surviving Corporation
Stock held by the Pre-Merger stockholders of Kushi to total outstanding shares
of Surviving Corporation Stock
Issuance of Additional Shares Pending the Merger
Under the terms of the Merger Agreement, American Phoenix and
Kushi are each prohibited from issuing any additional shares of capital stock
prior to consummation of the Merger, except upon the exercise of any options or
warrants to purchase American Phoenix Stock or Kushi Stock or upon the
conversion of convertible securities, which were outstanding as of the date of
the Merger Agreement except that this prohibition has been waived with respect
to 2.1 million shares of American Phoenix Stock to be issued to Mr. Di Carlo in
replacement of 1.1 million shares that were cancelled by American Phoenix and
as compensation for services rendered to American Phoenix from 1994 to 1996,
as a consultant, and from June 1996 to the present as Chief Executive Officer.
As at July 31, 1996 there warrants were to purchase 500,000 shares of American
Phoenix Stock. As at July 31, 1996 there were options to purchase 8,500 shares
of Kushi Stock, Warrants to purchase 3,185,000 shares of Kushi Stock (of which
1,050,000 are subject to rescission if the Merger is not consummated) and shares
of Kushi Preferred Stock convertible into 117,909 shares of Kushi Stock. Except
for the foregoing, and for the pre-Merger Warrants to be issued to Kushi
stockholders of record as of a date prior to the Effective Time, no rights to
purchase or securities convertible into American Phoenix Stock or Kushi Stock
are currently outstanding or, under the terms of the Merger Agreement, will be
permitted to be granted prior to the Effective Time. The number of shares of
American Phoenix Stock and the number of shares of Kushi Stock (assuming the
exercise or conversion of all outstanding securities exercisable or convertible
into such shares and the pre-Merger issuance of 2.1 million shares) that would
be outstanding immediately prior to the Effective Time is 35,522,109 and
6,311,406 respectively.
Treatment of Options, Warrants and Convertible Securities.
Under the terms of the Merger Agreement, each American Phoenix
Derivative Security, outstanding and unexercised or unconverted at the Effective
Time shall, at the Effective Time, remain outstanding and automatically be
deemed to be exercisable for that number of shares of Kushi Stock that the
holder of such American Phoenix Derivative Security would have received in the
Merger had such holder exercised or converted his American Phoenix Derivative
Security in full immediately prior to the Effective Time. With respect to
American Phoenix Options, any term or condition respecting the vesting of the
right to exercise such option shall remain unaffected by the Merger, but any
period during which the holder of such option shall have served as an employee
or a consultant, as the case may be, of American Phoenix will be counted toward
determining the vesting of the right to exercise such option after the Effective
Time.
<PAGE> 18
Fractional Shares
No fractional shares of Kushi Stock will be issued in connection
with the Merger. The number of shares of Kushi Stock any American Phoenix
stockholder would otherwise be entitled to receive pursuant to the Merger or any
holder of a American Phoenix Derivative Security would otherwise be entitled to
receive upon exercise of such American Phoenix Derivative Security will be
rounded to the nearest whole number of shares so as to eliminate any fractional
shares.
Exchange of Certificates
The Continental Stock Transfer & Trust Company (the "Exchange
Agent") has been designated to act as exchange agent in effecting the exchange
of certificates representing American Phoenix Stock for certificates
representing the shares of Kushi Stock into which such shares of American
Phoenix Stock have been converted. The Exchange Agent will send a letter of
transmittal to the holders of American Phoenix Stock offering to exchange the
certificates representing such American Phoenix Stock for certificates
representing shares of Kushi Stock. From and after the Effective Time, each
certificate or instrument which, prior to the Effective Time, represented shares
of American Phoenix Stock or American Phoenix Derivative Securities will be
deemed to represent, as applicable, only the right to receive certificates for
shares of Kushi Stock or the right to acquire shares of Kushi Stock, as the case
may be, in accordance with the terms of the Merger Agreement, and the holder of
each such certificate or instrument will cease to have any rights with respect
to the shares of American Phoenix Stock formerly represented thereby (in the
case of certificates formerly representing shares of American Phoenix Stock) or
with respect to the shares of American Phoenix Stock issuable upon exercise
thereof (in the case of instruments formerly representing American Phoenix
Derivative Securities), except as otherwise provided in the Merger Agreement or
by law.
Representations, Warranties and Covenants
The Merger Agreement contains representations, warranties,
covenants and agreements by Kushi, American Phoenix and Kushi regarding, among
other things, the accuracy and completeness of certain information furnished by
each of the respective parties in connection with the Merger. The Merger
Agreement also contains covenants of the parties with respect to the conduct of
their respective businesses pending the closing under the Merger Agreement,
including agreements (subject to certain exceptions) not to issue any equity
securities, not to pay any dividends and not to sell any material amount of
their respective assets outside of the ordinary course of business except as
contemplated by the Merger Agreement. In addition, each of the parties has
agreed (subject to certain exceptions) to carry on its respective business only
in the ordinary course and consistent with past practice and to use all
reasonable efforts to preserve intact its present business organization and
relationships with clients and others having business dealings with it.
There are no agreements or undertakings in the Merger Agreement
on the part of either American Phoenix, Kushi or Kushi Foods to indemnify any
other party in the event any representation or warranty made by one party to
another in the Merger Agreement was not accurate at the time made. However, in
the event the Merger becomes effective, the Surviving Corporation agrees to
indemnify any person who prior to the Effective Time was an officer or director
of Kushi, American Phoenix or Kushi Foods against liability, claims or amounts
paid in settlement of any claim, suit or proceeding, including any liabilities
arising under or out of any state or federal securities laws to the fullest
extent permitted by law, based in whole or in part on the fact that such person
is or was an officer or director of Kushi, American Phoenix or Kushi Foods.
<PAGE> 19
Conditions Precedent to Consummation of the Merger
The obligations of the parties to consummate the Merger are also
subject to various conditions, including the authorization for inclusion on
NASDAQ of Kushi Stock; the accuracy as of the closing date in all material
respects of the representations and warranties of the parties contained in the
Merger Agreement; the performance in all material respects of all covenants of
the parties contained in the Merger Agreement which were to be performed on or
before the closing date; the absence of any statute, rule, regulation or
governmental or judicial action which prohibits or restrains the transactions
contemplated by the Merger Agreement and the absence of certain suits or
investigations which would have a material adverse effect on the transactions
contemplated by the Merger Agreement; the delivery of certain certificates and
agreements by the parties and their respective officers and directors; and the
delivery of certain opinions by counsel and independent public accountants to
the parties. Kushi must also have filed and attempt to have an effective
registration statement covering the issuance of the Kushi stock upon exercise
of the Warrants.
The parties may waive compliance with any of the conditions to
their respective obligations to consummate the Merger.
Termination and Amendment
The Merger Agreement may be terminated at any time prior to
the Effective Time: (i) by mutual written consent of the Boards of Directors of
American Phoenix and Kushi; (ii) by either American Phoenix or Kushi if (A) any
court or governmental body takes any action restraining, enjoining or otherwise
prohibiting the transactions contemplated thereby and all appeals and means of
appeal therefrom have been exhausted, (B) the Effective Time shall not have
occurred on or before _________________, provided the failure of the Effective
Time to occur on or before such date does not result from a breach of the Merger
Agreement by the terminating party, (iii) by either American Phoenix or Kushi,
if any condition to its obligation to effect the Merger shall not be met in all
material respects or waived prior to such time as such condition can no longer
be satisfied.
The Merger Agreement may be amended by American Phoenix and Kushi
prior to the Effective Time, whether prior to or after approval thereof by the
stockholders of Kushi or by the stockholders of American Phoenix, provided that
after any such approval, no amendment may be made that changes the ratio
pursuant to which Kushi Stock will be issued upon conversion of American Phoenix
Stock without the further approval of the stockholders of each constituent
corporation.
Board of Directors and Management of Kushi, American Phoenix and Kushi Foods
Following the Merger and Spin-Off.
The Merger Agreement provides that immediately following the
Effective Time the Board of Directors of the Surviving Corporation shall be
comprised entirely of four directors who have been selected by American Phoenix.
With regard to Kushi Foods, the Merger Agreement further provides that Michio
Kushi will be the initial Chairman and shall appoint the initial Board of
Directors.
Interest of Management of Kushi and American Phoenix in the Merger
KUSHI. On or about July 1, 1996, Kushi issued an aggregate
of 700,000 redeemable purchase warrants to directors, officers and consultants
(a total of eight persons) and agreed to pay such persons an aggregate of
$475,000 representing settlement of Kushi's outstanding contractual obligations
to such persons. The warrants issued to such persons are subject to rescission
in the event the Merger is not consummated. Each warrant currently entitles the
holder thereof to purchase one share of Surviving Corporation Stock at $3.75
(subject to anti-dilution adjustments). Payment of the agreed settlement
amounts is contingent upon consummation of the Merger.
American Phoenix has entered into an employment relationship
with Daniel A. France, a director and officer of Kushi. Mr. France's employment
pursuant to the employment agreement will be effective upon the Merger.
<PAGE> 20
Certain Income Tax Consequences of the Merger, Spin-Off and Warrant Distribution
The Merger. The following is a discussion of the material U.S. federal
income tax consequences under the Internal Revenue Code of 1986, as amended (the
"Code"), of the Merger to holders of American Phoenix Stock. This discussion
does not deal with all the tax consequences of the Merger that may be relevant
to the particular circumstances of individual American Phoenix stockholders or
employees, such as holders of shares acquired upon exercise of American Phoenix
Options or in other compensatory transactions.
1. The Merger will be a reorganization within the meaning
of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and Kushi and American
Phoenix will be parties to the reorganization within the meaning of Section
368(b) of the Code;
2. No gain or loss will be recognized by Kushi or American
Phoenix;
3. No gain or loss will be recognized by shareholders of
American Phoenix with respect to their receipt solely of Surviving Corporation
Stock in exchange for their American Phoenix Stock;
4. The tax basis of the Surviving Corporation Stock
received by shareholders of American Phoenix will be equal, in each instance, to
the tax basis of the American Phoenix Stock surrendered in exchange therefor;
and
5. The holding period of the Surviving Corporation Stock
received by shareholders of American Phoenix will include, the period during
which the American Phoenix Stock surrendered therefor was held, provided that,
the American Phoenix Stock was a capital asset in the hands of such shareholders
on the effective date of the Merger.
A successful IRS challenge to the status of the Merger as a
reorganization within the meaning of Section 368 of the Code would result in a
American Phoenix shareholder recognizing gain or loss with respect to each share
of American Phoenix Stock surrendered equal to the difference between the
shareholder's tax basis in such share and the fair market value, as of the time
of the Merger, of the Kushi Stock received in exchange therefor. Even if the
Merger qualifies as a reorganization within the meaning of Section 368(a)(1)(A)
and Section 368(a)(2)(E) of the Code, the receipt of all or a portion of such
shares of Kushi Stock in exchange for services or property (other than solely
American Phoenix Stock) may be taxable as ordinary income. Gain may also be
recognized to the extent a American Phoenix Shareholder was treated as receiving
consideration (in addition to Kushi Stock) in exchange for such shareholder's
American Phoenix Stock.
The Spin-Off and Warrant Distribution.
The following is a discussion of the material U.S. federal income
tax consequences under the Code of the Spin-Off and the Pre-Merger Warrant
distribution to holders of Kushi Stock.
The Spin-Off will be a reorganization within the meaning of Section
368(a)(1)(D) of the Code and Kushi and Kushi Foods will be the parties to the
reorganization within the meaning of 368(b) of the Code.
No gain or loss will be recognized by stockholders of Kushi with
respect to their receipt solely of Kushi Foods Stock as a distribution on their
shares of Kushi Stock.
To the extent that the fair market value of the pre-Merger Warrant
received by Kushi stockholders, when combined with the fair market value of the
Kushi Foods Stock distribution, exceeds such stockholders' tax basis in their
Kushi Stock, such stockholders may recognize a gain to the extent of such
excess.
<PAGE> 21
The tax basis of the Kushi Foods Stock received by Kushi stockholders
will be equal to the tax basis of the Kushi Stock adjusted for any gain
recognized.
The holding period of the Kushi Foods Stock received by Kushi
Stockholders will include the period during which such Kushi Stock was held,
provided that such Kushi Stock was a capital asset in the hands of such
stockholders on the date of receipt.
THE FOREGOING IS A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER, THE SPIN-OFF AND PRE-MERGER WARRANT DISTRIBUTION.
AMERICAN PHOENIX STOCKHOLDERS AND KUSHI STOCKHOLDERS SHOULD CONSULT WITH THEIR
OWN TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF PRE-MERGER WITH RESPECT TO
THEIR OWN PARTICULAR CIRCUMSTANCES, INCLUDING THE APPLICABILITY OF VARIOUS
FOREIGN, STATE AND LOCAL LAWS.
Accounting Treatment
Although as a matter of corporate law,the existence of
American Phoenix ceases upon the Merger, for accounting purposes American
Phoenix is deemed the survivor and the Merger is considered a reverse
acquisition of Kushi by American Phoenix. Prior to the Effective Time, Kushi
will transfer substantially all of its assets and liabilities to Kushi Foods, an
entity newly organized for the purpose of pursuing the natural foods business of
Kushi. All of the issued and outstanding common stock of Kushi Foods will be
distributed to the pre- Merger stockholders of Kushi as a dividend. Inasmuch as
all of the net assets of Kushi will be spun off prior to the Merger, the
historical statements of operations of the Surviving Corporation exclude Kushi's
historical activities as disposed of operations and therefore reflect solely the
historical operations of American Phoenix.
Rights of Security Holders
The rights of the holders of American Phoenix Common Stock
are currently governed by Nevada law and by, American Phoenix's Articles of
Incorporation and American Phoenix's By-Laws. Upon consummation of the Merger,
holders of American Phoenix Stock will become holders of Kushi Stock and their
rights as such will be governed by Delaware law and by, Kushi's Restated
Certificate of Incorporation and Kushi's By-Laws. American Phoenix stockholders
are entitled to one vote for each share held and have no cumulative voting
rights. They have no preemptive rights with respect to subsequent share issues
and are entitled to share ratably in dividends declared and, upon liquidation,
in the assets of the corporation. The foregoing aspects of stock ownership will
remain unchanged upon American Phoenix shareholders becoming holders of Kushi
Stock. Although Delaware and Nevada Law and the respective corporate charters
and by-laws of American Phoenix and Kushi and not in every respect identical,
they are closely parallel with respect to basic principles of corporate
governance, the rights of holders of common equity, protections afforded with
respect to certain business combinations and the right of directors and officers
to indemnification. Accordingly, the Merger will not result in any material
change in the rights of holders of American Phoenix Stock, as such, upon
becoming holders of Kushi Stock.
<PAGE> 22
Description of Kushi Stock and Warrants
The Certificate of Incorporation of Kushi authorizes the issuance
of 15,000,000 shares of Kushi Stock, and 5,000,000 shares of Preferred Stock,
par value $.01 per share ("Kushi Preferred Stock"). As of the date of the
Prospectus, 2,749,997 and 117,909 shares of Kushi Stock and Preferred Stock,
respectively, are issued and outstanding. Upon the Merger, Kushi's Certificate
of Incorporation will be amended to increase the number of shares of Kushi Stock
authorized for issuance to 50,000,000 and to increase to 10,000,000 the
authorized number of shares of Preferred Stock.
The holders of Kushi Stock have no preemptive or subscription
rights in later offerings of Kushi Stock and are entitled to share ratably (i)
in such dividends as may be declared by the Board of Directors out of funds
legally available for such purpose and (ii) upon liquidation, in all assets of
Kushi remaining after in full of all debts and obligations of and any
preferences granted in the future to any preferred stock.
Holders of Kushi Stock are entitled to one vote for each share held
and have no cumulative voting rights. Accordingly, the holders of more than 50%
of the issued and outstanding shares of Kushi Stock entitled to vote for
election of directors can elect all the directors if they choose to do so.
After the Merger the current stockholders of American Phoenix will collectively
own more than 50% of the outstanding shares of Kushi Stock. All shares of Kushi
Stock now outstanding are fully paid and nonassessable and all shares of Kushi
Stock which are to be issued in the Merger, when issued, will be fully paid and
nonassessable. The Board of Directors is authorized to issue additional shares
of Kushi Stock within the limits authorized by Kushi Certificate of
Incorporation without stockholder action.
Section 203 of the Delaware General Corporation Law provides that
if a person acquires 15% or more of the stock of a Delaware corporation, he
becomes an "interested stockholder" and may not engage in a "business
combination" with that corporation for a period of three years. The term
"business combination" includes a merger, a sale of assets or a transfer of
stock. The three year moratorium may be terminated if any of the following
conditions are met: (1) the Board of Directors approved the acquisition of
stock or the business combination before the person became an interested
stockholder, (2) the interested stockholder acquired 85% of the outstanding
voting stock, excluding in the determination of outstanding stock is any stock
owned by individuals who are officers and directors of the corporation and any
stock owned by certain employee stock plans, or (3) the business combination is
approved after the person became an interested stockholder by voting stock which
is not owned by the interested stockholder.
The rights of the holders of shares of Kushi's capital stock
are established by Kushi's Certificate of Incorporation, Bylaws and by Delaware
law. The foregoing statements do not purport to be a comprehensive explanation
of such rights.
<PAGE> 23
Expenses of the Merger
Kushi and American Phoenix will pay their respective costs
and expenses in connection with the Merger. It is anticipated that the costs
and expenses of Kushi and American Phoenix in connection with the Merger will
be approximately $90,000 and $75,000, respectively.
Restrictions on Resale of Kushi Stock by Former American Phoenix Stockholders
Kushi has registered under the Securities Act the shares of Kushi
Stock that stockholders of American Phoenix will be entitled to receive upon
consummation of the Merger. Kushi Stock is authorized for inclusion on the
National Association of Securities Dealers Automated Quotation System and the
continued inclusion of Kushi Stock on NASDAQ is a condition to the consummation
of the Merger.
Dissenters' Rights
The following summaries of the Nevada Revised Statutes, Section
78.471 through Section 78.502, inclusive, (the "Nevada Statute") and Section 262
of the Delaware General Corporation law (the "Delaware Statute") which set forth
the rights of dissenting stockholders under the laws of Nevada and Delaware in
connection with certain merger transactions are qualified in their entirety by
reference to the full texts of the Nevada and Delaware Statutes that are annexed
hereto as Appendices B and C, respectively.
American Phoenix Shareholders
Any holder of shares of American Phoenix Stock who elects to
exercise dissenters' rights (a "Dissenting AP Shareholder") with respect to the
Merger must (A) send to American Phoenix a written demand for payment of the
fair value of all of the shares owned beneficially by the shareholder
accompanied by a certified statement by such shareholder as to whether such
stockholder acquired beneficial ownership of the shares prior to July 30, 1996
and (B) deposit certificates representing shares for which payment of value is
being demanded (the "Deposited Shares") with _____________________. A form for
use by Dissenting AP Stockholders in making such demand and in the transmission
of Deposited Shares has been provided with this Joint Information Statement to
holders of shares of American Phoenix Stock (the "Demand Form"). Any demand by
a person on whose behalf another person holds record ownership of American
Phoenix Stock must be accompanied by the written consent of such recordholder to
the dissent.
The (A) receipt by American Phoenix of an executed and certified
Demand Form on or before _______________, 1996 (together with the written
consent of the recordholder of shares for which payment is sought, if other than
the beneficial owner of such shares) and the (B) deposit of the share
certificates representing Deposited Shares are requirements for the exercise by
American Phoenix Stockholders of the dissenters' rights accruing as a result of
the Merger. A shareholder who does not demand payment or deposit his, her or
its certificates where required, each by ___________________, 1996 is not
entitled to payment of the fair value in lieu of the consideration (shares of
Surviving Corporation Stock) to be issued upon the Merger.
Effective upon receipt by American Phoenix of the Demand
Form, no transfer of Deposited Shares shall be recorded on the books of American
Phoenix.
<PAGE> 24
Within 30 days after its receipt of a demand for payment made in
compliance with the Nevada Statute, American Phoenix is required to pay to each
Dissenting AP Shareholder the fair value of the Deposited Shares as such value
is estimated by American Phoenix, together with accrued interest thereon from
the Effective Time.
Any Dissenting AP Shareholder who has a beneficial holder of
Deposited Shares on April 18, 1996 and who believes that the amount paid is
less than the full value of the Deposited Shares may notify American Phoenix of
his, her or its own estimate of fair value within 30 days after payment has been
made or offered. If any such demand for payment is not settled within 60 days
following its making, the Surviving Corporation must either pay such demand in
full (less any amount previously paid) or commence a judicial proceeding for the
determination of the fair value of the Deposited Shares and accrued interest.
Dissenters' rights may also be asserted by a person who became a beneficial
holder of shares after July 30, 1996. American Phoenix may elect to require as
a condition to payment of any Dissenting AP Shareholder who was not a beneficial
holder of shares before July 30, 1996, such Dissenting AP Shareholder's
acceptance of payment of the amount offered in full satisfaction of the demand.
Persons who decline to accept the amount offered by American Phoenix in full
satisfaction of their demand made pursuant to the Demand Form, may also submit
their own estimate of fair value and demand payment therefor.
The costs, fees (including those of appraisers, experts and
counsel) associated with proceeding for a judicial appraisal may be assessed
against either American Phoenix or the Dissenting AP Shareholders, as the court
finds equitable.
Kushi Stockholders
Under the Delaware Statute, a holder of shares Kushi Stock who
desires to exercise dissenters' rights of appraisal with respect to such shares
must deliver to the Surviving Corporation, within twenty (20) days after the
date of this notice (i.e., no later than __________, 1996), a written demand for
appraisal of the shares. The demand must adequately identify the stockholder,
including mailing address, and be sent to American Phoenix Group, Inc., 5 Park
Plaza, Suite 1260, Irvine, California 92714.
Only a holder of record is entitled to assert appraisal rights for
the shares of Kushi Stock registered in that holder's name. If shares are held
in a fiduciary capacity, such as by a trustee, guardian or custodian, or by
another record holder, such as a broker holding for its customer, the demand
should be made by the record owner in his or its respective capacity as such,
If a record holder holds shares for more than one beneficial owner, he, she or
it may exercise appraisal rights with respect to the shares held for one or more
such owners. In such case, the written demand must state the number of shares
as to which appraisal is sought; otherwise the demand will be presumed to cover
all shares of Kushi Stock held in the name of the record owner.
<PAGE> 25
Within 120 days after the Effective Time (i.e., by __________,
1996), any Kushi Stockholder who has made a timely written demand for appraisal
(a "Dissenting Kushi Stockholder") may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the Kushi Common stock held
by all Dissenting Kushi Stockholders. Failure to file a petition within the 120
day period may result in the termination of dissenters' rights. Service of a
petition to commence a judicial appraisal proceeding must be made on the
Surviving Corporation. Within 20 days after such a petition is filed, the
Surviving Corporation will file in the office of the Register in Chancery a list
of the Dissenting Kushi Stockholders with whom the Surviving Corporation has not
reached agreement as to the value of their shares. At a hearing on such
petition, the Court of Chancery will determine the stockholders who have
complied with the Delaware Statute and are entitled to appraisal rights. The
Court of Chancery will determine the fair value of the shares, excluding any
appreciation or depreciation arising from the accomplishment or expectation of
the Merger, including a fair rate of interest, if any, and such amount will be
paid by the Surviving Corporation upon the surrender of the certificates
representing such shares. Court costs may be determined by the Court of
Chancery and allocated between the Surviving Corporation and the Dissenting
Kushi Stockholders as the Court deems equitable.
Dissenting Kushi Stockholders are entitled to receive, upon
written request, a statement setting forth the aggregate number of shares of
Kushi Stock not voted in favor of the Merger and for which appraisal demands
have been received and the aggregate number of the holders of such shares, which
statement will be mailed to such stockholder within 10 days of receipt of such
request by Kushi or within 10 days after the expiration of the period for
delivery of demands for appraisal, whichever is later.
<PAGE> 26
KUSHI MACROBIOTICS CORP. AND
AMERICAN PHOENIX GROUP, INC., AND
SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of shareholders'
equity reflects the pro forma effects on shareholders' equity of the Merger and
the Spin-Off as if such transactions took place on May 31, 1996 and combines the
financial position of Kushi as of June 30, 1996. Although as a matter of law
the corporate existence of American Phoenix will cease upon the Merger, for
accounting purposes, American Phoenix is deemed the survivor and the Merger is
considered a reverse acquisition. Under this reverse acquisition, historical
operations of the survivor reflect solely the operations of American Phoenix as
Kushi's historical activities are treated as discontinued operations and are
excluded. Accordingly, no pro forma statement of operations is provided.
American
Phoenix
Kushi Group, Pro Forma
Macrobiotics Inc. and Acquisition for
Corp.* Subsidiaries Adjustments Acquisitions
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock,
$.01 par value,
5,000,000 shares
authorized $ $ $ $ --
Convertible Preferred
Stock, 400,000
shares authorized;
issued and
outstanding 117,909
as June 30, 1996 and
none subsequent to
acquisition(1) 1,179 (1,179)
Common stock, $.001
par value,
15,000,000 shares
authorized;(2) issued
and outstanding
2,749,997 shares at
June 30, 1996 and
19,119,371 shares
subsequent to
acquisition 2,750 329,220 (312,851) 19,119
Additional paid-in
capital 19,930,655 310,101 20,240,756
Accumulated deficit (3,929) (9,738,208) 3,929 (9,738,208)
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS'
EQUITY $ $10,521,667 $ $10,521,667
============ ============ ============ ============
* After giving effect to the distribution of all assets and liabilities.
1. Presumes the conversion to common stock.
2. Presumes increase in shares authorized.
<PAGE> 27
THE COMPANIES
Kushi
Kushi was formed under the laws of the State of Delaware in May
1994, to develop, produce and/or market a full line of high quality natural
foods based on Michio Kushi's Standard Macrobiotic Diet. In August 1995, Kushi
raised approximately $4.8 million in its initial public offering ("IPO") of
Kushi Stock and Warrants proceeds which were used to fund activities undertaken
during Kushi's development phase. The sale and shipment of product began in the
last quarter of fiscal 1995. In early 1996, management determined that revenues
and profit margins were not adequate to sustain the business as a going concern.
Since then Kushi management has focused on finding a merger, joint venture or
strategic alliance partner to protect stockholder equity. To conserve its
working capital pending fulfillment of this objective, Kushi reduced its staff
and liquidated or otherwise resolved certain of its contractual obligations. In
May 1996, Kushi executed a definitive agreement to merge with American Phoenix
which was subsequently amended in July 1996. The process of curtailment of
operations and the reduction of overhead has been continued following execution
of the Merger Agreement. Kushi continues to seek a business combination or
marketing alliance to enhance the long-term viability of its natural foods
business, after the Merger will be pursued by Kushi Foods.
Properties
In August 1995, Kushi entered into a five-year lease for
approximately 4,000 square feet of office space located in Stamford, CT. The
lease calls for monthly payments of approximately $5,000 in the first year,
escalating to $6,000 per month during the fifth year of the agreement. Kushi
moved into this facility in October 1995. Kushi is presently seeking to
sublease the Stamford office to a third party. It is anticipated that if a
subtenant is found for the Stamford office, Kushi will remain contingently
liable on the lease in the event of such subtenant's default.
In August 1995, Kushi entered into a five-year lease for 27,000
square feet of warehouse space located in Parsippany, NJ. The lease calls for
monthly payments of approximately $10,000 during the term of the lease. Kushi
occupied such space beginning in September 1995. On April 30, 1996, Kushi
vacated the Parsippany office pursuant to a sublease. In the event of a default
by Kushi's subtenant, Kushi remains liable for all obligations pursuant to the
Parsippany lease.
Legal Proceedings
On March 8, 1996, Kushi terminated Mr. Mark Mendelson as its Vice
President-Sales, for cause. Mr. Mendelson has sued Kushi claiming wrongful
termination and is asking for $1,000,00 in damages plus interest and expenses.
Kushi is defending the suit vigorously. The Court has granted Mr. Mendelson a
prejudgment attachment in the sum of $130,000.
Results of Operations
During the six months ended June 30, 1996, Kushi established
relationships with and began shipping Kushi Cuisine products to major
distributors. Kushi generated net revenues of approximately $118,000 and
$300,000 for the three and six months ended June 30, 1996, respectively. Kushi
was in a development phase and 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 costs of sales were $83,000 or 70% of revenues for the three months and
$222,000 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. Kushi recorded an
inventory valuation allowance for slow moving items of $150,000 during the three
months ended June 30, 1996.
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 Kushi
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 legal fees incurred in
connection with the Merger and related transactions, $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.
<PAGE> 28
Kushi 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
Kushi 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 IPO. The IPO, which became effective on August 11,
1995, generated approximately $4,863,974 of net proceeds. At June 30, 1996,
Kushi 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. 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.
American Phoenix
General
American Phoenix was incorporated in Nevada in 1989. In December
1995 American Phoenix changed it name from ECI International Inc. to American
Phoenix Group, Inc. Until August 31, 1994, American Phoenix was engaged
principally in environmental and construction businesses, which operations were
discontinued. American Phoenix now serves as an international holding company
that seeks to acquire, finance and develop technology-related companies have
growth potential. Management believes American Phoenix's current businesses and
growth plans are likely to yield enhanced shareholder value, long term growth
and attract strong management.
American Phoenix has three subsidiaries: Marine Turbine Australia
Pty. Ltd. ("MTA"), an Australian proprietary limited company; Masling Industries
Pty. Ltd. ("Masling"), an Australian proprietary limited company; and Tokan
Holdings Inc. ("Tokan"), a Delaware corporation. The company also holds
approximately 13.55 percent of Barlile Corp. Ltd. ("Barlile")
<PAGE> 29
Recent Developments
1994-1995 Developments
During fiscal year 1995 American Phoenix installed new management
and consummated several significant transactions:
PEGASUS RESCISSION AND SETTLMENT. On January 31, 1995, American
Phoenix, Pegasus Technologies, Inc., a Delaware corporation ("Pegasus"), and
Pegasus' controlling shareholders, E. Anne Eisenhower and Lloyd E. Eisenhower II
("Seller") entered into the Confidential Settlement and Mutual Release
("Rescission and Settlement Agreement") rescinding the August 30, 1994 Stock
Purchase Agreement among American Phoenix, Pegasus and Sellers. American
Phoenix valued Pegasus' aircraft inspection technology at approximately $7.62
million, or 80 percent of its appraised value. American Phoenix treated the
rescission as being effective ab initio, or as of August 30, 1994. As a result,
American Phoenix's assets (as reported in American Phoenix's Annual Report on
Form 10-KSB for the fiscal year ending August 31, 1994) were effectively reduced
to negative. The rescission also resulted in a divestiture of control.
NEW MANAGEMENT. As a result of the resignation of the Sellers
pursuant to the Rescission and Settlement Agreement, American Phoenix's sole
remaining Director and outside general counsel, John Holt Smith, assumed the
duties of President. On June 1, 1995, Mr. Smith resigned as President and
appointed Mr. Wallace N. Seward as his successor. On June 30, 1995, Mr. Smith,
acting in his capacity as sole director, filled a vacancy in the Board of
Directors by appointing Mr. Seward as Chairman of the Board. Shortly thereafter
Management successfully negotiated and consummated the Rubywell-MTA
Reorganization (described below).
RUBYWELL-MTA REORGANIZATION AND CHANGE IN CONTROL. Effective
August 31, 1995, American Phoenix, Airmotive Acquisition Corp. ("Airmotive") and
Rubywell Pty. Ltd. ("Rubywell") entered into the Amended Agreement and Plan of
Reorganization (as amended, the "Reorganization Agreement"). The Reorganization
Agreement provided for Rubywell's transfer to American Phoenix of 100 percent of
the issued and outstanding common stock of MTA in exchange for four million
shares of American Phoenix's Series "B" Preferred Stock, which was converted
into 20 million shares of common stock. However, in July 1996, Rubywell
surrendered nine million shares of American Phoenix Stock, thereby reducing its
holdings to 11 million shares.
Rubywell is a research and development company, operating under an
Australian government program, that developed and enhanced a high speed ocean
pursuit craft. MTA is an Australian technology company formed to build and test
a propulsion unit for marine applications. The propulsion unit design couples
aviation power sources with one "combining" transmission for these multiple
power sources. MTA's assets include government certifications, drawings, plans,
plant layouts, jigs, and molds and component hardware. These assets were
appraised at approximately US$9.5 million. Approximately US$9 million in
research and development costs were incurred by Rubywell or advanced by Masling
or its affiliates. In addition, MTA holds rights to the "Modular Power Unit"
(or MPU) technology, which permits power from two or more gas turbine engines to
be coupled and transmitted through one transmission, enhancing performance and
reliability while conserving weight, fuel and other costs. American Phoenix
expects to continue MTA's development of the MPU.
1996 Developments
Since the fiscal year ending August 31, 1995, American Phoenix
consummated transactions that Management believes add substantial additional
value to American Phoenix:
RESUMPTION OF PUBLIC MARKET. American Phoenix Stock traded on the
American Stock Exchange until December 1994 when its listing was suspended.
American Phoenix Stock resumed trading publicly over the counter in October 1995
on the Bulletin Board and continues to trade under the symbol "APHX."
BARLILE. In October, 1995, American Phoenix's wholly owned
subsidiary, Tokan, acquired 552,100 shares of the common stock of Barlile in
exchange for 1,195,642 shares of America Phoenix Stock. Tokan's interest in
Barlile represents approximately 13.55% of outstanding Barlile common stock.
Barlile is listed on the Australian Stock Exchange. Barlile is engaged in the
agribusiness, dairy and brewery industries as a participant in joint ventures
operating in the Pacific Rim.
<PAGE> 30
MASLING ACQUISITION. On February 16, 1996, MTA acquired 100
percent of Masling's outstanding shares. MTA contemporaneously acquired certain
assets of Masling Rotor Wing Pty. Ltd. ("Masling Rotor Wing") from Masling
shareholders, including hangar leases, subject to Cootamundra Shire Counsel
approval, which has been orally obtained. Masling is a leading accredited
aircraft component overhaul and engineering facility. This acquisition provides
American Phoenix with Masling's certified technical expertise, its integrated
fabricating facilities and, in addition, significant income if Masling's
earnings levels are maintained.
NOTES PURCHASE. On February 27, 1996, American Phoenix and P.R.
Finance & Investment Ltd. ("PRFI") entered into the Note Purchase Agreement,
which was amended as of May 3, 1996 (as amended, the "Note Purchase Agreement").
Under the Note Purchase Agreement, American Phoenix acquired approximately
US$9.7 million principal amount in promissory notes for 3 million shares of
American Phoenix Stock plus American Phoenix's promissory note in the principal
amount of US$3 million. This note is due on or before September 30, 1996.
RUBYWELL/AMERICAN PHOENIX/MTA ACQUISITION. On December 15, 1995
American Phoenix and Consortium Investment Group Pty. Ltd. ("CIG") entered into
an Agreement pursuant to which CIG acquired 12.5 percent of the outstanding
shares of MTA for aggregate consideration of AU$1.5 million. Of this sum,
AU$500,000 has been paid. AU$600,000 is due on or before September 30, 1996,
and AU$400,000 is due on or before September 30, 1996.
Results of Operation
American Phoenix had no operations in fiscal years 1994 and 1995.
Its total revenues of $6,269 for its fiscal year ended August 31, 1995 were
derived exclusively from the sale of property and equipment. It earned no
revenue in fiscal year 1994. Nonetheless, American Phoenix incurred costs and
expenses of $2,800,707 and $8,682,512 (principally for research and development)
in fiscal years 1995 and 1994, respectively, resulting in net losses for
these fiscal years.
During the nine months ending May 31, 1996, American Phoenix earned
total revenues of $1,765,924; incurred total costs and expenses of $784,807; and
had net income $308,117, resulting in net earnings per share of $.07. American
Phoenix had no revenue in the comparable period of 1995 and incurred $37,469 in
general and administrative costs. These revenues were generated principally by
MTA and Masling. American Phoenix also generated significant revenue from the
sale of a minority interest in Masling and from the note portfolio acquired from
PRFT.
American Phoenix is actively seeking to acquire technology related
businesses principally by the issuance or exchange of American Phoenix Stock
and/or other securities. American Phoenix believes it can add value to these
strategic acquisitions by focusing the international expertise of American
Phoenix's current management team and financial adviser to strategic planning,
asset redeployment and enhancement, and raising capital through American
Phoenix's financial adviser and other third parties for technology development
and marketing. American Phoenix's new management team intends to focus
principally on companies that have short- term revenue-generating potential or
that have long-term contracts and financial commitments in place. American
Phoenix will attempt to avoid investments that require greater capital than
American Phoenix believes it can raise readily or that are not likely to
generate revenue in the next twelve months. As revenues asset values of
American Phoenix's subsidiaries are developed, American Phoenix may hold or
divest itself of these subsidiaries through spin off or exchanges for the shares
or assets of other companies.
<PAGE> 31
Analysis of Financial Condition
American Phoenix's management believes that it has sufficient
working capital to continue operations as presently conducted through the next
fiscal year. Management believes that, upon consummation of the Merger,
American Phoenix's capital resources will be significantly enhanced. Among
several sources, American Phoenix is hopeful that a substantial amount of
Warrants will be exercised.
American Phoenix currently does not envision further capital
expenditure on commercializing applications of the MPU technology other than by
MTA in the pursuit boats under development. To commercialize other application
of the MPU, American Phoenix would seek outside capital government assistance or
partnerships with cross industry leaders.
American Phoenix continues to seek acquisition targets that may
add value to American Phoenix's shareholders. Management believes that
transactions which enhance American Phoenix's net assets and shareholders'
equity also improve American Phoenix's ability to attract target outside
capital to develop, expand and market the products and services of those
companies.
Liquidity and Capital Resources
American Phoenix's principal financial adviser is CIG, operating
from Australia. During fiscal year 1996 CIG has been American Phoenix's
principal source of capital through private placements with third parties,
loans or direct investments. CIG materially assisted American Phoenix in the
Notes Portfolio acquisition from PRFI. American Phoenix also has a AU$2.6
million loan commitment from the National Bank of Australia to meet the
obligation due to Masling shareholders, described below. Consequently, American
Phoenix generally believes that it can meet its current or contemplated
financial commitments.
On March 5, 1996, CIG committed to lend American Phoenix AU$3.5
million to fund the next generation MTA prototype pursuit boat. Funds expected
to be obtained pursuant to the CIG Financing Commitment, the Note Purchase
Agreement and other sources are likely to be sufficient to meet operating
expenses for the next 12 months and the costs of development and
commercialization to be incurred in commencing production of MTA's ocean pursuit
craft. However, if for any reason these funds were not to be available to
American Phoenix, American Phoenix's plan of operation would be materially and
adversely affected. No assurance can be made that alternative capital sources
will become available.
Material Commitments
Pursuant to the Notes Purchase, American Phoenix was required to
deliver its promissory note in the principal amount of US$3 million on or before
May 25, 1996. As extended, this note matures, and becomes due and payable, on
September 30, 1996, unless the parties agree to extend maturity of the note
further. American Phoenix believes it can negotiate a further extension of
payment of the note by the issuance of new shares of American Phoenix Stock to
the noteholder.
A further payment by MTA to the former Masling shareholders in the
amount of AU$2.6 million has been extended and becomes due on September 30,
1996. MTA believes it can meet this commitment from American Phoenix's capital
resources described above (National Bank of Australia) or renegotiate and extend
further the maturity of the payment obligation.
<PAGE> 32
License and Royalty Revenues
MTA will receive license revenues of US$1.6 million per year
commencing in fiscal year 1996 for 5 years from Rubywell, its exclusively
retained research partner, to develop additional "horizontal" product
applications (such as a four engine combining gearbox, capable of driving a
100 hull to 125 MPH) from MTA's core technology. In turn, MTA must pay
research royalties of 8 percent to 10 percent on product sales to Rubywell to
enable it to recover its cost for the investment in the technology enhancement
and improvement. Consequently, MTA may receive income of US$7.5 million
over the next five years regardless of product sales as long as this license
is renewed annually, which is at the sole option of Rubywell. Should Rubywell
determine not to renew the license, applications other than the two engine
combining gearbox for marine application would not be further developed.
The research royalty is treated as an unaccrued royalty, which will be
accounted for by MTA as a direct expense provided that it is able to collect
from its product sales. Under these mandates, MTA, as an Australian research
and development company, will continue to have an incentive to develop new
products which American Phoenix believes will ensure competitive improvement of
the MPU and gearbox design.
Legal Proceedings
AMERICAN PHOENIX GROUP, INC. V. DANIEL J DOUD. On August 2, 1995,
American Phoenix filed a complaint against Daniel J. Doud ("Doud") in the
Superior Court of the State of California, County of Los Angeles, Case No.
BC132728, alleging inter alia, breach of contract, breach of promissory note,
fraud, deceit and negligent misrepresentation. The dispute arises from the 1993
sale by American Phoenix of all of the issued and outstanding common shares of
ECI Construction Services, Inc. ("ECICS"), then a wholly owned subsidiary of
American Phoenix, for a purchase price of $750,000 (the "Sale"). Doud agreed to
purchase ECICS for $750,000 from Corona Properties, and executed a written
promissory note in favor of American Phoenix. The sale also required Doud to
deliver 500,000 shares of common stock of American Phoenix ("Shares")
beneficially owned by him to a collateral account for ECICS's bonding company,
Golden Eagle Insurance Company to satisfy a bond which was guaranteed by Doud
and American Phoenix. Beginning March 1994 and continuing to the present, Doud
has failed to pay to American Phoenix $750,000 pursuant to the written
promissory note and to deliver the shares into the collateral account.
American Phoenix seeks payment under the promissory note and other relief.
Doud has requested arbitration of this controversy.
DANIEL J. DOUD V. AMERICAN PHOENIX GROUP, INC. On November 8, 1995
Doud filed a complaint against American Phoenix in the Superior Court of the
State of California, County of Los Angeles, Case No. SC039240 alleging inter
alia breach of contract, breach of promissory note and unjust enrichment. Doud
further alleges that he entered into an Employment Agreement dated March 1, 1995
with American Phoenix whereby American Phoenix agreed to pay Doud $84,000 per
year plus certain benefits including a signing bonus; $4,200 per year
reimbursable costs of health insurance; $8,100 for moving expenses; $67,000 for
travel expenses; and $4,200 for auto allowance in exchange for Doud's future
services to be rendered for American Phoenix. Doud also asserts that on
November 9, 1993, he entered into a Business Loan Agreement with Handtop
Technologies, S.A. to receive the amount of $325,000 plus interest at the rate
of 8.5 percent per annum with a maturity date of June 30, 1994, and that this
obligation was subsequently assigned to and undertaken by American Phoenix.
American Phoenix disputes the validity of the employment agreement, the
validity of the business loan agreement and disputes that Doud rendered any
services to American Phoenix. American Phoenix has numerous defenses to this
complaint and intends to vigorously defend this action.
GENERAL ELECTRIC CAPITAL CORPORATION V. ENVIRONMENTAL CONTROL
INDUSTRIES AND AMERICAN PHOENIX, INC. On October 17, 1994 General Electric
Capital Corporation ("GECC") filed a complaint in the Superior Court of the
State of California, County of Alameda, Case No. 741459 against Environmental
Control Industries and American Phoenix for monies owed and seeking possession
of equipment provided to Environmental Control Industries under that certain
Lease Agreement dated August 23, 1990 ("Lease"). On or about August 24, 1990,
American Phoenix executed a guarantee in favor of GECC ("Guarantee"). GECC
alleges that Environmental Control Industries defaulted under the Lease. By
this complaint, GECC seeks the sum of $39,596.84, claimed to be due and owing
under the Lease as of March 1, 1994, $6,426.16 under an amendment to the Lease,
interest at the rate of 10 percent per annum or $7,679.14 up through October 30,
1995 and reasonable attorney's fees. GECC also seeks to hold American Phoenix
liable under the Guarantee. On October 30, 1995 GECFC sought and obtained
default judgment against Environmental Control Industries and American Phoenix.
American Phoenix is attempting to negotiate a settlement of this action.
American Phoenix is also party to various suits and claims
incidental to its business, none of which relate to asbestos exposure. In the
opinion of managment, the ultimate disposition of these proceedings will not
have a material adverse effect on American Phoenix's financial position or
results of operations.
<PAGE> 33
Properties
American Phoenix owns no real estate. American Phoenix leases
approximately 2,700 square feet of office space from Wall Street Consultants,
LLC at 5 Park Plaza, Irvine, California 92714 for approximately $1,210 per
month. The oral lease provides for rental rate on a month by month basis. Wall
Street Consultants is affiliated with Mr. Patrick N. Di Carlo, President of
American Phoenix.
Market Price Data
Kushi. Kushi Common Stock and Warrants trade on the Nasdaq Market ("Nasdaq")
tier of the Nasdaq Stock Market under the symbols "KMAC" and "KMACW,"
respectively. The following table sets forth, the range of high and low sales
prices for shares of Kushi Stock since becoming publicly held on August 11,
1995:
Fiscal Year High Low
- ---------- ---- ---
1995
Third Quarter $ 6.25 $ 4.00
Fourth Quarter 5.00 3.00
1996
First Quarter $ 4.88 $ 2.75
Second Quarter 4.25 1.63
American Phoenix. The principal market on which American Phoenix
Stock is traded is the over-the-counter market. The following table sets forth,
for the periods indicated, the range of high and low bid prices for shares of
American Phoenix Stock:
Fiscal Year High Low
- ---------- ---- ---
1993/1994
First Quarter $ 2.19 $ 1.31
Second Quarter 2.66 1.50
Third Quarter 2.25 1.31
Fourth Quarter 1.88 1.25
1994/1995
First Quarter $ 1.38 $ .38
Second Quarter ----- -----
Third Quarter ----- -----
Fourth Quarter ----- -----
1995/1996
First Quarter $ ---- $ ----
Second Quarter .69 .19
Third Quarter 1.33 .38
On July 29, 1996, the last full trading day prior to the
announcement of the Merger on the terms on which it is presently contemplated to
be consummated, the closing sales price per share quoted on NASDAQ for Kushi
Stock was $2.75 and the closing sales price per share of American Phoenix Stock
was $.89.
Kushi stockholders and American Phoenix stockholders are urged to
obtain current quotations for the market prices of Kushi Stock/and American
Phoenix Stock.
<PAGE> 34
Record Holders
As of August 12, 1996, there were 78 recordholders of Kushi stock
representing an estimated 1,000 beneficial owners. As of May 1, 1996, there
were approximately 122 recordholders of American Phoenix Stock.
Dividends
No cash dividends have been paid on either Kushi Stock or American
Phoenix Stock since the organization of each respective company. Pending
consummation of the Merger, Kushi and American Phoenix are restricted from the
payment of cash dividends. It is anticipated that following the Merger and for
the foreseeable future, the Surviving Corporation will retain all of its
earnings, if any, for use in its business and will not pay any cash dividends in
the foreseeable future. The declaration of any future dividends by the
Surviving Corporation is within the discretion of its Board of Directors and
will be dependent on the earnings, financial condition and capital requirements
of Surviving Corporation, as well as any other factors deemed relevant by its
Board of Directors.
Security Ownership of Certain Beneficial Owners and Management
Kushi. The following table sets forth certain information concerning ownership
of the Kushi Stock as of July 31, 1996, by (a) each stockholder known by Kushi
to own beneficially more than five percent of Kushi Stock, (b) each director of
Kushi and (c) all directors and executive officers of Kushi as a group. Except
as otherwise noted, each person listed below has sole voting and dispositive
power with respect to the shares listed next to such person's name.
Name and Address Shares Beneficially Owned Percentage of Class
- --------------- ------------------------ -------------------
Michio Kushi(1)
62 Buckminster Road
Brookline, Mass. 02146 616,812 22.36%
Fred Sternau
36 Schoolhouse Road
Cross River, NY 10518
217,148 7.90%
Mark Schindler(2)
200 East 69th Street,
Apt. 4M
New York, NY 10021 180,957 6.58%
Dr. Eugene Stricker(3)
42 Barret Road
Lawrence, NY 11559 180,957 6.58%
Daniel A. France(4)
3 Indian Hill Rd.
Westport, CT. 06880 58,371(4) 2.12%
Morris Kirsner(5)
47 Craftsland Road
Brookline, MA 02146 49,196 1.79%
All executive officers
and directors as a group
(7 persons) 1,359,312 49.43%
- ------------------
(1) Includes an aggregate of 379,913 shares owned by Aveline Kushi,
Mr. Kushi's wife and by his adult children (93,393 held by Aveline
Kushi and 71,630 shares held by each of Aveline Kushi, Arnold Norio,
Lawrence Haruo, Phillip Yoshio and Tenshin Hisao). Mr. Kushi
disclaims beneficial ownership as to all such shares.
(2) Includes 46,696 shares owned by the Mark Schindler Irrevocable
Trust and 46,696 shares owned by his fiance, Ms. Barbara Serota.
Mr. Schindler disclaims beneficial ownership of such shares.
(3) Includes 23,348 shares owned by the Eugene Stricker Irrevocable
Trust. Dr. Stricker disclaims beneficial ownership of such shares.
(4) Mr. France serves as a director of Kushi. Includes 3,000 shares
underlying currently exercisable stock options.
(5) Mr. Kirsner serves as a director of Kushi. Includes 2,500 shares
underlying currently exercisable stock options. All shares are held
by Mr. Kirsner as Trustee of the Morris Kirsner Trust.
Pursuant to individual agreements with Kushi, all of the shares
listed above are restricted from transfer until August 11, 1997, except for
transfers by operation of law or the laws of descent and inheritance in which
cases the restriction shall survive such transfer.
<PAGE> 35
AMERICAN PHOENIX. The following tables sets forth certain
information concerning ownership of American Phoenix Stock as of May 31, 1996,
by (a) each stockholder known by American Phoenix to own beneficially more than
five percent of American Phoenix Stock, (b) each director of American Phoenix
and (c) all directors and executive officers of American Phoenix as a group.
Except as otherwise noted, each person listed below has sole voting and
dispositive power with respect to the shares listed next to such person's name.
Name and Address Shares Beneficially Owned Percentage of Class
- --------------- ------------------------- -------------------
Rubywell Pty. Ltd.(1) 11,000,000(1) 33.41%
Level 20, 307 Queen Street,
Brisbane QLD 4000
Wallace N. Seward 100,000(2) .30%
1025 Jefferson Place N.W.
Suite 107
Washington, DC 20007
John Holt Smith 125,000(2) .38%
1901 Avenue of the Stars
Los Angeles, CA 90067
All executive (4 persons)
officers and directors
as a group 13,325,000(3) 38.05%
- ---------------------------
(1) Voting and dispositive power of shares owned of record by Rubywell
Pty., Ltd. ("Rubywell") is shared by Peter Benjamin and Charles E.
Miller, who, together with Rubywell, constitutes a "group" within the
meaning of Section 13(d)(3) of the Securities and Exchange Act of
1934. Peter Benjamin is a Director of American Phoenix.
(2) A director of American Phoenix.
(3) Includes 2.1 million shares to be issued to Patrick N. Di Carlo
prior to consummation of the Merger. Upon issuance, Mr. Di Carlo's
shares of American Phoenix Stock will represent 6% of all such
shares outstanding.
<PAGE> 36
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION
Directors and Executive Officers
Set forth below is certain information regarding each person
nominated or chosen to become a director or executive officer of the Surviving
Corporation as of the Effective Time.
Name Age Position to be held
- ---- --- -------------------
Patrick N. Di Carlo 59 Director, Chief Executive Officer
John Davis 41 Director
Jay W. Hubbard 72 Director
Daniel A. France 48 Director, Chief Financial Officer
Patrick N. Di Carlo. Mr. Di Carlo has been the Chief Executive
Officer and President of American Phoenix Group, Inc. since June 1996. Over the
last several years, Mr. Di Carlo served as a consultant to American Phoenix from
time to time. Before joining American Phoenix, Mr. Di Carlo spent the last ten
years as an international financial advisor in the U.K. and France. Prior to
his international financial advisor role, Mr. Di Carlo spent over 25 years in
roles such as a merchant banker (Zurich, Switzerland) and founder and chairman
of such companies as Cavendish Guaranty Bank (UK), Cavendish Insurance Co.,
Gilbraltar (UK), Cambridge Group International (UK) and GCI International
(domestic). Upon the Merger, Mr. Di Carlo will hold the position of Chief
Executive Officer of the Surviving Corporation.
John Davis. Mr. Davis has practiced as an attorney in Australia
for the past 18 years and has specialized in commercial and tax jurisdictions.
He has since 1988, also been a Director and Chief Executive Officer of Kamisha
Corporation Limited, a licensed securities dealer in Australia. John is on the
Board of various other companies which are active in managed futures, property
syndication, agribusiness, finance and technology industries.
Jay W. Hubbard. Mr. Hubbard is a native of California, who served
in the United States Marine Corps. from 1940 to 1972 as an Infantry Officer
(WWII) and as a Fighter Attach Pilot (Korean and Vietnam Wars). Mr. Hubbard
retired as Brigadier General in December 1972. Mr. Hubbard is a graduate of the
National War college and holds an M.S. in International Affairs from The George
Washington University. He has post-military experience in residential
development and served as a Consultant-Interim Chief Executive Officer/Chief
Operating Officer steering public companies through Chapter 11 reorganizations.
Mr. Hubbard married in 1943 and has four (4) children. He has been a resident
of Laguna Niguel since 1979.
Daniel A. France. Mr. France was a co-founder of Kushi and served
as its Vice President/Finance and Chief Financial Officer from 1994 to the
present. Mr. France is a CPA, beginning his career in public accounting with
Peat, Marwick, Mitchell & Co., in June 1973. From 1976 until 1989, Mr. France
held senior accounting and financial positions with CBS (June 1976 to April
1981), the RCA Corporation (May 1981 to January 1986) and Citibank, N.A.
(January 1986 to March 1987). From April 1988 until May 1992, he served as Vice
President/ Finance of Sonin, Inc., a privately-held manufacturer of electronic
tools. Mr. France was the Chief Financial Officer of Natural Child Care, Inc.
from May 1992 until September 1993. Following its merger with Winners All
International, Inc., he maintained its accounting records on a part-time basis
until August 1994. He also maintained the accounting records of Light Savers
USA, Inc. from February 1994 until December 1994 when he resigned to devote full
time to Kushi.
<PAGE> 37
Compensation
In replacement of 1.1 million shares that were cancelled by
American Phoenix and as compensation for services rendered to American
Phoenix from 1994 to 1996, as a consultant, and from June 1996 to the
present, as Chief Executive Officer, Mr. Di Carlo will be issued 2.1
million shares of American Phoenix Stock. Mr. Di Carlo will have demand
registration rights with respect to shares issued to him. The 1 million
shares of American Phoenix Stock issued to Mr. Di Carlo in 1994 as
compensation were surrendered by him in 1996 for cancellation.
It is anticipated that effective upon the Merger, Mr. France will
enter into an employment agreement with the Surviving Corporation pursuant to
which he will be entitled to cash compensation commensurate with his duties and
previous experience. The amount of such compensation and the terms of Mr.
France's employment relationship have not been determined. Mr. France's current
employment contract with Kushi pursuant to which he is entitled during the five-
year term thereof to receive an annual salary, will terminate upon the Merger.
Mr. France has accepted Kushi's offer to pay to him cash in the amount of
$89,000 and to issue to him 100,000 pre-Merger Warrants in settlement of Kushi's
contractual obligations to him for the balance of the term of his employment
agreement.
Except for the foregoing described compensation, no plan or non-
plan compensation has been awarded to, earned by or paid to any person nominated
or chosen to become an officer or director of the Surviving Corporation by
either American Phoenix or Kushi.
EXPERTS
The financial statements of Kushi included in this Joint
Information Statement/Prospectus, except as they relate to the unaudited six-
month periods ended June 30, 1996 and June 30, 1995 have been audited by
Israeloff, Trattner & Co., P.C., independent accountants whose reports appear
herein. The consolidated financial statements of American Phoenix included in
this Joint Information/Prospectus, except as they relate to the unaudited nine-
month periods ended May 31, 1996 and May 31, 1995, have been audited by
Hollander, Gilbert & Co. independent accountants, whose reports appear herein.
Such financial statements have been so included in reliance on the reports of
such independent accountants given on the authority of such firms as experts in
auditing and accounting.
LEGAL OPINION
Heller, Horowitz & Feit, P.C., counsel to Kushi has rendered an
opinion as to the legality of the shares of Kushi Stock to be issued upon the
Merger offered hereby.
Experts
By Order of the By Order of the
Board of Directors of Board of Directors of
American Phoenix Group, Inc. Kushi Macrobiotics, Inc.
PATRICK N. DI CARLO, MICHIO KUSHI,
Chairman Chairman
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors
Consolidated Balance Sheets
at August 31, 1994 and 1995
and May 31, 1996 (Unaudited)
Consolidated Statements of Operations
for the years ended August 31, 1995 and 1995
and nine months ended May 31, 1995 and 1996 (Unaudited)
Consolidated Statement of Shareholders' Equity (Deficiency)
for the years ended August 31, 1994 and 1995
and nine months ended May 31, 1996 (Unaudited)
Consolidated Statements of Cash Flows
for the years ended August 31, 1994 and 1995
and nine months ended May 31, 1995 and 1996 (Unaudited)
Notes to Consolidated Financial Statements
KUSHI MACROBIOTICS CORP.
Report of Independent Auditors
Balance Sheets at December 31, 1995
and June 30, 1996 (Unaudited)
Statements of Operations for the year ended December 31, 1995
and from inception (May 9, 1994) to December 31, 1994 and 1995
and for the six months ended June 30, 1996 and 1995 (Unaudited)
Statement of Shareholders' Equity (May 9, 1994)
to December 31, 1995
and June 30, 1996 (Unaudited)
Statements of Cash Flows for the year ended December 31, 1995
and from inception (May 9, 1994) to December 31, 1994 and 1995
and for the six months ended June 30, 1996 and 1995 (Unaudited)
Notes to Financial Statements
<PAGE> 39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors
Section 145 of the Delaware General Corporation Law, as amended,
authorizes the Registrant to indemnify any director of officer under
certain prescribed circumstances and subject to certain limitations
against certain costs and expenses, including attorneys' fees actually and
reasonably incurred in connection with any action, suit or proceeding,
whether civil, criminal, administrative or investigative, to which such
person is a party by reason of being a director or officer of the
Registrant if it is determined that such person acted in accordance with
the applicable standard of conduct set forth in such statutory provisions.
The Registrant's Certificate of Incorporation contains provisions relating
to the indemnification of directors and officers, to the full extent
permitted by Delaware law.
The Registrant also maintains insurance for the benefit of any
director or officer which may cover claims for which the Registrant could
not indemnify such persons.
ITEM 21. Exhibits and Financial Statement Schedules
Registrant hereby incorporates by reference the following
documents filed as part of its Registration Statement on Form SB-2 (File
No. 33-92154-NY), declared effective August 31, 1995 (the "Registration
Statement"):
3.1 Restated Certificate of Incorporation
3.2 By-Laws
4.1 Specimen Common Stock Certificate
4.2 Specimen Preferred Stock Certificate
4.3 Specimen 10% Promissory Note
4.6 Form of Representative's Stock Warrant
4.7 Form of Representative's Warrant
4.8 Form of Subscription Agreement between Registrant and Investors
pursuant to October 31, 1994 Private Placement Memorandum
10.1 Lease Agreement between the Registrant and American Office
Centers, Inc., dated December 12, 1994
10.2 Assignment and License Agreement between the Registrant and Michio,
Aveline and Philip Kushi, dated October 10, 1994, as amended
10.3 Agreement between the Registrant and Michio, Aveline and Philip
Kushi, dated October 10, 1994
10.4 Employment Agreement between the Registrant and Michio Kushi,
dated October 10, 1994, as amended
10.5 Employment Agreement between the Registrant and Robert M. Morrow,
dated October 20, 1994, as amended
10.6 Employment Agreement between the Registrant and Daniel A. France,
dated October 20, 1994, as amended
10.7 Employment Agreement between the Registrant and Rodney C. Lewis
dated October 20, 1994, as amended
10.8 Consulting Agreement between the Registrant and Mark Schindler
dated October 20, 1994, as amended
10.9 Consulting Agreement between the Registrant and Eugene Stricker
dated October 20, 1994, as amended
10.10 Consulting Agreement between the Registrant and Fred Sternau
dated October 20, 1994, as amended
10.11 1994 Kushi Macrobiotics Corp. Stock Option Plan
10.12 1994 Kushi Macrobiotics Corp. Stock Bonus Plan
<PAGE> 40
Registrant hereby incorporates by reference the following documents
that were filed with Amendment No. 1 to the Registration Statement:
1.4.1 Form of Underwriter's Consulting Agreement, as amended
1.5 Warrant Exercise Fee Agreement
4.4 Specimen Warrant Certificate
4.5 Form of Warrant Agreement
4.6.1 Form of Representative's Stock Warrant, as amended
4.7.1 Form of Representative's Warrant, as amended
10.13 Form of Employee/Consultant Waiver Agreement
10.14 Security Agreement between the Company and Mr. Kushi
10.15 Form of Lock-up Letter
10.16 Agreement between Registrant and ABIC International Consultants,
Inc. dated June 13, 1995
10.17 Agreement between Registrant and Regu-Tech(r) Associates, Inc.
dated January 12, 1995
Registrant hereby incorporates by reference to following documents
that were filed with Amendment No. 2 to the Registration Statement:
10.18 License Agreement between the Company and Baldwin Hill Bakery,
dated March 1, 1995
10.19 License Agreement between the Registrant and U.S. Mills, Inc.
dated June 9, 1995
The following exhibit is incorporated by reference from the
Registrant's Form 10-QSB for the quarter ended September 30, 1995:
10.1 Millennium Securities Corp. Agreement
Registrant hereby incorporates by reference the following
documents that were filed with Registrant's Form 10-QSB for the year
ended December 31, 1995:
10.20 Employment Agreement between the Registrant and Mark S.
Mendelson effective as of August 1, 1995
10.21 Agreement between Robert M. Morrow and the Registrant dated
as of December 22, 1995
10.22 Agreement between ACG International Inc. and the Registrant
dated December 4, 1995
10.23 Lease between the Registrant and Three Stamford Landing
Associates, LLC dated August 23, 1995
10.24 Lease between the Registrant and Allan V. Rose d/b/a AVR
Realty Company dated August 21, 1995
Registrant hereby incorporates by reference the following document
that was filed with Registrant's Form 10-QSB for the quarter ended June 30,
1996:
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.
(Terminated).
The following exhibits are filed herewith:
2.2 Amended and Restated Plan of Merger by and among Kushi Macrobiotics
Corp., American Phoenix Group, Inc. and Kushi Natural Foods Corp.
dated August 12, 1996. Annexed as Exhibit A to the Joint Information
Statement/Prospectus included in this Registration Statement;
Schedules and Exhibits thereto are listed therein and will be provided
supplementally to the Commission upon request.
24.1 Consent of Heller, Horowitz & Feit, P.C.*
- - - - - - - - - -
* To be filed by amendment.
<PAGE> 41
ITEM 22. Undertakings.
The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request and to send the incorporated documents filed subsequent to eh
effective date of the registration statement through the date of responding to
the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the act and is, therefore, unenforceable.
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on behalf of
the undersigned, thereunto duly authorized, tin the City of Stamford, State of
Connecticut, on August 16, 1996.
KUSHI MACROBIOTICS CORP.
s/Daniel A. France
By: ______________________________
Name: Daniel A. France
Title: Chief Operating and
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
s/Michio Kushi
- ----------------------- Chairman and August 16, 1996
Michio Kushi Chief Executive Officer
s/Daniel A. France
- ----------------------- Director, Chief August 16, 1996
Daniel A. France Operating and Financial
Officer
s/Mark Schindler
- ----------------------- Director August 16, 1996
Mark Schindler
s/Dr. Eugene Stricker
- ----------------------- Director August 16, 1996
Dr. Eugene Stricker
s/Fred Sternau
- ----------------------- Director August 16, 1996
Fred Sternau
s/Morris Kirsner
- ----------------------- Director August 16, 1996
Morris Kirsner
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Kushi Macrobiotics Corp.
We have audited the accompanying balance sheet of Kushi Macrobiotics Corp. (a
development stage enterprise) as of December 31, 1995, and the related
statements of operations, shareholders' equity and cash flows for the year then
ended and for the periods from May 9, 1994 (inception) to December 31, 1994 and
to December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kushi Macrobiotics Corp. (a
development stage enterprise) as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended and for the periods from
May 9, 1994 (inception) to December 31, 1994 and to December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, conditions exist that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Valley Stream, New York
February 2, 1996, except for
Note 11, as to which the date
is August 2, 1996
<PAGE> 44
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
ASSETS
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash (Note 1) $ 2,069,501 $ 1,093,367
Accounts receivable -- 47,086
Inventories (Notes 1 and 2) 530,764 239,143
Vendor advances 175,884 --
Prepaid expenses and other current assets 57,328 13,973
Deferred expenses (Note 4) 214,669 39,721
------------ ------------
Total Current Assets 3,048,146 1,433,290
------------ ------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation (Notes 1 and 3) 168,631 60,197
------------ ------------
OTHER ASSETS
Security deposit 52,682 50,040
------------ ------------
TOTAL ASSETS $ 3,269,459 $ 1,543,527
============ ============
See accompanying notes to financial statements.
<PAGE> 45
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accrued expenses and other current liabilities $ 169,111 $ 167,365
------------ ------------
OTHER LIABILITIES
Deferred income (Note 8 37,500 32,500
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 4, 5 and 6)
Preferred stock, $.01 par value, 5,000,000 shares
authorized;
Convertible preferred stock, 400,000 shares
authorized; issued and outstanding, 184,451
at December 31, 1995 and 177,909 at June
30, 1996 1,845 1,179
Common stock, $.001 par value, 15,000,000 shares
authorized; issued and outstanding 2,683,455
at December 31, 1995 and 2,749,997 at June
30, 1996 2,684 2,750
Additional paid-in capital 5,796,394 6,096,994
Deficit accumulated during the development stage (2,738,075) (4,757,261)
------------ ------------
Total Shareholders' Equity 3,062,848 1,343,662
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 3,269,459 $ 1,543,527
============ ============
See accompanying notes to financial statements.
<PAGE> 46
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended From May 9, 1994 (Inception) ---------------------------
December 31, to December 31, June 30, June 30,
------------ --------------------------- ------------ ------------
1995 1994 1995 1996 1995
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
</CAPTION>
<S> <C> <C> <C> <C> <C>
Sales $ 17,928 $ -- $ 17,928 $ 298,469 $ --
Cost of Sales 11,518 -- 11,518 222,169 --
------------ ------------ ------------ ------------ ------------
Gross profit 6,410 -- 6,410 76,300 --
------------ ------------ ------------ ------------ ------------
Costs and Expenses
Research and development 282,684 -- 282,684 -- --
Inventory write-down (Note 2) 290,210 -- 290,210 178,883 --
General and administrative expenses 1,598,384 45,244 1,643,628 1,885,957 640,572
------------ ------------ ------------ ------------ ------------
2,171,278 45,244 2,216,522 2,064,840 640,572
------------ ------------ ------------ ------------ ------------
Loss from operations (2,164,868) (45,244) (2,210,112) (1,988,540) (640,572)
------------ ------------ ------------ ------------ ------------
Other Income (Expense)
Loss on sale of equipment -- -- -- (66,297) --
Amortization of debt discount (506,001) (20,667) (526,668) -- (321,666)
Interest expense (50,877) (2,583) (53,460) -- (45,013)
Interest income 68,028 -- 68,028 35,651 15,384
------------ ------------ ------------ ------------ ------------
(488,850) (23,250) (512,100) (30,646) (351,295)
------------ ------------ ------------ ------------ ------------
Net loss (2,653,718) (68,494) (2,722,212) (2,019,186) (991,867)
Preferred dividends (15,863) -- (15,863) -- --
------------ ------------ ------------ ------------ ------------
Net loss applicable to common shareholder $(2,669,581) $ (68,494) $(2,738,075) $(2,019,186) $ (991,867)
============ ============ ============ ============ ============
Net loss per common share $ (.97) $ (.03) $ (1.00) $ (.74) $ (.36)
============ ============ ============ ============ ============
Shares outstanding (Note 1) 2,738,592 2,738,592 2,738,592 2,716,727 2,738,592
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 47
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Shares Common Shares Additional During the
--------------------------- --------------------------- Paid-In Development
Number Amount Number Amount Capital Stage Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
May 9, 1994 (inception) -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock -- -- 1,762,793 1,763 2,012 -- 3,775
Proceeds of private
placement, net of
offering costs:
Allocated to
common shares 144,759 1,448 -- -- 197,540 -- 198,988
Allocated to
preferred shares -- -- 144,759 145 503,137 -- 503,282
Net loss -
inception to
December 31, 1994 -- -- -- -- -- (68,494) (68,494)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance -
December 31, 1994 144,759 1,448 1,907,552 1,908 702,689 (68,494) 637,551
Proceeds of
private placement,
net of offering cost:
Allocated to
common shares 39,692 397 -- -- 55,526 -- 55,923
Allocated to
preferred shares -- -- 39,692 39 139,320 -- 139,359
Cost of common
stock retired -- -- (58,371) (58) (67) -- (125)
Cost of founders'
common stock
retired -- -- (200,351) (200) (229) -- (429)
Proceeds of initial
public offering
net of costs: -- -- 1,100,000 1,100 4,642,371 -- 4,643,471
Cost of common
stock retired -- -- (105,067) (105) -- -- (105)
Warrants issued
as payment for
services rendered -- -- -- -- 256,250 -- 256,250
Other -- -- -- -- 534 -- 534
Net loss for the
year ended
December 31, 1995 -- -- -- -- -- (2,669,581) (2,669,581)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance -
December 31, 1995 184,451 $ 1,845 2,683,455 $ 2,684 $ 5,796,394 $(2,738,075) $ 3,062,848
Conversion of
preferred shares
to common shares
(unaudited) (66,542) (666) 66,542 66 600 -- --
Warrants issued to
charity (unaudited) -- -- -- -- 225,000 -- 225,000
Warrants issued as
payment for services
rendered (unaudited) -- -- -- -- 75,000 -- 75,000
Net loss for the
six months ended
June 30, 1996
(unaudited) -- -- -- -- -- (2,019,186) (2,019,186)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance -
June 30, 1996
(unaudited) 117,909 $ 1,179 2,749,997 $ 2,750 $ 6,096,994 $(4,757,261) $ 1,343,662
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompany notes to financial statements.
<PAGE> 48
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended From May 9, 1994 (Inception) ---------------------------
December 31, to December 31, June 30, June 30,
------------ --------------------------- ------------ ------------
1995 1994 1995 1996 1995
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
</CAPTION>
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,653,718) $ (68,494) $(2,722,212) $(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 58,401 450 58,851 194,863 6,478
Amortization of discount on notes payable 506,001 20,667 526,668 -- 321,667
Contributions and consulting fees -- -- -- 300,000 --
Changes in assets and liabiilties:
Accounts receivable -- -- -- (47,086) --
Vendor advances (175,884) -- (175,884) 175,884 --
Prepaid expenses and other current assets (41,855) (15,473) (57,328) 43,355 (4,024)
Inventories (530,764) -- (530,764) 291,621 (139,775)
Accrued expenses and other current
liabilities 118,955 40,156 159,111 (11,746) 113,669
------------ ------------ ------------ ------------ ------------
Total adjustments (65,146) 45,800 (19,346) 1,013,188 298,015
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities (2,718,864) (22,694) (2,741,558) (1,005,998) (693,852)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Security deposits (50,657) (2,025) (52,682) 2,642 --
Rent concession received 50,000 -- 50,000 -- --
Payments for property and equipment (180,309) (1,280) (181,589) -- (15,990)
Proceeds from sale of property and equipment -- -- -- 27,222 --
Restricted cash and equivalents 413,333 (413,333) -- -- 350,000
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities 232,367 (416,638) (184,271) 29,864 334,010
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial issuance of common stock 4,663,473 3,775 4,667,248 -- --
Proceeds from private placement 251,950 933,100 1,185,050 -- 255,850
Preferred dividends paid (15,863) -- (15,863) -- --
Payment of notes payable (790,000) -- (790,000) -- --
Costs associated with private placement -- (30,980) (30,980) -- (5,000)
Payment of deferred registration costs -- (20,000) (20,000) -- (114,486)
Cost of stock retired (125) -- (125) -- (554)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 4,109,435 885,895 4,995,330 -- 135,810
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,622,938 446,563 2,069,501 (976,134) (224,032)
CASH AND CASH EQUIVALENTS - beginning 446,563 -- -- 2,069,501 446,563
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end $ 2,069,501 $ 446,563 $ 2,069,501 $ 1,093,367 $ 222,531
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 49
KUSHI MACROBIOTICS CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company, a development stage enterprise, was incorporated in May 1994 to
develop, produce and/or market a full line of high quality macrobiotic natural
foods. During August 1995, the Company received net cash proceeds of
approximately $4,600,000 from an initial public offering of its shares. The
proceeds were used to purchase inventory, fixed assets and to develop and market
the Company's products. The Company created a menu planner concept to enable
consumers to conveniently select virtually all of their macrobiotic and natural
food meals from their product line, "Kushi Cuisine=99". The Company has
attempted to utilize the reputation of its founder and chairman, Michio Kushi,
to market its product line, which currently includes 26 products. The demand
for the Company's product line has not developed, however, and production has
been temporarily suspended. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Furthermore, the Company is
subject to the usual risks and uncertainties associated with a start-up
enterprise including, acceptance of product line, that will be subject to
various government regulations in a highly competitive market. In an effort to
improve business, the Company has retained outside consultants to help increase
the market for the products already manufactured. The impact of such an effect
is still undetermined. In addition, the consultants are exploring merger and
acquisition possibilities.
The financial statements have been prepared on a going concern basis which
contemplates realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company's ability to continue in existence as
a going concern, is dependent upon its ability to market its products or to
merge with a financially healthier company. There can be no assurance, however,
that the Company will be successful. The financial statements do not include
any adjustments that might result from this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include those related to valuation of inventories and
litigation. It is at least reasonably possible that the significant estimates
used will change within the next year.
<PAGE> 50
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major expenditures for property
and those which substantially increase the useful lives are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When assets
are retired or otherwise disposed of, their cost and related accumulated
depreciation are removed from the accounts and resulting gains or losses are
included in income. Depreciation is provided by the straight-line method over
the estimated useful lives of the assets.
NET LOSS PER SHARE
Net loss per common share is computed based on the number of common and
common stock equivalent shares issued prior to the initial public offering
pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D. In that regard, 2,738,592 common and equivalent shares (after
application of the treasury stock method) have been treated as outstanding for
all periods in calculating earnings per common and equivalent shares because
such shares were issued at prices below the proposed public offering price.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks, money market funds, and Treasury Bills with a maturity
of three months or less. Cash paid for interest was $53,460 during 1995. There
were no interest payments prior to 1995. During 1995, the Company had a non-
cash financing activity when it issued warrants valued at $256,250 for services
rendered. For the period ended June 30, 1996, the Company issued warrants
valued at $300,000 to a charitable organization and for services rendered. At
December 31, 1995 and June 30, 1996, cash balances exceeded coverage provided by
the Federal Deposit Insurance Corporation by approximately $1,970,000 and
$1,035,000, respectively.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expense
was $151,890 in 1995 and $89,333 for the six months ended June 30, 1996. There
were no advertising expenditures prior to 1995.
INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements for the six months ended June 30,
1996 and 1995 reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation of the results for such interim period. Results of operations for
the six months ended June 30, 1996 and 1995 are not necessarily indicative of
the results to be expected for the year ended December 31.
2. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
Finished goods $ 640,560 $ 382,846
Ingredients 109,266 6,297
Packaging, labels, etc. 71,148 --
------------ ------------
820,974 389,143
Valuation allowance 290,210 150,000
------------ ------------
Total inventories $ 530,764 $ 239,143
============ ============
As a result of excess inventories, management has provided a valuation
allowance of $290,210 and $150,000 to reduce those inventories to their net
realizable value at December 31, 1995 and June 30, 1996, respectively.
Management believes that no additional loss will be incurred upon disposition of
the excess quantities. It is at least reasonably possible that this estimate
will change materially in the near-term, however, no estimate can be made of the
range of additional loss that is at least reasonably possible.
<PAGE> 51
3. PROPERTY, EQUIPMENT AND DEPRECIATION
Major classes of property and equipment consists of the following:
estimated
useful December 31, June 30,
life - years 1995 1996
------------ ------------ ------------
(Unaudited)
Leasehold improvements 5 $ 7,002 $ --
Warehouse equipment 5 89,534 --
Office equipment 5 38,954 26,528
Furniture and fixtures 5 46,099 46,099
------------ ------------
181,589 72,627
Less: Accumulated depreciation 12,958 12,430
------------ ------------
Net property and equipment $ 168,631 $ 60,197
============ ============
4. SHAREHOLDERS EQUITY
On April 21, 1995 the shareholders authorized a 1 for 2.1414884 reverse
stock split of the common and preferred stock thereby decreasing the number of
issued and outstanding shares of common stock to 1,688,522 and shares of
preferred stock to 184,451 without having an effect on par value. All future
references in the accompanying financial statements to the number of common and
preferred shares have been restated to reflect the reverse stock split.
During 1995, the Company purchased 58,371 shares of common stock, at a total
cost of $125, from a Vice President who then resigned. The Company also retired
another 200,351 shares of common stock from certain founders of the Company at a
total cost of $429.
In December 1995, the Company retired 105,067 shares of common stock at a
cost of $105 from its President and Chief Executive Officer who then resigned.
On August 23, 1995, the Board of Directors authorized a dividend of $.086
per share of non-cumulative preferred stock. Payments were made on August 25,
1995. In January 1996, the Company issued 265,000 warrants valued at $329,375,
in exchange for services rendered in 1995 and, accordingly, was accrued.
5. 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.
<PAGE> 52
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 $925,615 to 184,451 shares each of
preferred and common stock, which management believes approximated the fair
market value of the stock at the time of issuance. The balance of $263,334
($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 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.
6. 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 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.
<PAGE> 53
7. STOCK PLANS
On August 29, 1994, the Company adopted an Incentive and Non-Qualified Stock
Option Plan ("Option Plan") whereby options to purchase 250,000 shares of common
stock may be granted until October 31, 2004. The plan and terms of the stock
purchases are administered by a Compensation committee ("Committee"),
established by the Board of Directors. Qualified options, under the plan, may
be granted to management and key employees at a price equal to the fair market
value at the date of grant (110% of fair market value if the employee owns more
than 10% of the Company's voting stock). Options may be exercised at any time
during the ten year period following the date the option becomes exercisable
(five years if the employee owns greater than 10% of the Company's voting
stock), which is established by the Committee when the option is granted.
The Company has also established a Stock Bonus Plan ("Bonus Plan") whereby
an aggregate of 100,000 shares of common stock have been reserved for issuance.
There have been no options granted under the Bonus Plan. During August
1995, the Company granted options to purchase 30,000 shares at $5.125 to the
Vice President of Sales. During August and November of 1995, the Company
granted additional options to employees to purchase 24,500 shares at prices
ranging from $4.00-$5.00 per share. As of December 31, 1995, none of the
options are exercisable.
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
During 1994, the Company entered into five-year employment agreements with
its President and three Vice Presidents, providing for annual salaries of
$100,000 and $70,000 each, respectively (increasing to $125,000 and $75,000 upon
completion of the initial public offering). The agreements also provide for
bonuses of 25% and 12-1/2% each, (increasing annually by 12-1/2% and 6-1/4%)
based upon the Company achieving specified goals, as defined. The President
resigned in December of 1995 and his employment agreement was replaced with a
consulting agreement.
During March 1995, one of the Vice Presidents resigned and his employment
agreement was cancelled.
The Company has also entered into a five-year employment agreement with its
Chairman, providing for an annual salary of $52,000, and increasing to $90,000
per annum January 1, 1997 through October 1999. Upon mutual consent, the
agreement can be renewed for successive five-year periods at 20% increases for
each five-year period.
The Company has retained the Chairman's son, Norio Kushi, on a temporary per
diem basis as Acting Director of Operations. Compensation is based upon actual
days worked based upon an annual salary of $60,000. Subsequently, he was hired
as a consultant in August 1995.
In August 1995, the Company entered into a five-year employment agreement
with its Vice President of Sales that provides for compensation of $75,000 per
annum and for annual bonuses beginning at 12=BD% in the first year and
increasing by an average of 6=BC% per year thereafter, based upon the Company
achieving specified goals, as defined. In addition, he was granted options to
purchase up to 30,000 shares of common stock at the closing price of $5.125 at
August 18, 1995, the date of employment, pursuant to the Company's 1994
Incentive and Non-Qualified Stock Option Plan. The options expire ten (10)
years from the grant date (See Note 11).
<PAGE> 54
CONSULTING AGREEMENTS
The Company has entered into five-year consulting agreements with three
officers/
shareholders. The agreements require monthly payments aggregating $6,000,
increasing to $9,000 per month January 1, 1997 through October 1999.
On December 22, 1995, the President and Chief Executive Officer and a
Director of the Company resigned for personal reasons. He has agreed to serve
as a consultant to the Company from January 1, 1996 through August 31, 1997 at a
rate of $7,000 per month. On December 22, 1995, the Company engaged a new
President and Chief Executive Officer of the Company. On December 27, 1995, he
was appointed to fill the vacancy on the Board of Directors, created by the
former president's resignation, until at least March 31, 1996. The new
President will receive $5,000 per week for his services.
On April 26, 1996, the new President and Chief Executive Officer resigned
and was replaced by the Company's Chairman.
On December 3, 1995, the Company entered into a Consulting Agreement with
ACG pursuant to which ACG will review the Company's operations with special
emphasis on identifying ways that the Company can contain costs and increase
sales. As compensation, ACG will receive $4,375 per week plus actual expenses.
In addition, ACG received 100,000 warrants, valued at $73,125. The cost of this
agreement is being amortized over the 4=BD month term of the agreement. The
Company's newly hired President and Chief Executive Officer, is a Managing
Partner of ACG.
On October 31, 1995, the Company entered into an agreement with Millennium
Securities, Corp. ("Millennium"), for Millennium to perform investment banking
services for the Company, on a non-exclusive basis from the date of the
agreement until August 11, 1997. The Company has the right to extend the terms
of the agreement for two additional periods of two years each by written notice
to Millennium. In consideration of the services to be rendered by Millennium,
the Company granted warrants to purchase, at a price of $6.50 per share, a total
of 100,000 shares of common stock of the Company. Such warrants, valued at
$143,750, may be exercised at any time from the date of the agreement to and
including August 11, 2000. The Company granted Millennium registration rights
for the warrants.
LICENSE AGREEMENT
The Company has entered into a license agreement with its Chairman, Michio
Kushi to license his name and trademark seal to the Company. Under the terms of
the agreement, Mr. Kushi has the right to approve all Company products bearing
his name or seal. The Company will be obligated to pay royalties commencing in
the sixth year following the completion of the initial public offering, ranging
from =BD% to 4% of income before taxes, as defined, not to exceed $150,000 in
any year. Any royalty payments due pursuant to the formula in excess of such
amount will be accrued and paid to Mr. Kushi in the event the royalty payments
due in any year under the formula are below $150,000. The accrued amounts may
also be payable to Mr. Kushi, along with a lump sum payment of $1,000,000, in
the event the business of the Company is purchased by another entity. Mr. Kushi
will also receive 10% of the Company's licensing or royalty income attributable
to the trademark. Mr. Kushi retains the right under the agreement to open and
maintain retail stores bearing his name to sell macrobiotic food products and
related items. In addition, the agreement provides that the Company will pay up
to $200 per day for non-Company personnel to assist Mr. Kushi in Company
matters. To date, none of these payments have been made.
LEASES
In August 1995, the Company entered into a five-year lease for approximately
4,000 square feet of office space located in Stamford, CT. The lease provides
for monthly payments of approximately $5,000 in the first year, escalating to
$6,000 per month during the fifth year of the agreement. The Company moved into
this facility in October 1995. The Company received a $50,000 lease concession,
which is being amortized over the lease term.
<PAGE> 55
In August 1995, the Company entered into a five-year lease for 27,000 square
feet of warehouse space located in Parsippany, N.J. The lease calls 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 1996.
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.
Rent expense was $72,911 for 1995.
The following is a schedule, by year, of future minimum amounts due under
the terms of the agreements:
Total Employment Rental
------------ ------------ ------------
1996 $ 405,073 $ 337,000 $ 182,823
1997 386,803 315,000 186,553
1998 390,533 315,000 190,283
1999 354,263 275,000 194,013
2000 105,295 43,750 147,608
------------ ------------ ------------
$ 1,641,967 $ 1,285,750 $ 901,280
============ ============ ============
9. NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, the Company has book and tax net operating loss
carryforwards of approximately $2,738,000 expiring 2010. The Company has fully
reserved the tax benefit of the operating loss carry forward because the
likelihood of realization of the benefit cannot be established. The Internal
Revenue Code contains provisions which may limit the loss carry forwards
available if significant changes in stockholder ownership of the Company occur.
10. SUBSEQUENT EVENTS
Development Stage Enterprise
The Company was a development stage enterprise through December 31, 1995.
The six months ending 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") whereby the APHX shareholders will own 85%
of the combined company.
APHX, through its wholly owned subsidiary, Marine Turbine Australia Pty.
Ltd. ("MTA"), has a principal product under development, which is a marine craft
("pursuit craft") designed for high speed ocean pursuit. Prior to the
merger, the Company will form a new corporation, Kushi Natural Foods, Corp.
("Natural"), and transfer to "Natural" substantially all of the assets and
liabilities of the existing Kushi Cuisine food business. Three shares of
"Natural" will be distributed to the Company's shareholders for each share
currently owned. In addition, the shareholders will receive one common stock
purchase warrant to purchase an additional share of the Company's common stock.
At the closing of the merger (and simultaneously therewith), the Company will
change its name to American Phoenix Group, Inc.
Although the Company is the surviving entity following the merger, as the
shareholders of APHX obtained a majority of the voting rights in the Company
APHX will be deemed to be the acquiring entity, for financial reporting
purposes.
<PAGE> 56
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.
Issuance of Warrants in Exchange for Services
In 1996, the Company issued 65,000 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.
Lawsuit
During March 1996, the Company terminated its Vice President of Sales for
cause. He then instituted a suit against the Company claiming wrongful
termination and is asking for $1,000,000 in damages plus interest and expenses
plus an attachment of $1,000,000 of the Company's assets. 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.
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
American Phoenix Group, Inc.
We have audited the consolidated balance sheets of American Phoenix Group, Inc.
(formerly known as E.C.I. International, Inc.) and subsidiaries as of August 31,
1994 and 1995, and the related consolidated statements of operations,
shareholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with general accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Phoenix
Group, Inc. and subsidiaries as of August 31, 1994 and 1995, and the results of
their operations, shareholders' deficiency and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Hollander, Gilbert & Co.
Los Angeles, California
May 6, 1996
<PAGE> 58
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
--------------------------- ------------
1994 1995 1996
------------ ------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash (including cash held in
attorney's trust account
for the benefit of the
Company of $908,388) $ 149 $ 1,039 $ 1,111,697
Accounts receivable 273,917
Inventory 1,215,015
Accrued interest receivable
(Note 3) 293,676
Receivable from sale of
subsidiary stock (Note 3) 760,000
Receivable from related
party (Note 6) 85,356
Prepaid expenses 2,401
------------ ------------ ------------
TOTAL CURRENT ASSETS 149 1,039 3,742,062
------------ ------------ ------------
INVESTMENT IN BARLILE CORP. LTD.
(Note 3) 833,000
INVESTMENT IN NOTES RECEIVABLE
PORTFOLIO (Note 3) 9,700,000
PROPERTY AND EQUIPMENT, Net
of accumulated depreciation
of $47,685 at May 31, 1996 306,382 968,616
OTHER ASSETS
Organization costs 10,847
Deposits and advances to
affiliated company (Note 6) 282,468 3,091,001
Other deposit (Note 4) 150,000 150,000
------------ ------------ ------------
TOTAL OTHER ASSETS 432,468 3,251,848
------------ ------------ ------------
$ 306,531 $ 433,507 $18,495,526
============ ============ ============
See accompanying Notes to Consolidated Financial Statements
<PAGE> 59
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
August 31, May 31,
--------------------------- ------------
1994 1995 1996
------------ ------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable (Note 5) $ $ 696,762 $ 5,583,391
Accounts payable and accrued
expenses 846,790 979,901
Income taxes payable 731,614
Reserve for rescission/guarantee 526,000 526,000
Loans payable to related parties
(Note 6) 364,720 346,228
Net liabilities of discontinued
operations 594,188
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 364,720 3,009,968 7,820,906
MINORITY INTEREST (Note 3) 152,953
SHAREHOLDERS' EQUITY (DEFICIENCY)
(Note 9)
Preferred stock, $.01 par value;
authorized - 20,000,000 shares;
issued and outstanding - 4,000,000
shares at August 31, 1994 and 1995 40,000 40,000
Common stock, $.01 par value;
authorized - 50,000,000 shares;
issued and outstanding - 9,267,783
shares at August 31, 1995 and
32,922,109 shares at May 31, 1996 92,678 329,220
Additional paid-in capital 8,642,342 8,825,830 19,930,655
Accumulated deficit (8,740,531) (11,534,969) (9,738,208)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIENCY) (58,189) (2,576,461) 10,521,667
------------ ------------ ------------
$ 306,531 $ 433,507 $18,495,526
============ ============ ============
See accompanying Notes to Consolidated Financial Statements
<PAGE> 60
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31, Nine Months Ended May 31,
--------------------------- ---------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
REVENUES
Service and
parts sales $ $ $ $ 351,413
License fees
(Note 7) 1,719,994
Consulting fees 39,936
Gain on sale
of equipment 6,269 6,269
Gain on sale of
subsidiary stock
(Note 3) 1,067,801
Interest on loan
portfolio and
other (Note 3) 61 297,047
------------ ------------ ------------ ------------
TOTAL REVENUES 61 6,269 6,269 3,476,191
COSTS AND EXPENSES
Cost of goods sold 151,895
Research and
development 8,581,154 121,984 124,514
Selling, general
and administrative 3,185 902 902 1,360,984
Loss on reverse
acquisition 2,512,876
Discharge of net
liabilities of
discontinued
operations (594,188)
Foreign exchange
loss 98,173 154,859
Share of minority
interest (Note 3) 60,754
Interest 10,086 10,086 26,985
------------ ------------ ------------ ------------
TOTAL COSTS
AND EXPENSES 8,682,512 2,800,707 135,502 1,006,430
------------ ------------ ------------ ------------
INCOME (LOSS)
BEFORE PROVISION
FOR INCOME TAXES (8,682,451) (2,794,438) (129,233) 2,469,761
PROVISION FOR
INCOME TAXES 673,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(8,682,451) $(2,794,438) $ (129,233) $ 1,796,761
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF
COMMON SHARES
OUTSTANDING 9,268,000 9,268,000 9,268,000 26,500,000
------------ ------------ ------------ ------------
EARNINGS (LOSS)
PER COMMON SHARE $ (.94) $ (.30) $ (.01) $ .07
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements
<PAGE> 61
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED AUGUST 31, 1994 AND 1995
AND NINE MONTHS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated
--------------------------- --------------------------
Shares Amount Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1993 4,000,000 $ 40,000 $ $ (39,850) $ (58,080) $ (57,930)
Research and development
and other expenses
incurred by former
parent of MTA 8,682,192 8,682,192
Net loss for the year (8,682,451) (8,682,451)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1994 4,000,000 40,000 8,642,342 (8,740,531) (58,189)
Adjustment for reverse
acquisition 9,267,783 92,678 (92,678) --
Research and development
and other expenses
incurred by former
parent of MTA 276,166 276,166
Net loss for the year (2,794,438) (2,794,438)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1995 4,000,000 40,000 9,267,783 92,678 8,825,830 (11,534,969) (2,576,461)
Conversion of preferred
shares into common shares (4,000,000) (40,000) 20,000,000 200,000 (160,000) --
Cancellation of shares
issued to Rubywell (9,000,000) (90,000) 90,000 --
Sale of shares in Reg S
placements 7,420,903 74,209 2,736,117 2,810,326
Issuance of shares
for services 1,365,748 13,657 727,351 741,008
Issuance of shares
to acquire investment
in Barlile 1,195,642 11,956 821,044 833,000
Issuance of shares to
acquire promissory notes 3,000,000 30,000 6,670,000 6,700,000
Cancellation of shares
issued to Maker, Inc. (45,000) (450) 450 --
Cancellation of shares
issued to E.C.I.
Construction Services,
Inc. (500,000) (5,000) 5,000 --
Issuance of shares for
payment of note payable 217,033 2,170 214,863 217,033
Net income for the
nine months ended
May 31, 1996 1,796,761 1,796,761
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, May 31, 1996
(Unaudited) -- $ -- 32,922,109 $ 329,220 $19,930,655 $(9,738,208) $10,521,667
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE> 62
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31,
---------------------------
1994 1995
------------ ------------
Cash flows from operating activities
Net loss $ (8,682,451) $ (2,794,438)
Adjustments to reconcile net loss to
net cash used in operating activities:
Research and development and other expenses
incurred by Rubywell Pty. Ltd. and credited
to addtional paid-in capital of Marine
Turbine Australia, Pty. Ltd. 8,682,192 276,166
Loss on reverse acquisition, including
cash received 2,513,740
Gain on sale of property and equipment (6,369)
------------ ------------
Net cash used in operating activities (259) (10,801)
------------ ------------
Cash flows from investing activities
Proceeds from sale of property and equipment 312,851
Advances to Rubywell Pty. Ltd. (282,468)
------------ ------------
Net cash provided by investing activities -- 30,183
------------ ------------
Cash flows from financing activities
Loans received from related parties 259
Repayments of loans from related parties (18,492)
------------ ------------
Net cash provided by (used in) financing
activities 259 (18,492)
------------ ------------
NET INCREASE IN CASH -- 890
CASH, Beginning of period 149 149
------------ ------------
CASH, End of period $ 149 $ 1,039
============ ============
Supplemental disclosure:
Non-cash investing and financing activities
Acquisition of equipment by borrowing from
related parties $ 36,500
============
See accompanying Notes to Consolidated Financial Statements
<PAGE> 63
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended May 31,
---------------------------
1995 1996
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income (loss) $ (129,233) $ 1,796,761
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Gain on sale of property and equipment (6,269)
Gain on sale of subsidiary stock (1,067,801)
Reversal of net liabilities of
discountinued operations (594,188)
Research and development and other
expenses incurred by Rubywell Pty.
Ltd. and credited to addtional
paid-in capital of Marine
Turbine Australia, Pty. Ltd. 124,514
Expenses satisfied by issuance of
common stock 646,874
Changes in operating assets and
liabilities:
Accounts receivable (87,551)
Inventory (137,901)
Accrued interest receivable (293,676)
Prepaid expenses 7,323
Accounts payable and accrued expenses 189,911
Income taxes payable 673,000
Accrued interest on notes payable 26,985
------------ ------------
Net cash provided by (used in)
operating activities (10,988) 1,159,737
------------ ------------
Cash flows from investing activities
Proceeds from sale of property and equipment 312,651
Deposits and advances to affiliated company (2,808,026)
Deposit received on sale of subsidiary stock 400,000
Advances to loans to related parties (282,468) 34,849
Deposit paid to acquire Masling, net of cash
received (140,000)
------------ ------------
Net cash provided by (used in)
investing activities (30,183) (2,513,177)
------------ ------------
Cash flows from financing activities
Proceeds from sale of common stock 2,810,326
Repayments of loans from related parties (19,195) (346,228)
------------ ------------
Net cash provided by (used in)
financing activities (19,195) 2,464,098
------------ ------------
NET INCREASE IN CASH 1,110,658
CASH, Beginning of period 175 1,039
------------ ------------
CASH, End of period $ 175 $ 1,111,697
============ ============
Supplemental disclosure:
During the nine months ended May 31, 1996, the Company issued 1,365,748 shares
of its common stock for services, 1,195,642 shares to acquire interest in
Barlile, 3,000,000 shares and a note payable for $3,000,000 to acquire a loan
portfolio and 217,033 shares for payment of note payable.
See accompanying Notes to Consolidated Financial Statements
<PAGE> 64
AMERICAN PHOENIX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - American Phoenix Group, Inc. (the "Company"), through
its majority owned subsidiary, Marine Turbine Australia Pty. Ltd. ("MTA"),
principal product under development is a marine craft ("pursuit craft") designed
for high speed ocean pursuit. MTA's pursuit craft is designed to be able to
maintain continuous pursuit speeds in excess of 70 mph. These boats are expected
to be approximately 55 feet in length. MTA developed proprietary technology
utilizing aircraft lightweight gas turbine engines coupled to the Modular Power
Unit ("MPU"). MPU uses a selective transmission system, the combining gear box,
which is designed to accept power from two or more turbines on demand from the
pursuit craft pilot. The MPU allows the pursuit craft to operate at cruise speed
on one engine and engage the second engine on demand to rapidly attain pursuit
speeds.
Basis of Presentation - Effective August 31, 1995, the Company issued 4,000,000
shares of its Series B Preferred Stock to Rubywell Pty. Ltd., an Australian
proprietary limited company, ("Rubywell") in exchange for all outstanding common
stock of MTA, an Australian proprietary limited company. Each share of Series B
Preferred Stock is convertible into five shares of common stock. On March 4,
1996, Rubywell gave notice to the Company of its exercise of its right to
convert 4,000,000 shares of Series B Preferred Stock into 20,000,000 shares of
common stock. This transaction was accounted for as a reverse acquisition
whereby American Phoenix Group, Inc. was the legal survivor, however, the
accounting reflects MTA as the survivor since MTA was in effect the continuing
business and, accordingly, the accompanying financial statements include the
accounts and operations of MTA through August 31, 1995. This accounting
treatment resulted in a loss on reverse acquisition representing the excess of
liabilities of American Phoenix Group, Inc. over its assets in the amount of
$2,512,876 and its resultant charge to income. Under the terms of the Australian
Industry Research and Development Act 1986, Rubywell was granted certain tax
preferences. Under such auspices, it entered into a development and research
program and the testing of the marine turbine propulsion system. As such all of
the research and development expenditures were borne by Rubywell and therefore,
these expenditures were considered as having been incurred by MTA. The financial
statements for the years ended August 31, 1994 and 1995 have been prepared
combining the results of operations of Rubywell and MTA as if they were a single
entity.
The Company was incorporated in Nevada in 1989, and amended its Articles of
Incorporation to change its name from E.C.I. International, Inc. (formerly
E.C.I. Environmental, Inc.) to its present name in December 1995. Until December
1993, the Company served as a holding company for four wholly-owned
subsidiaries: Environmental Control Industries (a California corporation founded
in 1982, and the Company's principal operating subsidiary), PacTherm, Inc.,
E.C.I. Construction Services, Inc. (formerly Environmental Industrial Safety,
Inc.), and Western Environmental Insurance Company. On August 31, 1993, the
Company adopted a formal plan of discontinuance of all operating segments. On
August 31, 1994, Environmental Control Industries and PacTherm, Inc. filed
Chapter 7 Bankruptcy with the United States Bankruptcy Court, Northern District
of California, whereby they will be liquidated and dissolved upon the resolution
of the court. The net liabilities to be disposed of have been separately
classified in the accompanying consolidated balance sheets at their expected net
realizable values at August 31, 1995. During the nine months ended May 31, 1996,
the Company wrote off the net liabilities of discontinued operations since there
were no debts that survived.
<PAGE> 65
On August 30, 1994, the Company entered into an agreement among the Company,
Pegasus Technologies, Inc., a Delaware corporation, ("Pegasus"), and Pegasus'
controlling stockholders, E. Anne Eisenhower and Lloyd E. Eisenhower. The
Company issued to Pegasus 4.72 million shares of Series A preferred stock of the
Company in exchange for a license of all of the Pegasus rights and interest in a
certain technology, an assignment of a $14.4 million loan commitment from Euro
American Insurance Company and Pegasus' lease for a facility in Mojave,
California. On December 13, 1994, Douglas A. Froom delivered notice to the
Company which stated his termination of the relationship created by the December
4, 1992 Exclusive License Agreement, as amended, between NDI Technologies, Inc.,
a Delaware corporation ( formerly Pegasus Technologies, Inc.), as licensee, and
Douglas A. Froom as licensor, which was assigned to Pegasus by Douglas A. Froom
for common stock representing 20 percent of the Company, and further stated that
Froom intended to market the underlying technology to third parties. By reason
of Froom's termination, the Board of Directors determined it to be in the best
interest of the Company to rescind the Pegasus agreement. Effective August 30,
1994, the Company rescinded that certain purchase agreement titled " An
Agreement for the Purchase of the Stock of Pegasus Technologies, Inc." (as
amended, the "Purchase Agreement") among the Company, Pegasus Technologies, Inc.
and Pegasus ' controlling stockholders, E. Anne Eisenhower and Lloyd E.
Eisenhower, as sellers. As a result, the Company's net assets (as reported in
the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31,
1994) were effectively reduced to negative. The rescission also resulted in a
divestiture of control.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Property and Equipment - Property and equipment is stated at cost. Depreciation
is computed on the straight-line method based upon the estimated useful life of
the asset.
Inventory - Inventory consisting of spare parts are valued at lower of cost
computed on average costs basis and net realizable value.
Foreign Currency Translation - Results of operations of foreign subsidiaries are
translated using the average exchange rates during the period. Resulting
translation adjustments are not material.
Income Taxes - The Company utilizes the asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
Earnings (Loss) Per Common Share - Earnings (Loss) per common share is based
upon the weighted average number of common shares outstanding during the period.
Common stock equivalents are not included since the effect would be anti-
dilutive.
Interim Financial Statements - The accompanying interim consolidated financial
statements are unaudited but, in the opinion of the management of the Company,
contain all adjustments, consisting of only normal recurring accruals, necessary
to present fairly the financial position at May 31, 1996, the results of
operations for the nine months ended May 31, 1996 and 1995, and the changes in
cash flows for the nine months ended May 31, 1996 and 1995. Operating results
for the nine months period ended May 31, 1996 are not necessarily indicative of
the results for the year ending August 31, 1996.
<PAGE> 66
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Concentration of Funding - The Company has been receiving substantially all of
its funding from one related group and its majority stockholder, Rubywell. There
is no assurance that the Company will continue to receive such support.
Additional Funding May be Required - Achievement of management's objectives will
be dependent upon the ability to access significant capital. Current management
believes that it can raise sufficient capital through private placements,
registered public offerings or exercise of outstanding Warrants of Kushi
Macrobiotics Corporation. If for any reasons sufficient capital is unavailable,
the ability to develop and market existing business and to acquire new or
additional businesses will be adversely affected.
Dependence on Major Shareholder - The Company had substantially all of its
research and development activities contracted by Rubywell, its major
stockholder. Additionally, all of the Company's management and administrative
costs are borne by Rubywell. Any changes in these arrangements would require the
Company to seek other favorable arrangements.
Initial Limited Customers - The Company's principal product under development is
a marine craft designed for high speed ocean pursuit, therefore, the Company has
initially targeted its marketing to various governments. Over 144 countries are
accessible by sea or estuary. Many governments allocate maritime patrol
expenditures based largely on security considerations. With the United Nations
Law of the Sea ratified in November 1994, many countries are taking greater
steps to ensure territorial water integrity. Although the Company has received
expressions of interest from various countries for over 130 pursuit boats, there
is no assurance that these interests will ever be committed to firm orders.
Geographic Area of Operations - The Company's research and development
activities are carried out in Australia.
3. SUBSEQUENT EVENTS
Barlile - On July 26,1995, through the Company's wholly owned subsidiary, Tokan
Holdings, Inc. ("Tokan"), the Australian Foreign Investment Review Board gave
approval for Tokan to lodge a tender offer through September 25, 1995 to acquire
up to all of the issued and outstanding common stock of Barlile Corp. Ltd.
("Barlile") for AU$2.50 per share. Barlile is listed on the Australian Stock
Exchange. Tokan elected not to proceed with lodging a full tender offer. On
October 5, 1995, Tokan reached an agreement to acquire 552,100 shares of Barlile
common stock (or approximately 13.55 percent of the outstanding shares) for
AU$1,380,250 to be delivered at settlement. On October 26, 1995 the Company
delivered 1,086,947 shares of its common stock as a guarantee against Tokan's
payment due at settlement, and issued an additional 108,695 shares of the
Company's common stock (or US$103,519) reserved to compensate for foreign
currency exchange rate fluctuations at the time of settlement. This transaction
settled for the consideration of an aggregate of 1,195,642 shares of the
Company's common stock in exchange for 552,100 shares of Barlile common stock.
<PAGE> 67
Notes Purchase - On February 27, 1996, the Company and P.R. Finance & Investment
Ltd. entered into the Note Purchase Agreement, which was amended as of May 3,
1996 (as amended the "Note Purchase Agreement"). Under the Note Purchase
Agreement, the Company acquired approximately $9.7 million principal amount in
unsecured promissory notes for 3,000,000 shares of the Company's common stock,
plus the Company's promissory note in the principal amount of $3,000,000. This
note that was originally due on May 25, 1996 was extended to September 30, 1996.
During the three months ended May 31, 1996, the Company accrued interest income
of $293,676 and management expense of $36,862.
Masling Acquisition - On February 16, 1996, MTA paid a non-refundable deposit of
AU$370,000 for the purchase of 100% outstanding shares of Masling Industries
Pty. Ltd., ("Masling"). MTA contemporaneously paid a non-refundable deposit of
AU$30,000 for the purchase of certain assets of Masling Rotor Wing Pty. Ltd.
from Masling stockholders, subject to Cootamundra Shire Counsel approval, which
has been orally obtained. A further AU$2,600,000 is due and payable on
settlement date, May 16, 1996 that was extended to September 30, 1996. The
following unaudited pro forma summary presents information as if the acquisition
of Masling had occurred at the beginning of each fiscal year. The unaudited pro
forma information is provided for information purposes only. It is based on
historical information and does not reflect the actual results that would have
occurred nor is it necessarily indicative of future operations of the combined
enterprise:
1994 1995
------------ ------------
REVENUES
Sales $ 685,520 $ 1,026,335
Interest 2,385 9,815
Gain on sale of property and equipment 6,052
------------ ------------
TOTAL REVENUES 687,905 1,042,202
COSTS AND EXPENSES
Cost of goods sold 301,361 458,874
Research and development 8,581,154 121,984
Selling, general and administrative 338,835 461,996
Loss on reverse acquisition 2,512,876
Foreign exchange loss 98,173 154,859
Interest 10,086
------------ ------------
TOTAL COSTS AND EXPENSES 9,319,523 3,720,675
------------ ------------
NET LOSS $(8,631,618) $(2,678,473)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,268,000 9,268,000
============ ============
NET LOSS PER COMMON SHARE $ (.93) $ (.29)
============ ============
Sale of Subsidiary Stock - During the six months ended February 29, 1996, the
Company sold 1,250 shares of MTA's common stock to Consortium Investment Group
Pty. Ltd. for a total consideration of $1,160,000 (AU$1,500,000) of which
AU$500,000 had been paid, AU$600,000 is payable on or before May 15, 1996 and
AU$400,000 is payable on or before June 30, 1996. The date of the receipt of the
balance of AU$1,000,000 has been extended to September 30, 1996. Prior to this
sale, the Company owned 100% of MTA and after this transaction, the Company
owned 88% of MTA. This transaction resulted in a gain of $1,067,801 representing
the excess of the issued prices of MTA's shares over the Company's carrying
amount.
<PAGE> 68
During the three months ended May 31, 1996, MTA sold 937 shares of its common
stock to Consortium Development Fund ("CDF") for a total consideration of
$897,664 (AU$1,123,875) which was paid in full. During the same period, the
Company repurchased the shares from CDF in exchange for 2,247,750 shares of the
Company's common stock at $.40 per share. The Company recorded the transaction
as issuance of shares of common stock above par value. No gain or loss was
recognized from the exchange of the shares.
4. DEPOSIT
On March 4, 1994, the Company entered into a Compromise and Settlement Agreement
("Settlement Agreement") by and between the Company, Western Environmental
Insurance Company ("WEIC") and National Union Fire Insurance Company
("National"). The Settlement Agreement resolved the issues surrounding the
workers' compensation policies that the Company purchased from National for the
periods of April 1, 1990 through April 1, 1992, inclusive, and the separate
reinsurance agreement National had with WEIC with respect to the above workers'
compensation policies. The Settlement Agreement became effective as of January
31, 1994, and the terms were as follows:
a. The Company paid $1,000,000 to National and, in return, the Company and
WEIC obtained a release from National, for any and all claims, as it relates to
the workers' compensation policies purchased by the Company for the periods of
April 1, 1990 through April 1, 1992, and the separate reinsurance agreement
between National had with WEIC with respect to said workers' compensation
policies.
b. The Company placed $150,000 on deposit to be held for purposes of
indemnification which will inure to the benefit of National for losses which
exceed $1,000,000. Should the losses be less than $1,000,000, the Company shall
participate in the savings at a rate of fifty percent.
In May 1994, WEIC was dissolved with the State of Vermont.
<PAGE> 69
5. NOTES PAYABLE
Notes payable consisted of the following at August 31, 1995 and May 31, 1996:
August 31, May 31,
1995 1996
------------ ------------
(Unaudited)
John Errecart (see below) $ 494,354 $ 506,714
Kurt P. Zimmerman (see below) 202,408
Note payable on acquisition of
notes receivable portfolio (Note 3) 3,000,000
Note payable on acquisition of Masling (Note 3) 2,076,677
============ ============
$ 696,762 $ 5,583,391
============ ============
On December 22, 1993, the Company entered into a note payable with John Errecart
("Errecart') in the sum of $300,000 with an interest rate of 1.66% per month and
was secured by the assets of the Company. This note payable and all unpaid
interest were due on April 22, 1994. The Company is currently in default of this
note. On December 12, 1995, Errecart was awarded a court judgment in the amount
of $494,354 (see Note 7).
Kurt P. Zimmerman ("Zimmerman"), former Chairman of the Board and Chief
Executive Officer of the Company, advanced the Company the sum of $350,000 for a
one time fee of $25,000. On March 31, 1994, $200,000 was paid, leaving an amount
outstanding of $175,000, which was due on April 30, 1994. The Company is
currently in default of the note and is negotiating with Zimmerman for payment
terms. The amount outstanding as of August 31, 1995 was $202,408, including
accrued interest of $27,408. On May 31, 1996, Zimmerman converted the principal
amount plus the accrued interest of the note into 217,033 shares of the
Company's common stock.
6. RELATED PARTY TRANSACTIONS
Receivable from Related Party - During the nine months ended May 31, 1996, the
Company advanced $49,356 to Mr. Seward, the Company's former President. In
addition, Mr. Seward owes $36,000 to the Company from the exercise of his
100,000 stock options.
Deposits and Advances to Affiliated Company - As of August 31, 1995 and May 31,
1996, MTA had outstanding deposits and advances of $282,468 and $3,091,001,
respectively, to its former controlling entity, Rubywell Pty. Ltd.
<PAGE> 70
Loans Payable - As of August 31, 1994 and 1995, MTA had outstanding advances
payable to a director and director related entities in the amounts of $364,720
and $346,228, respectively. The loans were paid in full as of May 31, 1996.
John Holt Smith Assumption of Duties of Sole Officer and Director - As a result
of the resignation of all other remaining officers and directors of the Company
in connection with the Pegasus Rescission and Settlement Agreement on January
31, 1995, John Holt Smith assumed the duties of President, Secretary and Sole
Director of the Company. During this interim period until appointment of Mr.
Wallace N. Seward as President and Director, Mr. Smith agreed to guide and to
assist the Company in negotiations with the American Stock Exchange concerning
the Company's listing and to pursuit of a transaction to bring value to the
Company's public stockholders. Prior to Mr. Smith's assumption of these
responsibilities, the Company's major stockholders declined to assume these
responsibilities or to finance the Company's continuing expenses. Mr. Smith also
served as the Company's legal counsel.
John Holt Smith - The Company agreed to pay Mr. Smith a salary of $15,000 per
month beginning January 1995. None of this salary was paid. On May 6, 1996, Mr.
Smith relinquished all rights to receive back salary. For Mr. Smith's services
rendered to the Company in connection with the Pegasus Purchase Agreement, Smith
& Simpson were issued an aggregate of 1,500,000 options to purchase common stock
of the Company at $0.50 per share. The option price was later reduced to $0.10
per share. On May 6, 1996, the number of options was reduced to 228,000 shares.
Smith & Simpson - By letter agreement dated May 6, 1996, Smith & Simpson
confirming compromise, reduce its legal fees and number of shares of the
Company's common stock subject to exercise of options. Smith & Simpson has
served as outside counsel to the Company since September 10, 1993. John Holt
Smith, partner of Smith & Simpson, also serves as the Secretary and a Director
of the Company. Between January 31, 1995 to June 15, 1995, Mr. Smith served as
the Company's President, Secretary and sole Officer and Director. In addition,
from time to time prior to August 30, 1994, Mr. Smith represented Pegasus and
certain stockholders of the Company.
MTA and Rubywell License - In May 1996, MTA and Rubywell entered into an
agreement, amending the license agreement dated June 16, 1995. The parties
agreed that the license fee payable by Rubywell to MTA is the sum of $1,600,000
payable annually effective from August 31, 1995. The parties also agreed that
the license shall not be terminable at the will of MTA but shall be for a term
of five years commencing on August 31, 1995. Rubywell shall be entitled at any
time during the term of this agreement by notice in writing to MTA to terminate
this agreement. Rubywell shall pay to MTA a proportionate part of the license
fee payable under this agreement calculated from August 31st in the relevant
year until the date of expiration of the notice of termination.
<PAGE> 71
7. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases an office space in Washington, DC on a
month by month basis under an oral understanding with the building management
since September 1, 1995. The Company has reserved a first right of refusal, to
enter into an option with the landlord for a minimum of two year lease at $5,500
per month.
Employment Agreement - On June 15, 1995, Mr. Wallace N. Seward was elected
interim President of the Company. On June 30, 1995, the Board of Directors
approved Mr. Seward's employment agreement which pays him $120,000 per year for
a term of three years and pays him a bonus of not less than $100,000 per year.
On November 2, 1995, the Board granted 100,000 stock options to Mr. Seward in
three different amounts and prices as follows: (I) 10,000 at $0.10; (ii) 40,000
at $0.25; and (iii) 50,000 at $0.50.
License and Royalty Agreement - MTA will receive license revenues of $1,600,000
per year for five years from its exclusively retained research partner, Rubywell
Pty. Ltd., to develop additional "horizontal" product applications ( such as a
four engine combining gear box capable of driving a 100 feet hull to 125 MPH)
from MTA's core technology. In return, MTA must pay research royalties of 8% to
10% on all commercial product sales to its research partner until its able to
pay for its investment in the technology enhancement and improvement.
Pending Proceedings -
American Phoenix Group, Inc. v. Daniel J. Doud - On August 2, 1995, the Company
filed a complaint against Daniel J. Doud ("Doud") in the Superior Court of the
State of California, County of Los Angeles, Case No. BC132728, alleging, inter
alia, Breach of Contract, Breach of Promissory Note, Fraud, Deceit and Negligent
Misrepresentation. The dispute involves the 1993 sale by the Company of all of
the issued and outstanding common shares of ECI Construction Services, Inc.
("ECICS"), then a wholly owned subsidiary of the Company, for a purchase price
of $750,000 (the "Sale"). Doud agreed to purchase ECICS for $750,000 and
executed a written promissory note in favor of the Company. The Sale also
required Doud to deliver 500,000 shares of common stock of the Company
("Shares") beneficially owned by him to a collateral account for ECICS's bonding
company Golden Eagle Insurance Company to satisfy a bond which was guaranteed by
Doud and the Company. On March, 1994 and continuing to the present, Doud has
failed to pay to the Company $750,000 pursuant to the written promissory note
and to deliver the Shares into the collateral account. The Company seeks payment
under the promissory note and other relief. Doud has requested arbitration of
this controversy.
Bruce Street Medical Center Annex, a Nevada Limited Partnership, and Robert
Roggen, as General Partner v. American Phoenix Group, Inc. - On May 17, 1995,
Bruce Street Medical Center Annex, a Nevada Limited Partnership, and Robert
Roggen, as General Partner (jointly "Medical Center"), filed a complaint in the
District Court of the State of Nevada, Clark County, Case No. A346087, against
the Company alleging monies owed pursuant to a certain lease agreement which the
Medical Center allegedly entered into with the Company on or about December
1994. The Complaint seeks to recover monies for, inter alia, unpaid rent at the
rate of $3,880.10 per month from and after December 24, 1994 and for
reimbursement of certain tenant improvements made by the Medical Center
allegedly on the Company's behalf in an amount in excess of $12,500. The Company
disputes the validity of the lease agreement. To date, the Company is unaware of
any further prosecution of this lawsuit.
Daniel J. Doud v. American Phoenix Group, Inc. - On November 8, 1995 Daniel J.
Doud ("Doud") filed a complaint against the Company in the Superior Court of the
State of California, County of Los Angeles, Case No. SC039240 alleging inter
alia breach of contract, breach of promissory note and unjust enrichment. Doud
further alleges that he entered into an Employment Agreement dated March 1, 1994
with the Company whereby the Company agreed to pay Doud $84,000 per year plus
certain benefits, including a signing bonus; $4,200 for reimbursable costs of
heath insurance; $8,100 for moving expenses; $67,000 for travel expenses; and
$4,200 for auto allowance in exchange for Doud's future services to be rendered
for the Company. Doud also asserts that on November 9, 1993, he entered into a
Business Loan Agreement with Handtop Technologies, S.A. to receive the amount of
$325,000 plus interest at the rate of 8.5 percent per annum with a maturity date
of June 30, 1994, and that this obligation was subsequently assigned to and
undertaken by the Company. The Company disputes the validity of the employment
agreement, the validity of the business loan agreement and disputes that Doud
rendered any services to the Company. The Company has numerous defenses to this
complaint and intends to vigorously defend this action.
<PAGE> 72
John Errecart, et al. v. American Phoenix Group, Inc., et al. - On December 22,
1994, John Errecart, Danny Dalonzo, Donny Lewis, Petrus, L.P, a California
Limited Partnership, Jonathan Bearg, individually and as Trustee for the
Stanfield Family Trust (the "Errecart Plaintiffs") filed a complaint in the
Superior Court of the State of California, County of San Joaquin, Case No.
282996 against Daniel Doud, American Phoenix Group, Inc. and Handtop France,
S.A. (the "Doud Defendants"), alleging inter alia breach of a promissory note
executed by the Company in favor of Mr. Errecart in the amount of $300,000, for
intentional misrepresentation, for violation of corporations Code Section 25401
and for conversion. The Errecart Plaintiffs sought and obtained a default
judgment against Doud and against the Company. The Company did not receive
actual notice of the lawsuit. The judgment by the Court became final on December
22, 1995 and the Court ruled for judgment in favor of Mr. Errecart against the
Company in the total amount of $494,354.36, which represents $300,000 in unpaid
principal on the Note, $9,300 in attorneys' fees, $50,054.36 in unpaid interest
calculated from the date of default at the legal rate of interest, and damages
in the amount of $135,000. The judgment also awarded Errecart a security
interest in a cash account (already closed) and ordered the Company to transfer
to Errecart, free of restrictions on transferability under Rule 144 promulgated
under the Securities Act of 1933, 50,000 shares of the Company's Common Stock,
previously held of record by Doud, and pledged to Errecart. The Company is
engaged in settlement discussions with Errecart.
General Electric Capital Corporation v. Environmental Control Industries and
American Phoenix Group, Inc. - On October 17, 1994, General Electric Capital
Corporation ("GECC") filed a complaint in the Superior Court of the State of
California, County of Alameda, Case No. 741459 against Environmental Control
Industries and the Company for monies owed and seeking possession of equipment
provided to Environmental Control Industries under that certain Lease Agreement
dated August 23, 1990 ("Lease"). On or about August 24, 1990, the Company
executed a guarantee in favor of GECC ("Guarantee"). GECC alleges that
Environmental Control Industries defaulted under the Lease. By this complaint,
GECC seeks the sum of $39,596.84, claimed to be due and owing under the Lease as
of March 1, 1994, $6,426.16 under an amendment to the Lease, interest at the
rate of 10 percent per annum or $7,679.14 up through October 30, 1995 and
reasonable attorneys' fees. GECC also seeks to hold the Company liable under the
Guarantee. On October 30, 1995 GECC sought and obtained default judgments
against Environmental Control Industries and the Company.
The Company is also party to various suits and claims incidental to its
business, none of which relate to asbestos exposure. In the opinion of
management, the ultimate disposition of these proceeding will not have a
material adverse effect on the Company's financial position or results of
operations.
Threatened Claims
On July 6, 1995, the Franchise Tax Board of the State of California ("FTB")
served the Company with a Notice of Corporation Tax Deficiency demanding that
the Company pay $93,434.65 in delinquent income taxes for the periods August
1990, August 1992, January 1993, August 1993 and August 1994, file all past due
returns and pay the total of all tax, penalties and interest due for each of the
above referenced years. These assessments arise from federal income tax amounts
assessed by the FTB. The Company disputes that any of this assessment is due. In
addition to other remedies, the FTB suspended the Company's foreign corporation
qualification in California.
<PAGE> 73
8. INCOME TAXES
There were no provisions for income taxes for the fiscal years ended 1994 and
1995. The Company has federal tax net operating loss carry forwards of
approximately $10 million which is available to offset future taxable income.
The utilization of such carry forwards will be limited by the change in
ownership (see Note 1). The Company has not recorded any deferred tax asset as a
result of the net operating loss carry forwards as it has provided a 100%
allowance against this asset.
9. SHAREHOLDERS' EQUITY
The authorized capital stock of the Company, as amended in December 1995,
consists of 50,000,000 shares of common stock with $.01 par value and 20,000,000
shares of preferred stock with $.01 par value.
Preferred Stock - The Series B Preferred Stock is convertible into common stock
of the Company at any time at the option of the holder thereof and confers
voting rights until conversion at a ratio of ten shares of common stock for each
share of Series B Preferred Stock. The Series B Preferred Stock is redeemable by
the Company upon the occurrence of certain events set forth in the agreement
with Rubywell Pty. Ltd. dated June 15, 1995, as amended. The Series B Preferred
Stock has a liquidation preference equal to the market price at the time of
liquidation of the Company. Subsequent to August 31, 1995, 4,000,000 shares of
preferred stock were converted into 20,000,000 shares of common stock of which
9,000,000 shares were subsequently surrendered to the Company for cancellation.
Stock Option Plan - During fiscal 1987, the Company adopted a stock option plan
under which options to purchase a total of 415,625 shares of common stock may be
granted to employees at a price of not less than the fair value (as determined
by the Board of Directors) of the common stock at date of grant. In fiscal 1992,
the Company increased the total options available for grant to 481,783. During
fiscal 1994, the Company increased the total options available for grant to
2,556,783. Options vest over a maximum period of ten years.
As of August 31, 1995, 2,383,154 options were outstanding with exercise prices
ranging from $.50 to $1.56 per share.
Warrants - In connection with a private placement in January 1994, the Company
issued two classes of warrants to the subscriber of the private placement.
500,000 Class A warrants were issued to purchase 500,000 shares of common stock
at $1.50 per share which became exercisable in July 1994 and expire in January
1999. In addition, 100,000 Class B warrants were issued to purchase 100,000
shares of common stock at $1.75 per share which became exercisable in July 1994
and expire in January 1997.
10. SUPPLEMENTAL EARNINGS PER SHARE INFORMATION
Subsequent to August 31, 1995, 4,000,000 shares of preferred stock were
converted into 20,000,000 shares of common stock of which 9,000,000 shares were
subsequently surrendered to the Company for cancellation. Assuming the
conversion and subsequent cancellation of the shares took place at the beginning
of fiscal year 1994, net loss per common share and related data would have been
as follows:
Nine Months
Years Ended Ended
August 31, May 31,
--------------------------- ------------
1994 1995 1995
------------ ------------ ------------
(Unaudited)
Net loss available to common
stockholders $(8,682,451) $(2,794,438) $ (129,233)
============ ============ ============
Weighted average number of common
shares, adjusted for 11,000,000
shares issued on conversion
(net of 9,000,000 shares
subsequently cancelled) 20,268,000 20,268,000 20,268,000
============ ============ ============
Net loss per common share $ (.43) $ (.14) $ (.01)
============ ============ ============
<PAGE> 1
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
KUSHI MACROBIOTICS CORP.
AND
AMERICAN PHOENIX GROUP, INC.
AND
KUSHI NATURAL FOODS CORP.
DATED: AUGUST 12, 1996
TABLE OF CONTENTS
Page
AMENDED AND RESTATED 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 2
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
<PAGE> 2
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
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 Natural Foods 39
<PAGE> 3
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 46
7.4 Registration Statement; Blue Sky Laws 47
7.5 Restrictive Legends 47
7.6 Absence of Litigation 47
7.7 Opinion of Counsel 47
7.8 Appraisal Rights 48
7.9 Certificates of Merger 48
7.10 Consents 48
7.11 No Material Change in Financial Statements 48
7.12 Directors and Executive Officers 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 49
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
<PAGE> 4
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
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
<PAGE> 5
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated August __, 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 NATURAL FOODS
Corp., a corporation organized under the laws of the State of Delaware
("Foods").
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; and
WHEREAS, the parties hereto entered into an Agreement and Plan of Merger
dated June 1, 1996 and now wish to amend said agreement and restate it in its
entirety.
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:
<PAGE> 6
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 Bylaws 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, 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.
<PAGE> 7
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) The current holders of APHX Common Stock shall be entitled to
own, in the aggregate, eighty five 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 eighty five 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 eighty five 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.
<PAGE> 8
(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 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 eighty five 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").
<PAGE> 9
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO APHX
APHX, represents and warrants to KMC as follows:
3.1 Corporate Existence and Power; Qualification; Subsidia- ries. 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
Bylaws 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 Bylaws 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
____________ 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.
<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, February 29, 1996, and May 31, 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;
<PAGE> 11
(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;
(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.
<PAGE> 12
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.
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.
<PAGE> 13
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;
(g) a Contract with any distributor, dealer, sales agent or
representative;
<PAGE> 14
(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.
<PAGE> 15
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 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.
<PAGE> 16
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 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.
<PAGE> 17
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.
(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.
<PAGE> 18
(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
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.
<PAGE> 19
(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.
(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.
<PAGE> 20
(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 therein as "Representative") for inclusion in
the proxy (or information statement) and registration statement on Form S-4 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.
3.26 Directors and Executive Officers. There are no directors or
executive officers of APHX other than as set forth on Schedule 3.26.
<PAGE> 21
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 its
principals caused the formation of Foods. 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 Bylaws 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 ___________
shares are issued and outstanding and 5,000,000 shares of Preferred Stock, of
which _______ shares are issued and outstanding.
<PAGE> 22
(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 periods
ended March 31, 1996 and June 30, 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;
<PAGE> 23
(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;
(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.
<PAGE> 24
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.
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;
<PAGE> 25
(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;
(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.
<PAGE> 26
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 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, 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.
<PAGE> 27
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.
<PAGE> 28
(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 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).
<PAGE> 29
(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 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.
<PAGE> 30
(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.
(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 S-4 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 Natural Foods. Foods has been 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, KMC will transfer substantially all
of its assets and liabilities to Foods and the shares of Foods will be
distributed to the stockholders of record of KMC on ____________, 1996, at a
ratio to be determined by KMC's Board of Directors, but currently contemplated
to be three shares of Foods for every share of KMC.
<PAGE> 31
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;
(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.
<PAGE> 32
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;
(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 (including warrants for the
purchase of capital stock of the Surviving Corporation) in settlement thereof,
(ii) transfer, as of the Effective Time, all of its operational assets to Foods
and (iii) issue as of the Effective Time, one common stock purchase warrant,
similar to the warrants sold in its initial public offering, to each of its
stockholders of record on the date set for such distribution by KMC's Board of
Directors for each share of KMC Common Stock held.
<PAGE> 33
5.3 KMC Spin Off. Prior to the Merger, KMC will (i) form Foods, and
(ii) resolve its outstanding liabilities associated with consulting and
employment contracts. Prior to the Closing of the Merger (and simultaneously
therewith), KMC will (1) transfer to Foods all of the assets and
liabilities/obligations 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 __________ 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 its
stockholders, in a tax-free distribution, shares of Foods's common stock
notwithstanding possible opportunities for such individuals with APHX and/or KMC
after the Merger. Mr. Michio Kushi is the initial Chairman of Foods and he will
appoint its initial board of directors.
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 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 (the
"Registration Statement"), which shall cover all of the shares of KMC Common
Stock to be issued in connection with the Merger to the shareholders of APHX,
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
to the shareholders of APHX. 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. In compliance with all applicable federal
and state corporate, 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 or Information
Statement contained in the Registration Statement and, if necessary after the
Proxy or Information 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.
<PAGE> 34
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 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 December 31, 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 Foods (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 Foods, 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.
<PAGE> 35
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.
<PAGE> 36
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.
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 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."
<PAGE> 37
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 Foods 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.
7.12 Directors and Executive Officers. APHX shall deliver to KMC at the
Closing a list of all of its directors and executive officers.
<PAGE> 38
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
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.
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 Foods 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 (in cash and/or securities) 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 be 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. Foods 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 Foods or the Mendelson litigation.
<PAGE> 39
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
December 31, 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 by it in writing; or
(d) by KMC, if any of the conditions specified in Article VII shall
not have been met in all material respects or waived by it in writing.
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.
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.
<PAGE> 40
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. Patrick N. DiCarlo, President and CEO
American Phoenix Group, Inc.
1042 Castlerock
Santa Ana, California 92705
with copies to:
Whitman Breed Abbott & Morgan
633 West Fifth Avenue, 21st Floor
Los Angeles, California 90071
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.
<PAGE> 41
10.5 No Third Party Beneficiaries. Except as provided in Section 6.10
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.
<PAGE> 42
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.
________________, KMC, APHX and Foods have caused this Agreement to be duly
executed and delivered as of the date first above written.
KUSHI MACROBIOTICS CORP.
s/Daniel A. France
By: _______________________
Name: Daniel A. France
Title: Chief Financial and
Chief Operating Officer
AMERICAN PHOENIX GROUP, INC.
s/Patrick N. Di Carlo
By: _______________________
Name: Patrick N. Di Carlo
Title: Agent in Fact
KUSHI NATURAL FOODS CORP.
/Daniel A. France
By: _______________________
Name: Daniel A. France
Title: As Agent For
Michio Kushi, Chairman
<PAGE> 43
NOTICE OF DISSENTER'S RIGHTS
TO STOCKHOLDERS OF AMERICAN PHOENIX GROUP, INC.:
If you you intend to assert dissenter's rights with respect to the merger of
American Phoenix Group, Inc. (the "Company") into Kushi Macrobiotics Corp., you
must:
(1) Sign and send to the Company a demand for payment in substantially the
form attached hereto at the Company's address indicated on the attached form;
(2) Ensure that the Company receives your demand for payment at the above-
referenced address no later than [date between 30 and 60 days from date of
notice], 1996;
(3) Deposit your stock certificates with the Company's transfer agent,
American Securities Transfer, Incorporated, 938 Quail Street, Suite 101,
Lakewood, CO 80215-5513 no later than [date between 30 and 60 days from date of
notice], 1996;
If you are the holder of uncertificated stock of the Company, you are advised
that the Company may restrict transfer of such shares from the date the demand
for their payment is received.
A copy of the sections 92A.300 throught 92A.502 of the Nevada Revised Statutes
accompanies this Dissenter's Notice.
Patrick N. Di Carlo
President
TO:
AMERICAN PHOENIX GROUP, INC.
5 Park Plaza
Suite 1260
Irvine, California 92714
Re: Demand for Payment
The undersigned shareholder of American Phoenix Group, Inc. (the "Company")
hereby dissents from the merger between the Company and Kushi Macrobiotics Corp.
and demand payment for my shares. The first announcement to the news media of
the proposed terms of the merger was made on ______, 1996. The undersigned
hereby certifies that he, she or it did [__] did not [__] (check one) acquire
beneficial ownership prior to such date.
_________________________
[Signature of Shareholder]
_________________________
[Name of Shareholder]
Date: ____________________
<PAGE> 44
NEVADA REVISED STATUTES ANNOTATED
Copyright (c) 1986-1993 by The Michie Company
Copyright (c) 1995 by The Michie Company,
a division of Reed Elsevier Inc. and Reed Elsevier Properties Inc.
All rights reserved.
*** THIS SECTION IS CURRENT THROUGH THE 1995 SUPPLEMENT ***
*** (SIXTY-EIGHTH (1995) SESSION) ***
TITLE 7. BUSINESS ASSOCIATIONS; SECURITIES; COMMODITIES
CHAPTER 92A. MERGERS AND EXCHANGES OF INTEREST
RIGHTS OF DISSENTING OWNERS
Nev. Rev. Stat. Ann. @ 92A.300 (1995)
@ 92A.300. Definitions
As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise
requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have
the meanings ascribed to them in those sections.
@ 92A.305. "Beneficial stockholder" defined
"Beneficial stockholder" means a person who is a beneficial owner of shares
held in a voting trust or by a nominee as the stockholder of record.
@ 92A.310. "Corporate action" defined
"Corporate action" means the action of a domestic corporation.
@ 92A.315. "Dissenter" defined
"Dissenter" means a stockholder who is entitled to dissent from a domestic
corporation's action under NRS 92A.380 and who exercises that right when and in
the manner required by NRS 92A.410 to 92A.480, inclusive.
@ 92A.320. "Fair value" defined
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which he
objects, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable.
@ 92A.325. "Stockholder" defined
"Stockholder" means a stockholder of record or a beneficial stockholder of a
domestic corporation.
@ 92A.330. "Stockholder of record" defined
"Stockholder of record" means the person in whose name shares are registered
in the records of a domestic corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee's certificate on file with the
domestic corporation.
@ 92A.335. "Subject corporation" defined
"Subject corporation" means the domestic corporation which is the issuer of
the shares held by a dissenter before the corporate action creating the
dissenter's rights becomes effective or the surviving or acquiring entity of
that issuer after the corporate action becomes effective.
<PAGE> 45
@ 92A.340. Computation of interest
Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be
computed from the effective date of the action until the date of payment, at the
average rate currently paid by the entity on its principal bank loans or, if it
has no bank loans, at a rate that is fair and equitable under all of the
circumstances.
@ 92A.350. Rights of dissenting partner of domestic limited partnership
A partnership agreement of a domestic limited partnership or, unless
otherwise provided in the partnership agreement, an agreement of merger or
exchange, may provide that contractual rights with respect to the partnership
interest of a dissenting general or limited partner of a domestic limited
partnership are available for any class or group of partnership interests in
connection with any merger or exchange in which the domestic limited partnership
is a constituent entity.
@ 92A.360. Rights of dissenting member of domestic limited-liability company
The articles of organization or operating agreement of a domestic limited-
liability company or, unless otherwise provided in the articles of organization
or operating agreement, an agreement of merger or exchange, may provide that
contractual rights with respect to the interest of a dissenting member are
available in connection with any merger or exchange in which the domestic
limited-liability company is a constituent entity.
@ 92A.370. Rights of dissenting member of domestic nonprofit corporation
1. Except as otherwise provided in subsection 2 and unless otherwise provided
in the articles or bylaws, any member of any constituent domestic nonprofit
corporation who voted against the merger may, without prior notice, but within
30 days after the effective date of the merger, resign from membership and is
thereby excused from all contractual obligations to the constituent or surviving
corporations which did not occur before his resignation and is thereby entitled
to those rights, if any, which would have existed if there had been no merger
and the membership had been terminated or the member had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
@ 92A.380. Right of stockholder to dissent from certain corporate actions and to
obtain payment for shares
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation isa
party:
<PAGE> 46
(1) If approval by the stockholders is required for the merger by
NRS92A.120 to 92A.160, inclusive, or the articles of incorporation and he is
entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
itsparent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporationis
a party as the corporation whose subject owner's interests will be acquired, if
he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders
tothe event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are entitled
to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.
@ 92A.390. Limitations on right of dissent: Stockholders of certain classes or
series; action of stockholders not required for plan of merger
1. There is no right of dissent with respect to a plan of merger or exchange
in favor of stockholders of any class or series which, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or exchange is to be acted on, were either
listed on a national securities exchange, included in the national market system
by the National Association of Securities Dealers, Inc., or held by at least
2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
sharesprovide otherwise; or
(b) The holders of the class or series are required under the plan
ofmerger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
offractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan
ofmerger or exchange, were either listed on a national securities exchange,
included in the national market system by the National Association of Securities
Dealers, Inc., or held of record by a least 2,000 holders of owner's interests
of record; or
(2) A combination of cash and owner's interests of the kind describedin
sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
@ 92A.400. Limitations on right of dissent: Assertion as to portions only to
shares registered to stockholder; assertion by beneficial stockholder
1. A stockholder of record may assert dissenter's rights as to fewer than all
of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
<PAGE> 47
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of
thestockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficialstockholder or over which he has power to direct the vote.
@ 92A.410. Notification of stockholders regarding right of dissent
1. If a proposed corporate action creating dissenters' rights is submitted to
a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken without a
vote of the stockholders, the domestic corporation shall notify in writing all
stockholders entitled to assert dissenters' rights that the action was taken and
send them the dissenter's notice described in NRS 92A.430.
@ 92A.420. Prerequisites to demand for payment for shares
1. If a proposed corporate action creating dissenters' rights is submitted to
a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is
taken,written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 is not
entitled to payment for his shares under this chapter.
@ 92A.430. Dissenter's notice: Delivery to stockholders entitled to assert
rights; contents
1. If a proposed corporate action creating dissenters' rights is authorized
at a stockholders' meeting, the subject corporation shall deliver a written
dissenter's notice to all stockholders who satisfied the requirements to assert
those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
whatextent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of thefirst
announcement to the news media or to the stockholders of the terms of the
proposed action and requires that the person asserting dissenter's rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the subject corporation must receive the demandfor
payment, which may not be less than 30 nor more than 60 days after the date the
notice is delivered; and
<PAGE> 48
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
@ 92A.440. Demand for payment and deposit of certificates; retention of rights
of stockholder
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
beforethe date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
thenotice.
2. The stockholder who demands payment and deposits his certificates, if any,
retains all other rights of a stockholder until those rights are canceled or
modified by the taking of the proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
@ 92A.450. Uncertificated shares: Authority to restrict transfer after demand
for payment; retention of rights of stockholder
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
@ 92A.460. Payment for shares: General requirements
1. Except as otherwise provided in NRS 92A.470, within 30 days after receipt
of a demand for payment, the subject corporation shall pay each dissenter who
complied with NRS 92A.440 the amount the subject corporation estimates to be the
fair value of his shares, plus accrued interest. The obligation of the subject
corporation under this subsection may be enforced by the district court:
(a) Of the county where the corporation's registered office is located; or
(b) At the election of any dissenter residing or having its
registeredoffice in this state, of the county where the dissenter resides or has
its registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
yearending not more than 16 months before the date of payment, a statement of
income for that year, a statement of changes in the stockholders' equity for
that year and the latest available interim financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair value
ofthe shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under
NRS92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
@ 92A.470. Payment for shares: Shares acquired on or after date of dissenter's
notice
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
<PAGE> 49
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480.
@ 92A.480. Dissenter's estimate of fair value: Notification of subject
corporation; demand for payment of estimate
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
@ 92A.490. Legal proceeding to determine fair value: Duties of subject
corporation; powers of court; rights of dissenter
1. If a demand for payment remains unsettled, the subject corporation shall
commence a proceeding within 60 days after receiving the demand and petition the
court to determine the fair value of the shares and accrued interest. If the
subject corporation does not commence the proceeding within the 60-day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district court
of the county where its registered office is located. If the subject corporation
is a foreign entity without a resident agent in the state, it shall commence the
proceeding in the county where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The appraisers have the powers described in the order appointing
them, or any amendment thereto. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
hisshares, plus interest, exceeds the amount paid by the subject corporation; or
(b) For the fair value, plus accrued interest, of his after-acquiredshares
for which the subject corporation elected to withhold payment pursuant to NRS
92A.470.
@ 92A.500. Legal proceeding to determine fair value: Assessment of costs and
fees
1. The court in a proceeding to determine fair value shall determine all of
the costs of the proceeding, including the reasonable compensation and expenses
of any appraisers appointed by the court. The court shall assess the costs
against the subject corporation, except that the court may assess costs against
all or some of the dissenters, in amounts the court finds equitable, to the
extent the court finds the dissenters acted arbitrarily, vexatiously or not in
good faith in demanding payment.
<PAGE> 50
2. The court may also assess the fees and expenses of the counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
thecourt finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
anyother party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
HISTORY: 1995, ch. 586
<PAGE> 51
APPENDIX C
Delaware Dissenters' Rights Statute
(Excerpted from the General Corporation Law of Delaware)
Section 262. Appraisal rights,
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
'stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and 'share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
'depository receipt' mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal nights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251, section 252, section 254, section 257,
section 258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and
to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if
the merger did not require for its approval the vote of the stockholders
of the surviving corporation as provided in subsections (f) or (g) of
section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal nights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation or depository receipts in respect
thereof:
<PAGE> 52
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will
be either listed on a national securities exchange or designated
as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c.
of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under tins section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsection (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonable informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 delves after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to section 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
<PAGE> 53
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
<PAGE> 54
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to tn'al upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by nv stockholder in connection "With the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
